Macroeconomics Problem

This Was Supposed to Be India's Big Year, but Businesses Aren't Investing; Many companies are afraid of sudden changes in costs or government policies Kala, Anant Vijay . Wall Street Journal (Online) ; New York, N.Y. [New York, N.Y]06 Nov 2017: n/a.

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FULL TEXT NEW DELHI--India will likely lose its title as the fastest-expanding large economy this year, as a recent growth spurt

sputtered after failing to trigger new corporate investment.

This was supposed to be the year Asia's third-largest economy could at last emerge from China's shadow. Instead,

it is struggling with a slowdown.

Ask executives, and they will tell you why. Prime Minister Narendra Modi's heavy-handed attempts to improve the

economy in the past 12 months have sapped them of confidence. They have been putting off investment plans,

which is hurting growth and dousing the job creation the country's citizens desperately need.

Krishna Kumar Jindal, a textile company owner, used to have his 48 looms running 24 hours a day, when Mr.

Modi's rollout of a new national tax left customers confused and slashed his sales in half. Now he's worried

whether he can pay his loans and 150 employees.

"Our factory used to run 360 days in a year," he said. "Now we are looking for reasons to keep it closed."

India's gross domestic product growth rate slowed to a three-year low of 5.7% in the quarter that ended in June,

well behind China's 6.9% for the same period. In the first half, India grew an average of 5.9% while China grew 6.9%.

Last year, Indian growth beat China's but is expected to fall behind for all of 2017.

While growth of almost 6% is nothing to sniff at, and optimists expect India's growth to improve last quarter, the

South Asian nation needs growth of closer to 10% if it hopes to provide good jobs for the close to one million

people entering its workforce every month.

Many blame Mr. Modi's most aggressive economic adjustments: The surprise crackdown on cash late last year

and the implementation of a nationwide goods and services tax this year. The double shock treatment, aimed at

bringing more Indians into the tax net, has chilled new investing by small and large companies and exacerbated

anemic private investment and lending.

Companies have scaled back investing, because they still have capacity left over from better times, economists

say. And banks aren't making it easy to borrow.

Last quarter, private and state company investment plans fell 66% from a year earlier to a 13-year low, according to

estimates from Mumbai think tank Centre for Monitoring Indian Economy. Indian factories are operating at only

71% of capacity, according to latest Reserve Bank of India data, well below their peak of more than 80% just five

years ago.

"The investment cycle is not taking off," said Tanvee Gupta Jain, chief India economist at UBS Securities.

A shoe factory owner, Rafeeque Ahmed, says he has put expansion plans on hold until he has more confidence

about New Delhi's policy plans, particularly about minimum wages. The $16 million he was going to invest to boost

his production capacity by 20% may now go to setting up facilities in Myanmar or Bangladesh.

"We are afraid to invest," because the government could suddenly change policies and thus our costs, he said.

Companies are also struggling with a debt hangover, the result of too much borrowing a decade ago. Banks have

piled up about $150 billion of bad loans, leading to a sharp decline in their lending capacity. Credit growth has

slowed to the lowest rate in more than two decades.

Last month, the government pledged a close-to-$33 billion capital infusion into state-run banks to help shore up

their resources. While the move has been welcomed and triggered a rally in bank shares, it is still only about half

the $65 billion that Fitch Ratings estimates Indian banks require to meet new Basel 3 regulatory requirements that

come into effect in 2019.

Neeraj Kedia, chairman of fertilizer company Chakradhar Chemicals Pvt. Ltd., said he would invest more if he could

borrow more, but banks have become too cautious. Some are even demanding big upfront cash deposits as

collateral for loans, he said, something they never asked for before.

"They want to make themselves 200% secure," he said.

New Delhi is trying to step up state spending to offset some of the weakness in private investment. Last month it

announced plans to spend more than $100 billion on new highways.

The government's investments in banks and infrastructure will help, economists said, but India needs the private-

sector motor of the economy to be working harder to keep growth accelerating.

"It is [a] systematic [problem] and one has to persevere, in terms of the policy changes, and the policy changes are

many," said Junaid Ahmad, the World Bank's India director.

Write to Anant Vijay Kala at anant.kala@wsj.com

Credit: By Anant Vijay Kala

DETAILS

Subject: Production capacity; Factories; Economic growth; Gross Domestic Product--GDP

Location: China Asia India Mumbai India

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Company / organization: Name: Reserve Bank of India; NAICS: 521110

Publication title: Wall Street Journal (Online); New York, N.Y.

Pages: n/a

Publication year: 2017

Publication date: Nov 6, 2017

Section: World

Publisher: Dow Jones &Company Inc

Place of publication: New York, N.Y.

Country of publication: United States

Publication subject: Business And Economics

Source type: Newspapers

Language of publication: English

Document type: News

ProQuest document ID: 1960494963

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Last updated: 2017-11-07

Database: The Wall Street Journal