Investment malaise thwarting quick economic rebound

BALLABGARH, India Wed Feb 13, 2013 1:48pm IST

A worker uses a hammer to break apart a used truck engine at a small scale factory in Kolkata February 12, 2013. REUTERS/Rupak De Chowdhuri

A worker uses a hammer to break apart a used truck engine at a small scale factory in Kolkata February 12, 2013.

Credit: Reuters/Rupak De Chowdhuri

Related Topics

Stocks

   

BALLABGARH, India (Reuters) - Being a big wheel in the earth mover business, Vipin Sondhi has a very clear idea why the Indian economy is stuck in the mud and what the government must do to change the mindset of business executives, like himself, who are too wary to invest.

The chief executive officer and managing director of JCB India, the country's largest construction equipment manufacturer, says Prime Minister Manmohan Singh has improved business sentiment with the launch of urgently needed reforms last September.

But that, he says, won't justify fresh investment when his firm, a fully-owned subsidiary of UK-based JC Bamford Excavators Ltd, is already running 20 to 25 percent below capacity that was doubled just over three years ago.

"Has there been a turnaround in construction demand? The answer is no," Sondhi told Reuters at JCB's headquarters at Ballabgarh in Haryana. "The sentiment is changing, but the situation on the ground has not changed."

Sales of JCB's tractor-mounted diggers, loaders and other machines hit a record 27,000 units in 2011, but after last year's sharp slowdown the firm is working on the basis that there will be no sales growth at all in the first half of 2013.

The latest macroeconomic data provides scant evidence of anything changing fast for the better, with India on course to end the 2012/13 fiscal year in March with its slowest growth in a decade at 5.0 percent.

Industrial output data released on Tuesday added to the gloom.

India's industrial production unexpectedly shrank for a second straight month in December, weighed down by weak investment and consumer demand, casting doubt on Finance Minister P. Chidambaram's view that Asia's-third largest economy is showing signs of recovery.

The index of industrial production (IIP) fell 0.6 percent annually in December, following a revised 0.8 percent drop in November. Output has grown in just three of the last nine months.

The output data follows even more chastening preliminary gross domestic product (GDP) estimates released last Thursday that showed annual growth would probably cool to 4.6 percent in the six months through March, down from 5.4 percent in the first half of the fiscal year.

The slowdown has left India a long way off the near double-digit growth it had hoped would become routine, given the need to raise the living standards of hundreds of millions of poor among its 1.2 billion people.

Infrastructure firms like Bharat Heavy Electricals Ltd. (BHEL.NS), Larsen & Toubro (LART.NS) and Hindustan Construction (HCNS.NS) reported dismal sales during the October-December quarter, and their order books showed little hope for a quick turnaround.

GRAPHICS:

GDP and investment growth link.reuters.com/vep85t

GDP vs industrial output link.reuters.com/qaw46s

Output, exports link.reuters.com/gaj55s

Rates, inflation link.reuters.com/saq26s

ALL GEARED UP, NO PLACE TO GO

Weak investment, now projected to hit at least a five-year low, lies at the heart of India's economic malaise, with some firms saddled with spare capacity built up in the expectation that the boom years of the early 2000s had further to run.

"We can recapture the magic of 2004-08. The average growth was 8.5 per cent during that period," Chidambaram said on Saturday.

"Why should we, without any reason, denigrate our own performance and record? I have no doubt in my mind that we will come out of the trough and we will climb back to a growth rate of between 6-7 percent next year," he said.

After being pilloried for inaction as the economy faltered in the past two years, the Congress-led government has launched a slew of economic initiatives since September last year that have helped lower the risk of a downgrade in its sovereign debt rating to junk bond status.

It has opened retail and aviation sectors to more overseas investment, hiked rail passenger fares, cut fuel subsidies and delayed tax changes that threatened to deter capital inflows.

But at the same time the government is having to cut spending to trim a worryingly high fiscal deficit.

The budget for road building is one item that will be slashed, not that many were being built.

Earlier this month, a road ministry official told Reuters that the ministry had awarded just 1,000 km of road projects, out of a target of 9,000 km for the current fiscal year.

The most positive development for the infrastructure sector, according to JCB's Sondhi, has been the formation of the cabinet committee on investment (CCI).

Meant to help major projects get the approvals they need from various ministries, the panel met for the first time last month, without making any big decisions. But Sondhi was optimistic that Singh's government, after nearly nine years in power, will straighten out priorities.

Red tape, public interest litigation and a lack of power generating capacity are nothing new in India. What has been missing is the political will to force change needed to allow projects to move ahead.

South Korean steelmaker Posco (005490.KS) has a $12 billion project in Odishastill waiting to get off the ground. Posco has been struggling to acquire land since 2005.

For the past seven years Luxembourg-based ArcelorMittal's (ISPA.AS) $30 billion steel projects have been waiting for forest department approvals.

"The cabinet committee on investment has to get going," Sondhi said. "Issues related to land acquisition, forest and environmental clearances need to be ironed out. And they have to be ironed out at the level of the CCI."

Notably, Sondhi didn't mention India's high interest rates as he ran down a list of disincentives to investment in his sector.

"If the government manages to address the bottlenecks, the change could come in the next two quarters," he added. "By doing nothing, nothing will change."

(Graphics by Catherine Trevethan; Editing by Simon Cameron-Moore & Kim Coghill)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Pricing Controls

REUTERS SHOWCASE

India-China Relations

India-China Relations

India says to defend China border after standoff ahead of Xi visit.  Full Article 

Importing Iron Ore

Importing Iron Ore

As mining curbs bite, India offers market to glut-hit iron ore.  Full Article 

Lower Output

Lower Output

IOC cuts refinery output as rains hit fuel demand - source.  Full Article 

Drug Approval

Drug Approval

Epirus, Ranbaxy win India approval for arthritis drug copy.  Full Article 

Farming and Technology

Farming and Technology

Climate smart farmers get tech savvy to save India's bread basket.  Full Article 

Rajan Speaks

Rajan Speaks

RBI chief Rajan says limiting reliance on foreign debt.  Full Article 

India-Vietnam Ties

India-Vietnam Ties

India tightens Vietnam defence, oil ties ahead of China Xi's visit.  Full Article 

Debt & Equity Deal

Debt & Equity Deal

KKR to lend $175 million to GMR Infrastructure - source.  Full Article 

Preparing for IPO

Preparing for IPO

Alibaba boosts IPO as demand strengthens.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage