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India's investment malaise thwarting quick economic rebound
February 12, 2013 / 10:01 PM / 5 years ago

India's investment malaise thwarting quick economic rebound

By Rajesh Kumar Singh
    BALLABGARH, India, Feb 13 (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 the northern state of 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
    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.
, Larsen & Toubro and Hindustan Construction
 reported dismal sales during the October-December
quarter, and their order books showed little hope for a quick
    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
    "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 has a $12 billion
project in eastern Odisha state still waiting to get off the
ground. Posco has been struggling to acquire land since 2005.
    For the past seven years Luxembourg-based ArcelorMittal's
 $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
    "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)

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