The Indian economy's investment ratio is likely to rebound to 34% by the end of this decade helped by strong capital expenditure, in-house construction, and power generation mostly in the renewable energy space, according to a research note by Axis Capital.
The slowdown in investment activity between 2012 and 2021 was primarily driven by the real estate and power generation sectors, the note said. India’s investment-to-GDP ratio fell sharply from 34% in 2012 to 27% in 2021.
Of the 7 percentage point drop in investment-to-GDP ratio, 5 percentage points came from household spend on real estate, and around 3 percentage points were from corporate capex on machinery for utilities and manufacturing, offset by higher corporate capex on dwellings and IP/software.
The reduction in manufacturing capital expenditure as a share of GDP was largely influenced by inputs related to real estate, such as metals, construction materials, and machinery.
Urban real estate, which represents two-thirds of construction value, is particularly vulnerable to inventory cycles.
Furthermore, the excessive capacity improvements in the power sector between 2012 and 2016 led to a subsequent decrease in capex.
Factors In Favour
Real estate is supported by several structural demand drivers, including a growing population, smaller household sizes, urbanisation, increased built-up area per capita, and improvements in construction quality, Axis Capital said.
Additionally, the reduced construction activity between 2012 and 2021 resulted in low inventories, indicating potential for significant growth in dwelling construction, with commercial real estate also expected to expand. This surge in construction will likely drive demand for materials such as steel, cement, and machinery.
Power generation is projected to witness robust capex growth, with investment potential of Rs 19 lakh crore over the previous year to fiscal 2030, according to Axis Capital. This will include Rs 10 lakh crore in renewables, excluding hydro.
There will also be substantial investments in transmission and distribution capacity. Emerging sectors like green hydrogen, defence, solar modules, robotics, data centres, and energy storage are anticipated to contribute an additional 60–80 basis points to India's investment ratio, the brokerage said.
Axis Capital said it remains overweight on industrials and construction inputs, as the near-term slowdown is due to unintended policy tightening and should reverse by the fourth quarter of the current year.
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