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 Consumer spending was the main driver behind India's 7.3 percent
growth in the October-December quarter, as a pick up in urban
spending more than compensated for subdued spending in rural areas
where the majority of India's 1.3 billion people live.
But there was little sign of an upturn in private capital
investment, which has been dormant for the past four years, despite
efforts by Prime Minister Narendra Modi's 19-month-old government to
stimulate it through debt-fuelled higher public spending.
The higher spending by families and the government not only risks
fanning inflation but also worsening household and national debt
levels. Already retail loans are growing at a double-digit rate even
as overall bank lending is crawling at its slowest pace in over a
decade.
Personal loans that include loans for durable goods, housing and
education are growing 14 percent year-on-year compared with 5.4
percent growth in overall bank credit, while credit card loans are
growing at about 23 percent on year.
It would be better all round if Modi were to make faster progress on
bank, land and tax reforms. But legislation for the latter two items
is stuck in parliament despite the government's large majority in
the lower house.
"If India wants to be the next emerging market star, it has to
reform," said Mark Williams, chief Asia economist at Capital
Economics. "There is no alternative."
RELUCTANT LENDERS
Even after the prime minister's much trumpeted push to expedite
clearances for major projects, most remain stalled.
In the December quarter, projects worth $155 billion remained stuck
due to issues related to land acquisition and funding constraints,
according to think-tank CMIE. New private investments in the same
period dived 60 percent.
Finding it hard to borrow from banks worried by stressed loans at
their worst level in 13 years, cash-strapped private firms have kept
a lid on fresh capital outlay, dashing Modi's hopes that higher
public spending would provide a stronger investment multiplier.
Overall investment growth hit a 15-month low of 2.8 percent in the
December quarter despite a 34 percent annual increase in public
capital spending.
Underscoring the downbeat investment activity, Larsen & Toubro (L&T)
<LART.NS> - a bellwether of India's engineering & construction
sector - recently slashed its orders outlook.
"Policies are being announced, good intentions are there," S.N.
Subrahmanyan, deputy managing director at L&T. "What needs to be
done is to hold the hand of the entrepreneurs to see that the
concrete is poured on the ground."
Nineteen road projects worth nearly $6 billion, involving firms like
Gammon and Madhucon <MAPR.NS>, are stuck as developers have run out
of cash and banks are reluctant to offer a lifeline, said a senior
road and transport ministry official.
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Even big projects have struggled to find takers. The $1.5-billion
Zojila Pass tunnel in Kashmir, India's most expensive road project,
languished for 18 months before being awarded to contractor IRB
Infrastructure <IRBI.NS> in January.
DETERIORATING DEBT RATIO
Statistically, India's economic growth has overtaken China's. But
economists are questioning the official data, which they say has
been overestimating the pace of expansion following a change made a
year ago to the method GDP is calculated.
Finance Minister Arun Jaitley, due to present his third budget on
Feb. 29, is under pressure to relax fiscal deficit targets to
further ramp up public spending to give the economy more momentum.
But the move is likely to further worsen India's debt dynamics. The
federal debt-GDP ratio is set end the fiscal year in March at 50.8
percent, according to Reuters' estimates, rising sharply from 46.8
percent in 2014/15 due to a sharp slowdown in nominal economic
growth.
A higher fiscal deficit would also undermine the fight against
inflation.
GDP data shows private consumption is outpacing investment. With a
robust 6.4 percent annual growth, consumption contributed roughly
half of overall spending growth in the December quarter.
A hike in salaries and pensions of government employees later this
year is further expected to boost consumption, raising the risk of
putting upward pressure on prices.
Meantime, the government is struggling to make progress on other
fronts.
Modi has spelt out a plan to nurse ailing state banks back to
health. Its implementation, however, remains patchy.
Similarly, no progress has been made on simplifying rules on land
sales or on a major indirect tax reform that would eliminate customs
barriers between states and, for the first time, create a single
market nationwide.
"There is a big gap between promises and delivery," said Sandeep
Upadhyay, managing director at the Centrum Infra Advisory Ltd.
consultancy. "Results drive investments, not promises."
(Writing by Rajesh Kumar Singh; Editing by Douglas Busvine and Simon
Cameron-Moore)
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