Capital expenditure of private sector to dip 20-26 per cent in FY21: Ind-Ra

India Ratings & Research (Ind-Ra) in its latest report has pointed out that the private sector’s capital expenditure is set to contract by 20-26 per cent in the ongoing financial year, owing to COVID-19 pandemic-led business disruptions.

The rating agency also warned that in the absence of a broad-based pickup in domestic and external demand, faster resolution of stressed assets and deep structural reforms, private sector investments are unlikely to recover meaningfully before FY25. It noted that in fact, the pandemic outbreak and ensuing national lockdown have crippled the economy, making corporates and individuals, risk-averse.

As per the report, as uncertainties around demand recovery have persisted and the deleveraging process is yet to kick start, the private sector capex growth has remained mute or low, clocking only 5 per cent annual growth since FY17.

Ind-Ra added that since then, growth in the overall gross fixed capital formation continued to fall over FY18-FY19. It also stated that corporates' capacity utilisation level continues to hover below 75 per cent since the last round of growth Capex between FY12 and FY14. Weak demand growth, even prior to the pandemic outbreak, resulted in a shortfall of the cash flow generation thus, delaying their deleveraging.

The report further said that while capacity utilisation will take at least another four years to peak, the broad-based deleveraging will take another six to seven years and this will have the maximum impact on Capex this year, which may contract by 20-26 per cent due to COVID-19-led business disruptions, before growing 15-20 per cent in the next fiscal year. It expects low Capex intensity sectors to be early movers and capital intensive sectors to see a prolonged wait.