12 January 2012

Indian Economy in Danger Zone

Companies like Reliance Power and GMR brought their projects to a standstill as they feared economic slowdown in 2012, resulting in a five year low in 2011 in investment proposals. The lingering phase of weak investment will either raise loan defaults by companies or demand for reconstructing of debts, denting banks' profitability.
Indian Economy in Danger Zone

The data from the Centre for Monitoring Indian Economy (CMIE) states that the graph for new investment proposal in 2011 came down to 10.46 lakh crore (i.e. 45 percent) from 18.88 lakh crore a year previously.
A Subba Rao, Chief Financial Officer, GMR Group, that runs airports and utilities said, "If investment-led growth does not happen, we will manage to have a GDP of around 6.5% over the next 3-5 years." He further added, "Investment is weak and if the government does not act fast, it may come to a grinding halt. The government needs to work overnight and carry forward reforms and approve policies over the next 2-3 months for things to improve," as quoted by Economic Times.

As government is flip on policies is portraying a vague impression on returns, companies have iced-up their investments specifically in power sectors which swallows capital and requires departmental approvals for even effects. Since welfare programmes takes priority over asset creation, it also halted state investments.

The slowdown and stalling of projects has made the banks hesitant to lend money fearing the bad loans. The funds have been made expensive by RBI with 13 percent increase in rates.
Investments have declined by 40 percent so government is struggling hard to attain the fiscal deficit, while private sector investment declined nearly 48 percent year after year.

According to CMIE data, Gujarat, the state favored most by corporate India, has kicked out the trend, as it pulled off 18 percent of the latest announced projects and registering around 14 percent increase year after year. It also includes the labour problems faced by Maruti Suzuki in Haryana, which registered around 90 percent fall in previous year.

Rashesh Shah, Chairman, Edelweiss Financial Services, said, "Capex has come down because of higher interest rates and low liquidity. But, this is just a short-term trend. Capex numbers will bounce back from a low base when rates start going down."