Since the Covid lows, the market’s upward trajectory seemed unstoppable, a siren song luring firms away from the steady anchor of capital expenditure.
Data from the Centre for Monitoring Indian Economy (CMIE) covering more than 3,000 non-financial listed firms indicates that net fixed assets, a proxy for capex, slowed to 4.7% year-on-year by the end of the first half of 2024-25 (April-September 2024), against a 6.6% rise at the end of 2023-24 (March 2024).
Meanwhile, corporate investments in financial instruments such as equity and debt securities registered double-digit growth, significantly outpacing capital expenditure investments in that period.
Experts argue that this shift is largely a consequence of subdued demand and weak consumer spending. “As there is no broad-based increase in consumption, companies tend to invest their surpluses in financial instruments,” said Madan Sabnavis, chief economist of Bank of Baroda.
Moreover, the investment spigot has been kept tight due to ongoing global uncertainties.
CMIE’s project-tracking database shows periods of contraction for new private projects over the past two years. New investments announced declined by over 10% in the December quarter after a brief recovery in the preceding three months.
“The private capital expenditure cycle has remained constrained in the recent past in view of the uncertainties around geopolitical developments, weak domestic consumption, especially urban, and muted export demand,” said Sakshi Suneja, vice president and sector head of corporate ratings at ICRA Ltd.
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Strategic shifts
This shift is not sudden but a calculated pivot. Year-on-year growth trends show a growing gap between physical and financial investments, which widened significantly when the markets peaked in September.
According to Sabnavis, this investment in financial instruments was not driven by potential gains but simply because there hasn’t been enough reason to invest in physical capital. “Therefore, market conditions won’t significantly influence this decision,” he said.
Anirudh Garg, partner and fund manager at Invasset PMS, said companies are adopting asset-light strategies and capital allocation that can maximize returns instead of locking up resources in long-term projects. “The focus has shifted towards financial prudence, strategic investments, and maintaining liquidity, rather than large-scale expansions in manufacturing capacities,” Garg said.
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Until the engine of demand roars back to life, capital investments are expected to remain limited. Debopam Chaudhari, chief economist at Piramal Group, citing a Reserve Bank of India survey, said capacity utilization for manufacturing had reached levels to justify expansion. However, companies remain hesitant due to US President Donald Trump’s volatile stance on tariffs, subdued domestic demand, and high capital costs.
With markets in the red and capacity utilization peaking, private capex may see a gradual pick-up provided domestic conditions improve and the US stance on tariffs crystallises. Chaudhari expects capex recovery by the second quarter of 2025-26 (July-September 2025).
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The plan B
While there is hope on the capex front, what will happen to financial instruments amid the sharp market corrections? Will the once-promising investments lose their luster?
Market apprehension is evident, given a 10% fall in the corporate sector’s total equity assets under custody since scaling a high in September, reflecting both mark-to-market losses and asset disposals. Foreign portfolio investors also saw a significant reduction in their holdings, with assets dropping to ₹62.38 trillion in February from ₹77.96 trillion in September—a decline of nearly 20%.
Since the capex revival may be a few months away, what is next for the Indian companies?
Bonds may gain appeal, according to Atul Parakh, chief executive officer of fintech platform Bigul.
“With volatile equity markets, firms are increasingly parking funds in corporate bonds, debt mutual funds, and REITs/InvITs, which offer stable returns of 9-14%,” said Parakh, adding that high-rated corporate bonds and dynamic bond funds were particularly favoured for their liquidity and reliability.
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