ICRA: Increased geopolitical tensions in the Middle East and a possible slowdown in the pace of government capital expenditure (capex) and project execution before the general elections are likely to temper the demand for new investments in the second half of this fiscal year, according to a report released on Tuesday by credit rating agency ICRA.
With the exception of indicators like the export and import of engineering goods, the output of capital goods, and the consumption of finished steel, India’s investment activity remained strong in Q2 FY24, which is why the anticipated slowdown in new investment demand is coming.
The central government’s capital expenditures increased by 43.1% in the first half of this fiscal year, while the capital outlays and net lending of 22 states experienced a sharp increase of 47.5%. These states benefited from the central government’s upfronting of tax devolution (Rs 4.6 trillion) and release of interest-free capital loans (Rs 535.4 billion vs nil in H1 FY2023).
In spite of this, the pace of the central government’s capital expenditures and project implementation may decelerate as the fiscal year draws to a close and the general elections of 2024 approach. A similar loss of momentum may occur in Q3 FY2024 due to elections in a few states. In addition, given the ongoing emphasis on fiscal consolidation, the growth in the central government’s capital expenditure target for FY25 is probably going to be more moderate than the 37% planned level for FY24, the report states.
The report also mentions that 628 projects, with a total estimated completion cost of Rs 7.7 trillion, are expected to be finished in H2 FY24. By September, projects valued at Rs 4.3 trillion had already incurred 60–100% of the total expected project cost.
As a result of the possibility of project execution slowing down near the end of the fiscal year in the lead-up to the elections, which could cause spillovers into FY25, the report states that only a small portion of this amount is likely to be completed.
The report also shows that, from Rs 6.1 trillion in Q1 (led by Indigo’s aircraft order of Rs 4.1 trillion), the value of new project announcements dropped to a 13-quarter low of Rs 1.3 trillion in Q2. Additionally, in Q2, there were few announcements from the public and private sectors.
Notably, this was the lowest value of the new project announcement since Q1 FY2005 (Rs 0.4 trillion), excluding the Covid-affected quarters. In light of the unpredictability surrounding Middle East geopolitical tensions and the upcoming 2024 parliamentary elections, new investment announcements across all sectors may be cautious in H2 FY24, the report suggests.
