Investment malaise thwarting economic rebound

BALLABGARH Sat Feb 23, 2013 2:36pm IST

A worker repairs iron rings used in heavy wheels inside a small scale factory in Kolkata February 12, 2013. REUTERS/Rupak De Chowdhuri

A worker repairs iron rings used in heavy wheels inside a small scale factory in Kolkata February 12, 2013.

Credit: Reuters/Rupak De Chowdhuri

Related Topics

Stocks

   

BALLABGARH (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

REUTERS SHOWCASE

Coal Block Allocation

Coal Block Allocation

Government urges Supreme Court to not cancel some 'illegal' coal mines  Full Article 

Modi in Japan

Modi in Japan

Japan and India agree to boost strategic ties at summit  Full Article 

Basel III Norms

Basel III Norms

RBI amends Basel III guidelines for banks  Full Article 

HSBC PMI

HSBC PMI

Factory activity expands at slower clip in August.  Full Article 

Current Account

Current Account

Balance of payments surplus for third straight quarter  Full Article 

India Infrastructure

India Infrastructure

RBI rule handicaps India's infrastructure hopes  Full Article 

Book Talk

Book Talk

Reema Abbasi and a glimpse of Pakistan’s Hindu past  Full Article 

China Economy

China Economy

Retreat in China's PMIs heightens calls for policy easing.  Full Article 

Managing Share Sales

Managing Share Sales

Govt seeks bids from banks to manage PFC, REC share sales   Full Article 

Reuters India Mobile

Reuters India Mobile

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