Homegrown woes weigh on India amid slowdown

Economists in recent days have downgraded their outlook for Asia's third-largest economy, with some making deep cuts in their growth forecasts to below 7 percent for the fiscal year that will start in April.

A slowdown in capital spending growth is keeping a lid on the potential of the economy.
“Where others are struggling to get any demand, we could be better placed,” Piramal Group Chairman Ajay Piramal,  told the Summit.

“India actually has internal demand and therefore this is the time in the sun, if I may say, for India, and therefore we must not lose the opportunity," he said.

“That is where I feel there is a sense of frustration, that if we did more we can establish ourselves in the world economy in a stronger position,” he said.

India has been beset by policy gridlock over the past year as a spree of corruption scandals has put the government on the back foot, slowing reforms. Big-ticket projects have been delayed awaiting environmental clearances or access to coal. Rising interest rates, high inflation and worsening global conditions are also dragging down near-term business sentiment in India.

Top Indian engineering firm Larsen & Toubro is stepping up its business overseas as a hedge against uncertainty in India, where half the expected $100 billion potential opportunity for his company this year has been deferred, Chief Financial Officer R Shankar Raman told the Summit.

“The world is virtually on its knees. This is an opportunity for you to announce yourself, that what you did in the IT space was not an aberration, that you have the engineering skills, manufacturing skills, and an opportunity to...strengthen the country for a long time to come,” he said.

“You cannot mess up with this opportunity...because there will be a third country that will come up and do all this, and better...It is disheartening at the moment," he said.

Capex cutbacks
Macquarie expects gross fixed capital formation growth in India to slow to 4.2 per cent in the current fiscal year from 8.6 per cent last year, far below the double-digits clocked in the years before the global financial crisis in 2008.

Kotak Mahindra Bank on Monday cut its economic growth estimate for the fiscal year ending in March to 7.1 per cent from 7.3 per cent, and slashed its outlook for the following year to 6.9 per cent from 7.9 per cent. India’s economy grew 8.5 per cent last year.

The Reserve Bank’s 13 interest rate increases since March 2010 have eroded demand in credit-sensitive sectors as well as investment, but have not managed to curb inflation that remains near double-digits. Monetary policy can do little to address structural bottlenecks in the economy.

Morgan Stanley said in a note on Monday that while the government’s recent approval of three major infrastructure projects is a step in the right direction, it needs to spur private investment. “In this cycle, reviving growth will be possible only with a push to capex,” Morgan Stanley wrote.