India's Second Investment Boom - A Déjà Vu to 2003-2008? | The Beam: Weekly Market Narrative

Last week the US FED delivered a 25bp hike to 375-400bp, a decision widely expected by the market.  According to our global CIO, “A positive reaction in the run-up, and to the FOMC result, is a bullish positive, suggesting a market far more focused on near-term growth than the ensuing, eventual slowdown, a hike will bring.  The market shrugging off the hike is meaningful signal - not only have indices reclaimed critical support levels, but a move up also bodes well for risk-on scenarios, notwithstanding longer-term issues that will linger.   Also Read

Global bond yields have also settled down, following the hike.   While we will keep encountering air pockets like we experienced last week, it seems we may have flown out of this one, for now.

As we turn our attention to the Indian market, we are increasingly getting convinced on the capital formation theme which we believe will gain prominence.   We believe that India has entered its second investment boom, since the last one seen between 2003-2008 and the data is increasingly validating it.

India's Capital Formation Cycle:  It is turning and it looks to be durable

In the 1QFY27 GDP numbers that just came out, the surprise was not only the headline beat.  The bigger surprise was the pace of growth in gross fixed capital formation, which rose 11.9 % year-on-year, more than double the 5.8 % pace of a year earlier and the fastest rate in many years. The ratio itself, capital formation measured against nominal GDP, rose to 34.3 percent from 31.4 percent, while manufacturing GVA accelerated to 9.2 percent from 8.3 percent, outpacing the headline growth rate and nudging the sector's share of output higher after years in which manufacturing's contribution to GDP had stagnated.  We see considerable skepticism on the sustenance of this momentum.  However, we stand against the consensus.  We do not think this is a one-quarter statistical anomaly. We underscore our conviction that India’s private capex cycle has turned, and that the composition of Indian economic and as a corollary,  corporate earnings growth is shifting in a direction that should matter a great deal to how we as investors think about the next five years.

India has spent most of the period since the 2008 global financial crisis as a consumption and services-led economy, with private final consumption and government transfers doing the heavy lifting while corporate balance sheets stayed deliberately conservative.  According to data from the National Institute of Public Finance and Policy (NIPFP), India's capital expenditure multiplier stands at 2.45x versus 0.98 for transfer payments and 0.99 for other revenue expenditure.  As the share of capital formation in GDP growth increases, we will see a shift back towards the higher-multiplier model of economic growth and it is arriving at a moment when the underlying demand drivers behind it look unusually durable.  This is what we try and address in this issue of The Beam.

For investors looking for data, we would like to highlight the following.  CMIE's tracking of new private project announcements shows ₹13.1 lakh crore in Q1 FY27 alone, up 70 percent both quarter-on-quarter and year-on-year, a sharp reversal from a soft Q4 FY26 of ₹7.5 lakh crore, with power and electricity projects up 398 percent quarter-on-quarter as the single biggest driver.

Three Manufacturing-Intensive Cycles, Running simultaneously

Our confidence in the durability and certainty of this capital formation cycle sustaining over the next five years rests on the belief that India is not looking at one large capex theme but at three simultaneous ones, each driven by factors that are structurally difficult to postpone, and each one being manufacturing intensive.

The first is AI infrastructure and we have spoken about this in earlier issues of The Beam! AI Infrastructure is now one of the largest sources of announced private investments in the country, spanning data center construction, power generation and transmission built specifically to serve compute demand, cooling systems, and the cabling, electrical and conductor ecosystem that connects all of it. This capex is being financed by the largest, least capital-constrained balance sheets in Indian corporate history, and it is being deployed against a global compute shortage and the urgency of building data centers.   As we have discussed earlier, the articulated spend on this theme is cumulatively estimated to be US$100-150bn over the next five years.

The second is the renewable energy transition.   Grid modernization, HVDC transmission corridors, renewable capacity addition, and the power-generation buildout needed simply to keep pace with AI-driven electricity demand are now running concurrently, and the timelines behind them are largely set by regulatory mandates and physical grid constraints than by sentiment. Renewable transmission is the one piece of this cycle with no optionality left. India has already built enough solar and wind capacity that curtailment — power generated but not evacuated because the grid cannot carry it — is running at 50 to 60 percent during peak hours in high-renewable states like Rajasthan and Gujarat, according to ICRA.  The mismatch is also widening with  only about 12 percent of transmission projects under the competitive-bidding model have been completed on schedule, with median delays running past ten months, even as renewable capacity additions accelerate and AI-linked electricity demand increases pressure on the grid.  As we had highlighted in the earlier issue of The Beam, the estimated capex on this theme is close to US$300bn between now and 2032.

The third is defense indigenization and exports.  A record capital acquisition budget, a large majority of it now reserved for domestic industry, has already been converted into large order books and it is increasingly private companies, not only the traditional public-sector companies, that are being treated as first-choice suppliers. Defense capital commitments of this kind are, by their nature, the least discretionary form of government spending.  Let us look at the following examples which demonstrate the potential durability of Defense capital spending. Solar Industries, an explosives maker rather than a traditional defense contractor, saw its defense revenue grow 123 percent year-on-year and now accounts for over a quarter of its business, up from a fifth just twelve months earlier. Astra Microwave's order book effectively doubled on the strength of a single radar contract from HAL. Bharat Forge, a forgings and auto-components manufacturer, disclosed a fresh ₹11,196 crore defense order book.

The Order Books Are Already Confirming It

If this were only a thesis about announcements, skepticism would be warranted, since we have seen false starts on capex many times in past twelve years. What makes this cycle different is that it is already visible in reported order books rather than in just stated intentions.   Let us look at some examples of the evidence.  Larsen & Toubro closed the year with order inflows of roughly ₹4.35 lakh crore, its highest ever, and its order book has since climbed 27 percent year-on-year to ₹7.79 lakh crore.  Apar Industries, which supplies conductors into data center and HVDC projects and is now approved to sell into Meta, Microsoft and Google's US data centers, has grown revenue 29 percent and is looking at an order book of ₹10,190 crore.  KEC International and Kalpataru Projects both point to HVDC-linked demand behind order books up sharply year-on-year, the latter at a record ₹66,600 crore, while Power Grid alone is guiding to a transmission investment requirement of nearly ₹8 lakh crore through FY36. These are not soft indicators. Order books are compounding faster than India’s nominal GDP growth.

Order Book positions of leading capital goods companies

As investors we have been awaiting a private capex revival for almost fifteen years now. This quarter, for the first time, the GDP composition, the investment ratio, the credit data and the order books of the country's leading manufacturing and infrastructure companies are all telling the same story simultaneously, and the demand pools behind that story, AI infrastructure, energy transition and defense, are the kind that get built regardless of the news cycle. We will not say this cycle is risk-free, an El Nino-driven hit to rural incomes and a volatile geopolitical backdrop are real and current threats to near-term sentiment, but we would call it the first capex Supercycle since 2003-2008 and where the countervailing forces are working in India's favour rather than against it. India’s gross domestic capital formation is entering a multi-year upcycle rather than a temporary rebound.  It is time to pivot our portfolios appropriately.