Capitalizing on India’s Infrastructure Growth Amidst the US Recession

If you’ve visited India recently, you’d have noticed a marked difference in the roads infrastructure, particularly state and national highways. This is part of a much larger trend. Over the last 6 years, annual capital expenditure in India has increased by 3x to Rs 10 lakh crore! This is one of the fastest increases in capex spends, not just in absolute terms but also from 1.2% capex-to-GDP ratio to 3.3% now.

A higher CapEx-to-GDP ratio indicates greater long-term investments in the infrastructure, manufacturing, and technology sectors. It reflects the confidence and commitment of India’s private sector and government to sustainable growth. It implies a larger fiscal multiplier, meaning a magnified impact on employment and economic development.

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Why CapEx Trends Matter to the Global Investor?

Understanding CapEx data can help global investors identify high-potential growth sectors, manage geographical exposure, and maximize their financial potential. With that, let’s give some context into the state of the U.S. and India CapEx spending amidst global economic fear and uncertainty.

The recent news of Silicon Valley Bank and First Republic Bank’s demise caused concerns about the strength of the U.S. banking system and its impact on the broad economy. As the Fed rapidly increased its policy rate, U.S. firms began to pause further CapEx investments due to higher financing costs. It worsened the decline in fixed assets investments and increased the likelihood of a housing market crash.

On the other hand, India remains well-positioned to withstand global macroeconomic pressures, being the fastest-growing large economy. The Reserve Bank of India paused interest rate hikes, and the government introduced regulations to support the private sector. With a strong financial position and an improving business environment, India continues to attract both foreign and domestic investments.

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India’s Public & Private Investment Trends

Now, let’s take a closer look at India’s CapEx story. We can divide it into four distinct phases:

Through all phases, public spending laid the basis for private CapEx growth. In Phase 1, India experienced strong growth in private investments. This was followed by a decline in government spending due to the Great Financial Crisis in 2008. Phase 3 witnessed stable public investment, but regulatory challenges affected private CapEx. This worsened with the COVID-19 pandemic, which affected the confidence of the private sector.

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Is India on the Cusp of a CapEx Supercycle?

Now, with government infrastructure and capital outlay reaching record levels, India‘s economic output is expected to increase by a minimum of fourfold. When the government increases spending, it cycles repeatedly and has a greater impact than the initial investment.

Government initiatives like Project Gati Shakti and the National Infrastructure Pipeline form a strong foundation for economic development. Accordingly, Private sector investments are expected to rebound with a strong balance sheet and record profitability. Consumption is projected to grow at 7.3% in FY ‘23, and Gross Fixed Capital Formation, a key metric for productive capacity and economic progress, is projected to grow at 11.2% in FY ‘23.

As India enters a new phase of the CapEx cycle, the combined efforts of public and private investment will drive economic expansion. Now, let’s examine key factors driving India‘s promising future.

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India’s Economic Drivers

CapEx Supported by Policy Push: Efforts to clean up banks’ books and corporate deleveraging will create a favorable investment environment.
Digitalization Boom Boosting Productivity: Technological advancements will drive the digital economy, leading to enhanced productivity andincreased online penetration.
Higher FDI Inflows for Manufacturing and Exports: Attracting consistent FDI boosts competitiveness in manufacturing, brings knowledge transfer, and increases productivity.
Rural Revival: Positive indicators in rural employment, credit offtake, auto sales, and trade indicate a revival of economic activity in rural areas.
Broad-Based Recovery in Demand: Domestic demand indicators show a broad-based recovery, with increased credit growth and consumer spending in domestic-facing sectors.

Now, let’s shift our focus to the U.S.

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Uncovering Investments Trends in the U.S.

To evaluate the capital expenditure trajectory of the U.S., we can divide it into two phases. Here’s some quick terminology:

Structures: Investments in physical infrastructure such as buildings, factories, and transportation facilities.
Equipment: Investments in machinery, tools, and technology to enhance production processes.

In Phase 1, the U.S. witnessed consistent CapEx growth, amidst a robust investment climate. However, investor confidence fluctuated in Phase 2, with economic uncertainties and unfavorable business conditions.

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Response to COVID-19: A CapEx Supercycle

Supported by low-interest rates, CapEx in the U.S. surged across all regions and sectors amid the pandemic. Private investment in infrastructure, manufacturing, semiconductors, and software skyrocketed with supply chain disruptions and automation spending. The U.S. government implemented extensive measures to minimize the economic impact of the COVID-19 pandemic.

Public expenditure reached a peak of $7.2 trillion in FY ‘21, with more than 6 trillion dollars, or 1/4th of the U.S. GDP injected into the economy since the COVID-19 pandemic. Expansionary fiscal and monetary operations boosted aggregate demand and employment.

However, the key question is: Is the pandemic boom coming to an end?

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The Uncertain Path Ahead

Here are the fundamental reasons behind the bearish outlook on U.S. CapEx:

Decline In Available Cash: Cash balances have declined by ~$1 trillion since the end of 2021, restricting the private sector’s ability to sustain high levels of investment.
Effect Of Inflation: Lower consumer purchasing power has hampered demand.
Interest Rate Hikes: Aggressive interest rate hikes invited conservative capital investment plans.
Realization Of Post-Pandemic Similarities: The assumption that pandemic-level spending and demand would continue has been challenged.

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Bullish vs. Bearish Economic Outlook

India’s stable economy, favorable government policies, and resilient financial position are driving sustained CapEx growth. Meanwhile, the U.S. is experiencing a slowdown in CapEx due to interest rate hikes and concerns about the banking system.

India’s public investments are laying the foundation for private CapEx growth, with robust government initiatives. The U.S. has seen fluctuations in CapEx spending, with a surge during the pandemic but concerns arising from declining cash balances and fears of recession.

Looking ahead, India shows promising short- and medium-term growth prospects, with the potential to become the third-largest economy driven by favorable demographics, robust domestic long-term investments, and manufacturing tailwinds.

Inri, backed by Y Combinator, is an investment platform dedicated to NRIs & OCIs to invest in Indian markets. Inri is like Wealthfront for India, making investing in India fast and hassle-free.

This article does not provide any investment advice. Please consult your financial advisor before investing.

For insights into how India's banking system is structured compared to the U.S., read more in 'Indian Banking System vs the US'

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