GDP growth set to weaken, business wants reforms more than rate cut

Saturday, 29 November 2014 00:00 - - {{hitsCtrl.values.hits}}

Reuters: Anticipating data out on Friday will show weakening economic growth, the finance ministry will argue for an interest rate cut, but bankers and company executives say the key to recovery lies in how fast Prime Minister Narendra Modi acts on reforms. “Interest rates are also important, but more important is enabling policy directives from the government to resolve the issues affecting our sector,” said K. Rajagopal, chief executive officer of power producer Lanco Power.

The Lanco Infratech unit’s biggest problem is a shortage of coal supplied by an inefficient state-run monopoly, Coal India Ltd. Indian companies are keenly waiting for reforms on rules related to land acquisition, labour, coal and power sector, and foreign direct investment in insurance sector. Most of these are expected to be taken up in the current winter session of parliament. A lack of reforms explains the dearth of capital investment that lies at the heart of India’s anaemic growth. In the past two years Asia’s third largest economy has grown at rates below 5%, recording its slowest phase since the 1980s. Promising to oversee a revival, Modi swept to power in May. His election generated euphoria in the stock markets. Some of the optimism probably also helped economic growth to speed up to 5.7% in the April-June quarter. But, with no major new legislation to encourage industry, growth is expected to have fallen back to 5.1% in the July-September quarter, according to a Reuters poll. In September, credit growth hit a 13-year low. Two finance ministry officials told Reuters that the GDP figure could be as low as 5%, saying Finance Minister Arun Jaitley would use the weak performance to ask the Reserve Bank of India for a rate cut as soon as next week. With consumer inflation slowing to 5.2% last month, markets are already pricing in a possible reduction in the repo rate from 8% when the RBI reviews policy on Tuesday, though most analysts see the central bank waiting until early 2015. To power the economy back to the 8% growth needed to create enough jobs for India’s fast growing population, analysts say the government needs to focus on construction and manufacturing - the same sectors that helped India recover from the global financial crisis of 2008. Yet these capital-heavy sectors have plenty of spare capacity, and thus no urgent need to invest in new plant or machinery. Capacity utilisation fell to about 70% in the June quarter from nearly 85% three years earlier. Executives say any pick-up in corporate demand for loans requires business confidence, which depends on Modi’s government living up to its campaign promises. They want to see progress in reforming land acquisition laws, a controversial issue in India, as well as improvements in areas such as coal supply and transport infrastructure. “The government needs to make it easier to do business in this country. Clearances have got to be much easier. Land acquisition is still a big problem,” said Isaac George, chief financial officer of GVK Power & Infrastructure Ltd, one of India’s leading infrastructure builders. The RBI itself made clear the limits of monetary policy in a report on Sept. 30 that noted a sustained government progress is needed to revive “the animal spirits” in corporate investment. Many bankers agree. “I don’t think a 25 basis point cut is going to matter to corporates. More important than a rate cut is, I think, government policy changes. That will help the turnaround,” said a senior executive at State Bank of India who declined to be identified.