Economic growth in India stalls on low investment

Local investments in India are declining with companies holding back on launching new projects amid the uncertainty caused by reforms such as the introduction of a sales tax and reluctance of banks to lend in one of Asia's largest economies.

Investments in new projects by Indian companies fell to a 13-year low in the quarter to the end of December, reaching 770 billion rupees (us$12.17bn), less than half the amount spent in the same period a year earlier, according to the Centre for Monitoring Indian Economy (CMIE), a business and economic database and research firm. Manufacturing and construction sectors led this decline.

Fresh investment is critical for India, as the country tries to boost economic growth, which has been negatively impacted by factors including demonetisation and the introduction of a new goods and services tax, which businesses have been trying to adjust to.

Demonetisation, which resulted in the government banning the two highest value bank notes of 500 and 1,000 rupees, clamped down on black money, but left liquidity for many businesses strained.

India needs investment to drive growth, but growth has languished below the 8 per cent rate needed to create jobs for a population of 1.3 billion. Gross domestic product expanded 6.3 per cent in the quarter between July to September, lower than the growth of 7.5 per cent that India had achieved in the same quarter in 2016. 

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"In the absence of investment, there are no chances of job creation," says Mahesh Singhi, the founder and managing director of Singhi Advisors, an investment banking firm based in Mumbai. "Indian growth has largely been supported by government expenditure for the past few years. But a constant decline in private sector investment proposals indicates a big mismatch between the Indian stock markets – which are at an all-time high – and the real economic activity."

Avneet Singh Marwah, the director and chief executive of Super Plastronics, an Indian consumer electronics company, says that demonetisation and GST have been the main factors that have discouraged companies from investing.

"Over the last one year, most of the corporate players were waiting for the action on these reforms and this slow investment was a strategy on behalf of most of the corporate players," says Mr Marwah.

“Due to these reforms, all investments were put on hold.”

A number of projects have stalled in India because of factors including a lack of funds and problems securing permissions such as environmental clearances, while land acquisition issues have also played a role.

Saddled with billions of dollars of bad debt, Indian banks are not lending to projects which are critical to drive growth.

 “Given the NPA (non-performing assets) situation in the banks, they weren’t lending, particularly in infrastructure, the power sector, the core industries,” says Bhaskar Majumdar, the managing partner at Unicorn India Ventures, a venture capital fund. 

“The government did drag their feet on resolving the banking issues. It is only in the last quarter that some of the bankruptcy rules have come in.”

A lot of Indian companies have turned their focus to reducing their debt rather than investing. For example, telecommunications firm Reliance Communications, owned by billionaire Anil Ambani, last month unveiled plans to sell-off assets to reduce its debt burden from 450bn rupees to 60bn rupees.

“Today for the first time in the history of India I think, you see that companies are deleveraging. Everybody is getting into sensible balance sheets,” says Mr Majumdar.

But some experts are optimistic about a reversal of fortune for the Indian economy and investments amid bullish forecasts for growth.

“Now, reviewing the current scenario, the next financial year should see maximum investment in terms of both value and numbers,” says Mr Marwah. “Today the picture seems to have improved and with ‘one nation one tax’, it becomes fairly simple for a corporate to come and invest in India and the economy.”

The IMF expects India’s economy to recover and grow 7.4 per cent in 2018. The finance ministry also has a  recapitalisation plan of more than 2 trillion rupees for the country’s ailing state-controlled banks, which once implemented could improve the conditions for investment.

“The government has taken various steps for simplification of various regulations, and is trying to bring about a relaxation of the tax and insolvency regime,” says Atul Pandey, an associate partner at Khaitan & Co, a law firm. “Most of these reforms will actually start showing effect with some time lag, but we expect the benefits from these regulations to manifest in the coming financial year, and therefore, the upcoming investment scenario in India looks bright.”

Meanwhile, when it comes to foreign direct investment (FDI) flows, the figures are in fact very positive. Data from the Indian government reveals that $33.75bn flowed into India in the first half of this financial year, which runs from April to March, which means the figure for the year could surpass the $60bn of foreign direct investment inflows into India in the previous financial year.

In terms of FDI, the current government has taken steps to open up India to more inflows by easing restrictions on investment into sectors including aviation, defence, and pharmaceuticals. Analysts say rules could be further eased to encourage investment from both within and outside the country.

“The biggest concern is infrastructure and this is an area, which we need significant improvement in,” says Mr Marwah.

The government is making efforts to try to improve infrastructure, but a lot of basic facilities such as roads are in a poor state in India, and there is much to be done.

Mr Marwah says there are encouraging signs for investors, however, under prime minister Narendra Modi’s Bharatiya Janata Party government, which came to power in 2014.

“In terms of corruption, which was always a concern for any investor, there is drastic improvement after the formation of the new government and we haven’t seen scams
for close to three years,” says Mr Marwah. “We are heading in the right direction but there is still a long way to go.”