A bunch of recent reports are forecasting that India is on the cusp of a huge capex cycle as in 2003, and hence, a 2004 to 2008 kind of growth pace is possible over the next four years.

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Morgan Stanley is forecasting a 7 percent average GDP growth from FY23 to FY26, and capital formation as a percentage of GDP to increase by 6 percentage points over these four years.

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Credit Suisse has said it expects a capex surge and higher-than-consensus GDP growth of maybe 13 percent for next year.

Are we really in that 2004-2008 eve? Are we seeing a capex surge and a 7 percent GDP growth? To debate all these questions, CNBC-TV18’S Latha Venkatesh spoke to two experts ― Samiran Chakraborty, Chief Economist of Citi, and Neelkanth Mishra, MD & India Equity Strategist of Credit Suisse.

Chakraborty said, “Part of this is also distorted by base effect. In fact, an FY23 GDP growth, as we are aware that that number itself could be significantly higher, because FY22 base is going to help it. We have a 9 to 10 percent GDP growth forecast for FY23 as well. So, to some extent, that FY23 to FY26 average growth would be distorted by this FY23 number.”

“However, if I may convert this into a potential growth argument, then our sense is that India is closer to 6 percent of GDP potential growth stage right now.”

On capex driving growth, Chakraborty said, “We have to be slightly conscious here that when we look at the gross fixed capital formation (GFCF), only 15 percent of GFCF comes from manufacturing. And that is why even if you have pretty broad-based manufacturing capex growth, that might not be good enough to move the needle so much on the overall GFCF to GDP ratio. What moves GFCF is real estate, real estate has a 22 percent weight in overall capex, add to it construction of about 6 percent and different infrastructure industries of about 12 percent more, you end up with about 40 percent GFCF coming from different sorts of construction activities. If we can give a big push to these construction activities, only then your overall GFCF to GDP ratio is likely to move up.”

“In the 2003 to 2007 cycle, we had seen exactly this thing play out, which is why the investment to GDP ratio increased, and in turn, you also had a significant improvement in the overall GDP growth. Within that capex, it is also important to increase the component of machineries and equipment, which increases the productivity part of the capex. So, I suspect that if we are able to do that ― we are seeing some early signs of that ― if that trend continues, that can also be a booster to the overall GDP growth. But for the moment, we are looking at a 6 percent potential GDP growth rather than a 7 percent.”

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Mishra said, “When we are thinking about capex, we need to look at it from different perspectives. The first is productive capacity, as Samiran was saying, the more you invest, the more productivity grows, etc. From that perspective, let us not forget that software, which is classified as intellectual property in CSO data in the national account statistics, is also very important. In fact, between 2012 and 2018, it was nearly 50 percent of incremental GFCF, and in the last three years also, it has been about 40 percent of incremental GFCF. Last year, software spending by Indian corporates went up by 15 percent year-on-year, FY21 ― when everything else was slowing down. If you are thinking about GFCF, from the perspective of investing in capital goods companies, then you need to focus on machinery, you need to focus on hard capex, etc.”

On real estate, Mishra said, “I do think that (among) the lenders, and borrowers there seems to be a general sense of optimism about India. You must have seen that because of the wealth creation that is happening in the stock markets, the IT boom that seems to be restarting, especially in some of the bigger cities, four-five bigger cities, which have the bulk of IT staff. We are seeing early signs of recovery in the real estate sector as well, (but) not yet translated into construction. But one would expect this to happen in the next three to five years.”

For full interview, watch accompanying video...

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(Edited by : Thomas Abraham)