A customer holds a sweater against a man’s back for size inside the new Marks & Spencer Reliance India store in Bandra, Mumbai. India’s economy grew 4.7% in 2013/14.
India’s economic growth picked up marginally from a decade low in the fiscal year ended March, but pro-business Narendra Modi’s thumping victory in the recent general election has stoked optimism of an investment-led turnaround in the coming quarters.
Asia’s third-largest economy grew 4.7% in 2013/14, slower than an official estimate of 4.9% and higher than 4.5% growth a year earlier. It marks the second straight year of – 5% growth – the worst slowdown in more than a quarter of a century.
Economic growth for the quarter to end-March came in at 4.6% from a year earlier, compared with 4.8% estimated by analysts in a Reuters poll and a revised 4.6% growth in the previous three months.
“We are not able to yet see...how the economy will grow but certainly the mood is upbeat,” said AM Naik, chairman at the country’s biggest engineering firm Larsen & Toubro, who expects growth to pick up to 5.5% this fiscal year.
Growth stuck below 5% is disappointing for an economy that boasted of a near double-digit economic expansion until a few years back and was widely expected to be one of the main drivers of the global economic recovery.
It also poses a challenge for the new government to generate enough job opportunities to employ the 10mn people who enter the country’s workforce every year. New Delhi reckons the economy needs to grow 8% a year to prevent a demographic disaster.
Modi won India’s first outright parliamentary majority in three decades with a pledge to boost growth and create jobs, raising hopes among investors for a turnaround led by spending on infrastructure.
Ninety-three per cent of CEOs in a polled carried out by one of India’s industry chambers FICCI said they expect a substantial improvement in the near-term economic situation following the election of a strong government.
“It is likely the infrastructure projects which have been held up for a long time...will hopefully begin to move,” said Naik. “We will see the impact of it more like in August, September, because it takes time for things to move.”
Capital investment contributes nearly 35% to India’s economy, but it contracted an annual 0.1% in the fiscal year that ended in March.
Projects worth RS6.2tn ($105.1bn) were shelved last year due to bureaucratic gridlock, according to CMIE, an economic think tank, the highest in the past 18 years.
Modi’s reputation, assiduously built while running the western state of Gujarat, of speeding up implementation of infrastructure projects and promoting manufacturing has raised hopes of a similar push at the national level.
Arvind Panagariya, an economics professor at New York’s Columbia University who is tipped to get an advisory role in the government, has called on the new administration to revamp the cumbersome tax regime and boost capital spending.
But that’s easier said than done. States wield much of the power in approving projects, while only a quarter of approvals come from federal agencies. High corporate leverage and rising bad loans at Indian banks are also weighing on investments.
Stressed loans in India – those categorised as bad and restructured – total $100bn, or about 10% of all loans. The debt-equity ratio of Indian firms, meanwhile, has hit a two-decade high of 97.9%, according to Nomura.
“Investor sentiment has changed but government needs to follow it up with action to address structural bottlenecks,” says MS Unnikrishnan, managing director at capital goods maker Thermax, who expects a gradual recovery.
Short-term steps to stimulate economic activity could also raise concerns about the new government’s commitment to reduce the fiscal deficit to 4.1% of GDP this fiscal year.
Fiscal belt-tightening helped narrow the federal fiscal deficit to 4.5% in 2013/14, below a revised official estimate of 4.6% and lower than 4.9% a year ago, government data showed yesterday.
Adding to the growth challenge is an adverse global economic climate that is hemming in the country’s exports growth. The sector accounts for nearly a quarter of the domestic economy.