The current geopolitical conditions and the resultant spike in commodity prices could impact profitability of corporates, imparting some caution in the private sector capital expenditure and investment plans in the medium-term, ratings agency Icra said on Thursday. This means that capex plans of central and state governments will continue to be crucial.
Icra said it expected capacity utilisation to reach the critical threshold of 75 per cent required to trigger broad-based capacity expansion, only by the end of the current calendar year. “While some green shoots are visible in private investments, protracted geopolitical tensions and elevated commodity prices could constrain the profitability of the corporate sector, imparting some caution to private sector capex in the immediate term,” said Aditi Nayar, chief economist with Icra.
In such a scenario, government capex, especially by states, will be critical to support investment demand and boost economic activity over the next two-three quarters, Nayar said, adding that at present, expansion is being announced, but in a narrower set of sectors such as power and metals, and in sectors related to PLI schemes.
Assocham President Sumant Sinha and Confederation of Indian Industries President TV Narendran had told Business Standard in separate interactions that firms will not be able to pass on all of their input cost increases due to inflation to customers, hurting their margins. Narendran said in traditional infrastructure sectors, the Centre’s capex push may continue to drive activity.
Icra’s Nayar said there were positive signs, with private sector project announcements touched an 11-year high in FY22, suggesting early signs of a pick-up in private sector investment activity.
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