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Such a let down Mr Modi! All is well but where is the investment?

May 12, 2015 11:22 IST

As Modi Sarkar approaches its first anniversary, inflation has cooled, in large measure due to the dramatic fall in global oil prices, but recovery in Asia's third-largest economy remains sluggish.

India's economic data on Tuesday is expected to be mixed, highlighting the need for Prime Minister Narendra Modi to accelerate reforms to bolster growth as he prepares to start his second year in office.

The nationalist leader came to power in May last year, winning the first outright parliamentary majority in 30 years with a promise to reboot economic growth and tamp down inflation.

As he approaches his first anniversary, inflation has cooled, in large measure due to the dramatic fall in global oil prices, but recovery in Asia's third-largest economy remains sluggish.

Consumer price inflation probably eased to a four-month low of 4.9 percent in April from 5.2 percent a month ago, according to a Reuters poll of economists.

But annual growth in industrial production is expected to have slowed to 2.8 percent in March from three-month high of 5.0 percent a month before, another poll showed.

The statistics ministry is due to release both industrial production and consumer inflation data at 5:30 p.m. While India's economic outlook has improved under Modi, corporate investments are showing little signs of revival due to over-indebtedness as well as growing bad debt at Indian banks.

Over the past year, Modi has taken a slew of measures to attract investment, but he has yet to initiate steps that could help repair corporate balance sheets and recapitalise ailing banks.

"There is no evidence on the ground to suggest a strong growth pick-up," said Radhika Rao, economist at DBS Bank.

"It would be a gradual recovery as there is no marked improvement in investment."

With bad loans pressuring profit margins, banks have shied away from passing on to consumers the 50-basis-point interest rate cuts delivered by the Reserve Bank of India (RBI) so far this year.

The RBI left rates unchanged last month, saying it would watch for transmission of previous rate cuts and price rises.

While most analysts expect the central bank to cut rates by another 25 basis points ahead of its June meeting, some say a rebound in crude prices, along with a sliding rupee and expected poor summer rains, could force a delay. Tumbling oil prices were one of the principal reasons for a dramatic cooling in inflation since last year.

But for a country that imports around 80 percent of the crude it needs, a 40 percent spike in oil prices since January doesn't bode well.

The rupee's slide against the dollar is not helping, either. The currency hit a 20-month low last week and is widely expected to remain weak against the dollar in the coming year, pushing up the cost of commodity imports..

There are also concerns about summer monsoon rains, which are forecast to be below average. The shortfall could hurt farm output and drive up food prices.

"The base case still remains for a rate cut next month," said Rao of DBS Bank.

"But prospects are not as bright as they were a month back."

Photograph: PTI

Rajesh Kumar Singh
Source: REUTERS
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