Delhi gridlock curbs India’s growth
Anil Gupta is an anxious man. Sharply rising interest rates, a gloomy mood among his fellow industrialists and the lack of direction displayed by a fractured government are all hitting his business.
“The sentiment in India is not very strong,” says Mr Gupta, joint managing director of Havells India, a large manufacturer of electrical equipment.
“Companies are trying to save cash, rather than invest in a major way. They are not building for the future.”
Sales of Havells’ industrial power cables have been hardest hit as large companies postpone new projects. The company’s more consumer-oriented business has remained buoyant but Mr Gupta fears that this will also taper off as corporate pessimism trickles down.
“This will eventually have a consumer impact, though we are not yet seeing it. But we are worried.”
The latest data are hardly reassuring. The Indian economy grew 5.5 per cent year on year in the quarter from April to June – marginally higher than the 5.3 per cent expansion of the previous quarter and a little better than expected.
After four quarters of falling growth, the figures “give reason to be cautiously optimistic that [the slowdown in] growth may have bottomed out”, says Leif Eskesen, chief India economist for HSBC.
Yet the sluggish pace of expansion leaves serious doubts about whether the economy will – as promised by Manmohan Singh, the prime minister, perform better than last year, when it grew 6.5 per cent – compared with 8.5 per cent the previous year. Many analysts are predicting full-year growth below 6 per cent.
“The heady days of the 8 or 9 per cent growth are well behind us, with the slowdown becoming much more widespread,” says Sumant Sinha, chief executive of Renew Power, a wind farm developer.
India escaped relatively unscathed, and then rebounded quickly, from the 2008 global economic crisis, which raised confidence that it would be able to maintain the 8-9 per cent growth it urgently needs to reduce poverty and create millions of new jobs for its young population. Many believed growth could even accelerate to double-digit figures.
But instead, the country’s own internal problems – rapid inflation, political gridlock in New Delhi over corruption claims and the next generation of reforms, unstable policies, a growing fiscal deficit, major infrastructure bottlenecks – have become brakes on growth.
“Private investment sentiment is at the weakest for a very long time,” warns Rajiv Kumar, head of the Federation of Indian Chambers of Commerce and Industry. “The downward momentum in growth will continue in the next quarter and there will be tougher times ahead.”
Growth in the past quarter was propelled by a sharp increase in government spending, which rose 9 per cent – despite pressure on New Delhi to rein in its fiscal deficit. Private investment growth was 0.7 per cent, compared with 3.6 per cent last year. Growth in consumption, one of the main forces propelling the economy forward, has also slowed to 4 per cent, compared with 6.1 per cent in the previous quarter.
Without any measure, India grows about 5 per cent, with some initiative, it grows at 6 per cent, and with a huge amount of policy impetus is reaches 7. Right now, there isn’t any impetus being provided on the economic front
– Koushik Chatterjee, Tata Steel
“The underlying momentum on the demand side clearly remains very, very weak,” says Sonal Varma, chief India economist of Nomura. “Overall, our expectation for the next three months is for sluggish growth around these levels.”
Chandrajit Banerjee, director-general of the Confederation of Indian Industry, appealed for co-ordinated fiscal and monetary policy to revive sentiment and growth.
“The GDP [gross domestic product] numbers leave no doubt about the criticality of the situation,” he says. “CII feels that opportunities for revival of economic growth would soon peter off if the economy dives into a downward growth spiral due to steep decline in growth of gross capital formation.”
Amid the gloom, building appeared to be a bright spot, rising 10.9 per cent. But analysts say this could be a statistical aberration because of delays in the monsoon rains, which allowed construction to continue longer than usual.
Koushik Chatterjee, chief financial officer of Tata Steel, says India’s economy could continue to grow at about 5 per cent on sheer momentum but would need a strong political focus to return to levels of 8 per cent growth.
“Without any measure, India grows about 5 per cent, with some initiative, it grows at 6 per cent, and with a huge amount of policy impetus is reaches 7,” he told Indian television. “Right now, there isn’t any impetus being provided on the economic front.”
At Havells, Mr Gupta says construction is slowing in big cities but remains strong in smaller towns, where pent-up demand is high. The company is trying to deepen its penetration to capitalise on this potential.
“Markets may shift a little, but there is still scope to grow,” he says. “We will just have to work harder.”
Additional reporting by James Crabtree in Mumbai