From household spending to corporate capex: Why the next leg of India’s growth may look different

The improvement has come almost entirely from higher net profit margins, which have climbed close to 9%. Leverage has not been the driver. In fact, the equity multiplier has fallen to about 1.64 times, indicating that balance sheets are cleaner than they were a few years ago. Asset turnover has remained largely flat, yet fixed-asset turnover has risen to roughly 2.1 times. Companies are generating more sales from the plants and machinery they already own.

At the same time, they are still reinvesting only about 54% of their operating cash flow into new projects, below the 61-62% average seen between FY16 and FY18. That gap is important. It suggests there is still meaningful room for companies to fund higher capital expenditure from internal accruals before relying more heavily on debt. The early signs of a shift are already visible. Project announcements between FY23 and FY26 have been roughly 3.7 times the average of the previous decade.

Funded intentions have roughly doubled, while actual capital expenditure by listed companies has more than doubled compared with levels seen through much of the 2010s. Corporate profits have risen from about 2.5% of GDP a decade ago to around 6%. Policy has helped create the runway. Production-linked incentive (PLI) schemes have turned India into a net exporter of mobile phones, while solar module capacity has expanded rapidly.

Newer initiatives covering electronics components, semiconductors, nuclear energy and artificial intelligence are designed to push companies further up the value chain. The combination of stronger margins, leaner balance sheets and targeted industrial policy has left corporate India better positioned to invest than at any point in recent years. This does not mean the transition will be frictionless.

Margins are near multi-year highs, so competitive intensity and capacity additions are likely to rise. Some of the next wave of investment will probably be funded by debt as companies move from sweating existing assets to building new ones. Yet the starting point is stronger than in previous cycles: profitability is higher, leverage is lower and cash-flow coverage of investment remains comfortable.