Economy awaits PM Narendra Modi's reforms to increase investment

For all the bullishness gripping domestic markets since the election victory of Prime Minister Narendra Modi in May, the prospect of better times ahead has not yet persuaded firms to invest, judging by the slack demand for earth moving equipment.

Busy construction sites would be a sure sign of a revival in capital investment, needed for the country to make a full fledged recovery from its longest economic slowdown in decades.

"You have to go out there and see backhoe loaders and earth moving equipment moving earth," said Anand Mahindra, chairman and MD of Mahindra Group.

"When you see that happening, when there is a real revival on the ground, that's when people will start to get confidence that things are going to turn around," the managing director told a World Economic Forum meeting in the national capital last week.

It doesn't appear to be happening yet, even though the domestic stock market has been Asia's best performer in 2014 thanks to belief that the strong parliamentary majority held by Modi's Bharatiya Janata Party (BJP) will make it easy to pass far-reaching reforms.

Sales of equipment to the construction industry, which fell 15 per cent in 2013, are stuck in the rut they have been in for the past two years.

During the past six months, Mahindra, a conglomerate whose revenues totalled nearly US $17 billion in the previous 2013-14 financial year, has seen little improvement in sales of its backhoe loaders and construction kit products.

Sure, the economy picked up in the June quarter, when growth hit a two-and-a-half-year high of 5.7 per cent, but, with factories running nearly 30 per cent below capacity, domestic industry's utilisation rates are at their lowest for at least seven years.

LONG FUSE FOR BIG BANG

Unsurprisingly, firms are not rushing to invest in new plants and machinery, particularly with high interest rates, needed to reduce inflation, dampening consumer spending.

"I'd rather wait a couple of months than suddenly come up with a new factory only for demand to come down again," said Sunil Mathur, who heads the domestic arm of Siemens. "I won't set up a new factory based on a few large orders," said Mathur.

Capital investment, which accounts for around 35 per cent of the economy, has barely grown since FY13. It posted an annual jump of 7 per cent in the June quarter, but was down 7.4 per cent on quarter-on-quarter basis.

Output data and corporate earnings suggest there was little change in investment activity in the quarter that ended on September 30, 2014. Industrial output data for September is due on Wednesday, and September quarter GDP (gross domestic product) data is due to be released on November 28.

The better showing in the June quarter had led some economists to forecast growth of 6 per cent in FY15, higher than 5.5 per cent that the Reserve Bank of India projected. But lacklustre industrial production has forced a few economists to revise forecasts downwards again.

The median revenue growth of domestic corporates, which have reported their September-quarter FY15 earnings so far, is the lowest in nearly five years and is expected to worsen this quarter, according to Thomson Reuters StarMine data.

Yet, portfolio inflows have gushed into the domestic stock and bond markets on hopes that the prime minister's reform agenda will unleash a new era of growth. Steps taken so far, however, have been conspicuously modest.

Gita Gopinath, an economics professor at Harvard University, says Modi will have to urgently overhaul laws related to land acquisition, labour and tax to galvanise capital investment.

"There are no ifs and buts," Gopinath said, adding, "The government can't escape the 'big bang' reforms for long."

(Reuters)