India’s capex challenge: A victim of growing uncertainty

The Indian economy has been a beacon of hope since the COVID-19 pandemic. As the fastest growing major economy, it has displayed robust resilience in the face of geopolitical and economic uncertainty that has been plaguing the world in the past few years. 

But not all is well. Economic growth has been supported by the government’s spending on infrastructure, even as exports have remained sluggish amid a global economic slowdown. Domestic consumption demand is uneven too. While rural demand is recovering with mellowing inflation and healthy monsoons, moderating stock market returns and the IT sector slowdown have suppressed urban demand. Meanwhile, private capex has been waiting on the fence – waiting for demand to come roaring back, and waiting for the haze of uncertainty to clear up. 

But after recent developments, the wait may have just gotten longer. 

The fog of uncertainty has thickened 

Almost immediately after the easy money-driven highs of the pandemic, concerns around inflation led to monetary policy uncertainty. Global economies were raising rates at the fastest pace seen in decades, resulting in high borrowing costs. The war in Ukraine added a geopolitical angle to the uncertainty, which was exaggerated by persistent conflicts around Israel. The uncertainty spilled over into global supply chains as sanctions and the Red Sea crisis affected global trade routes. 

Investors had pinned their hopes on 2025 bringing relief under the business-friendly US president. But instead, we saw threats of “reciprocal” tariffs which have been imposed, paused, and repealed at apparent whims. Despite concerns around subsidized dumping by China, the Indian economy had started figuring its way around the evolving global trade order. India had hoped to capitalize on its tariff-advantage over several other economies competing for trade with the US. Free-trade agreements with key trading partners are in the works, and the one with the UK was closed recently. Production and design-linked incentives also promise to ramp up India’s game in sunrise sectors including electronics. 

But barely a week after the announcement of reciprocal tariffs, they were paused for 90 days. This week, even the US’ escalating trade-war with China saw an abrupt truce. While temporary, the truce has closed the short window of opportunity that had opened for India as global supply chains reshaped. Global uncertainty around tariffs has been compounded by the domestic uncertainty introduced with the Indo-Pak conflict. 

Despite best intentions, uncertainty has derailed private capex plans 

According to a report released by the Ministry of Statistics and Programme Implementation (MoSPI), a survey conducted between November 2024 and January 2025 had indicated that private capex intention expressed in FY25 was the highest in at least 4 years. 

But on-the-ground execution has disappointed. Despite repeated calls to action by the government, private capex dropped to a 3-year low in FY25. During the year, private project completion dropped by 31% to Rs.2.5 trillion. 

Even as the Finance Ministry called upon the private sector to recognize the mutual endogeneity of investments and consumption demand, the slowdown in project completion worsened in the latest quarter – from 32% year-on-year decline in Q3 to 62% decline in Q4. The share of private capex in overall capex dropped from 82% to 69% year-on-year in the quarter ending March 2025. 

Projections don’t look promising either 

Despite mellow commodity prices set to boost India Inc.’s profitability in FY26, growing uncertainty has weighed on announcements of private projects. Announcements made in FY25, set to be implemented over the next few years, declined by 9% year-on-year to Rs.27 trillion. While new-age sectors which enjoy the support of government incentives bucked the trend, general manufacturing and services dragged down overall capex plans. 

Private capex announcements in electricity and renewable energy have expanded by 55%, and that in mining (buoyed by rising demand for power and critical earth minerals) has surged by a whopping 732% over last year. But these sectors comprise a small share of overall private capex at Rs.5.6 trillion and Rs.0.025 trillion respectively. The bulk of private capex, through general manufacturing and services, has declined by 5% and 18% respectively. 

FDI has been on a declining trend as well, having shrunk from $85 billion in FY22 to $71 billion in FY24 and clocking in only $62.5 billion in the first 9 months of FY25. Of course, the government has brought in measures to reduce the red tape, and has also allowed 100% FDI under the automatic route for all sectors except the ones of strategic importance. But as highlighted by foreign investors, policy uncertainty remains the primary deterrent. Recent developments have exacerbated this uncertainty. 

What does this mean for stock markets? 

Private sector investments used to contribute 11.8% on average to India’s GDP before the pandemic. This dropped to a 3-year low of 11.2% in FY24 and is likely to have fallen further to less than 11% in FY25. But it has a material multiplier effect on the Indian economy, and has gained particular relevance in current circumstances given sluggish exports, uneven domestic demand, and slowing government capex. 

So, the next leg of growth will need to come from private capex. Until then, foreign inflows and retail participation can provide the liquidity-push to stock markets. But a strong and sustained fundamentals-driven rally is critically dependent on private investments.

Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment adviser.

Views are personal and do not represent the stand of this publication.