Global slump: Why corporate capex in India is unlikely to rise just yet

Summary

Capital expenditure by corporate firms has been weak in much of the world. But India's total investment-to-GDP ratio has been better than pre-covid and is second only to China. That said, global policy flux and unfavourable government capex weigh against strong pick-up.

In the previous two parts of this series, I established that:

1) India's corporate profits have been stable at 9-10% of gross domestic product (GDP), though its composition has changed in favour of the listed sector

2) lower household savings, higher fiscal deficit and narrower current account deficit (CAD) have supported profits, despite lower corporate capex and

3) India's unlisted sector is huge, accounting for about two-thirds of the aggregate corporate sector in terms of capex, debt and gross value added (GVA), though its financial position has worsened in the post-pandemic period, hurting aggregate corporate capex.

In this final part, my key conclusions are two-fold: first, weak corporate capex is not a unique phenomenon in India. Second, considering various cyclical and structural factors, we don't expect corporate capex to pick-up anytime soon.

Note that India's corporate capex has been stable at 14-15% of GDP in the past decade, lower than the 17-18% in the post-2008 period and its peak of 21% in 2007-08. That makes it the lowest level in almost two decades, but it is not low compared to most other major economies.

While China has had the highest corporate capex at 26% of GDP in recent years, followed by Indonesia, South Korea and Japan (20%-plus), it is between 12-14% for others such as the UK, Germany, the Philippines, US and Spain.

Importantly, India's total investment-to-GDP ratio has averaged 33% in recent years. Not only is this better than about 30% in the pre-pandemic period, but also only second to China's 40% among the world's major economies.

These two facts suggest that the share of the corporate sector has fallen from above 50% a decade ago to about 45% in India's total investments, while the share of the household sector (primarily consisting of the residential property market) has risen to 42-43%, with a 12-13% share of the government sector.

Since corporate capex is the most efficient, its lower share does hit the overall efficiency of India's total investments. However, the quantity of total investments remains healthy in India owing to strong household capex.

Notably, the surge in China's total investment-to-GDP ratio from 35% at the turn of the century to its peak of 46% in the early 2010s was largely led by the household sector, whose capex more than doubled to a peak of 15% of GDP.

The corporate capex boom remains one of the most widely held expectations for India, which is yet to materialize. However, the absence of a pick-up is not unique to India. Using data on other major economies (such as China, euro-zone, Japan, South Korea, UK and US), together accounting for 70% of global GDP, we create annual data on global profits and corporate capex.

The results are staggering. Global corporate capex has increased to 17% of GDP in the 2020s decade (2020-24) from 16.1% in the 2010s decade and 14.4% in the 2000s, while global profits have increased every decade from 6.1% of GDP in the 1990s to 8% in the 2000s and about 9% in the post-pandemic period.

However, the conclusion changes dramatically if we exclude China from the global aggregates. Although the rise in global profits is starker now -- from 6% of GDP in the 1990s to 9.6% in the 2020s decade, global corporate capex has been actually stagnant at about 14% of GDP during the past two decades or so.

China, thus, is an exception, where profit is falling with rising corporate capex. Global corporate capex excluding China has been largely stagnant in the past two decades, despite much higher profits.

Similarly, India's prolonged corporate debt deleveraging episode in the recent decade was neither unique nor exceptional. Corporate debt fell from its peak of 70% of GDP in 2011-12 in India to a low of 48% in 2023-24, after which it has picked up towards 50%.

According to data on 43 countries from the Bank for International Settlements, there were 68 episodes of corporate deleveraging during the four decades up to 2007, of which only 11 were deep and prolonged cycles, lasting seven years or more. Since 2007, however, there have been at least 19 such deleveraging episodes, majority of which are still incomplete.

Further, while corporate credit growth has picked-up in recent quarters, other drivers such as global policy uncertainty, government capex and profit growth remain unfavourable. Therefore, we don't expect any strong pick-up in India's corporate capex over the next few years.

Can AI-led capex change that? Notwithstanding the news of hundreds of billions of dollars invested by US tech giants, its total investment-to-GDP ratio was unchanged at 21.5% in recent years. The US's total corporate capex has also been stable at 13.7% of GDP. Moreover, US corporate debt was at a decade low of 48.7% of GDP in the second quarter of calendar year 2026.

Not only the US, but the total investment-to-GDP ratio has been lower-to-stable in China, Singapore, South Korea and the UK. Taiwan and Japan are exceptions, with increases. If so, the case for AI-driven global capex recovery needs more scrutiny.

But what if corporate capex, and thus, the total investment-to-GDP ratio picks up? In that case, policymakers will have to shift their focus towards ensuring sustainable funding of higher investment.

The Indian economy has seen three episodes of a rise in investment-to-GDP ratio since the 1980s. During all these, the increase in savings lagged that in investment, leading to a wider CAD. Worryingly, the deterioration in CAD has accelerated over the decades. Therefore, if the investment-to-GDP ratio starts rising further, low household savings will become a key concern, as CAD will widen and constrain investment growth.

What else can be done to push growth higher? The quality of investment (or efficiency) must improve. Most successful economies have achieved high real GDP growth for decades with a lower investment-to-GDP ratio but better efficiency. Between 2003-04 and 2025-26, India's incremental capital-output ratio was 4.8 times, much worse than the average of about 3.5 times for a group of 10 other economies.

While impactful, such steps are challenging to implement and yield results only over the long term.

The author is an India Economist, executive director at CLSA India, and author of 'The Eight Per Cent Solution'