The Govt needs to boost public spending in the capital goods sector
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The Govt needs to boost public spending in the capital goods sector

For growth in the capital goods sector, there should be an increase in outlay for power, railway, defence and roads

  • February 17, 2016  
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Harsha Upadhyaya, CIO-Equity, Kotak Mutual Fund

In recent years, the private sector has been bogged down by low demand and reduced utilisation of assets and, hence, private sector capex as a percentage of gross domestic product (GDP) has declined significantly from the peak.

At a crucial juncture when private sector balance sheets are stretched and those of banks are burdened with deteriorating asset quality, the government's commitment to boosting public spending is imperative for overall growth of the economy as well as prospects of the capital goods sector. In the year 2015-16, there was a 25 per cent increase in government capex. We expect enhanced capital spending next year too. We expect planned expenditure outlay to be Rs 3 lakh crore, an increase of 25 per cent over the previous year.

Power:

The power sector is a major driver of capex. However, due to subdued growth in demand and poor financial health of Discoms, investments in the sector have stagnated. We expect outlays under UDAY (Ujjwal Discom Assurance Yojana), IPDS (Integrated Power Development Scheme) and DDUGJY (Deen Dayal Upadhyay Gram Jyoti Yojana) schemes to increase significantly, which is likely to lead to a substantial increase in demand for distribution transformers, low-voltage switch gear, and conductors and cables.

Renewables would remain an area of focus. We may see some more incentives for roof-top solar power this year. Accelerated depreciation benefit and generation-based incentives, allowed for solar and wind power in 2015-16, may continue.

Railways:

The total planned expenditure is expected to be about Rs 1.3 trillion for the railways, as against Rs 1 trillion in 2015-16. The Ministry of Railways has laid out a comprehensive investment plan of Rs 8.5 lakh crore for the period from 2014-15 to 2018-19. In the early years of the plan, the focus is on decongestion of important routes through doubling, tripling and electrification.

We expect final award of two locomotive factories, introduction of 15 train sets with semihigh speeds and start of the Mumbai-Ahmedabad high-speed train project. Capex on civil works, track laying and electrification is expected to increase significantly.

Roads:

This sector is expected to see a major increase in outlay. The ministry is aiming for a capex of Rs 1.3 lakh crore and award of 15,000 km national highways in 2016-17. Roads have been identified as a major sector for kick-starting the capex cycle.

Defence:

Defence capital acquisition budget has been almost stagnant at Rs 95,000 crore for the past two years because of lack of much fiscal headroom. We expect significant increase this year as some of the key programmes are coming close to fruition. We expect to see the fi rst major order for the private sector. We expect major orders for 155-mm artillery and six diesel electric submarines to be placed this year.

Manufacturing:

We expect some more incentives for kick-starting manufacturing in the electronics sector. We may see some capital subsidy for solar PV panel manufacturing and silicon wafer fabrication. The government had announced capital subsidy for manufacturing solar PV panels but, so far, no significant capacity has seen the light of day.

Smart Cities:

The government is identifying cities that will be developed as smart cities. We expect to see significant outlay to the tune of about Rs 10,000 crore towards this. Initial work would include investment in improvement of road infrastructure, municipal water management and power and telecom infrastructure.

Written by Harsha Upadhyaya, CIO-Equity, Kotak Mutual Fund