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India - ECONOMICS
Plenty more to come
Infrastructure spending, private-sector capex to boost investment.
A key worry over India’s macro outlook is whether the ongoing investment
cycle will lose steam. This could be a function of a still-cautious corporate
sector, political fallout from the recent corruption-related scandals, and/or
slower pace of loan approvals by the public-sector banks after the recent
bribery case. However, we believe that the investment upturn will further
strengthen in 2011-12 due to the combined effect of higher infrastructure
spending and an increase in private-sector capex.
Vulnerable to global conditions. In an interdependent world, no economy
is immune to a deceleration in growth in the developed world, and India is no
exception. If global growth disappoints more than what we currently expect,
the Indian economy will be affected via the financial markets and confidence
channels, apart from the export transmission. However, India’s real sector
impact will be much less pronounced than in other Asian economies because
India is less geared into goods exports.
Investment spending will rise sharply. The main reason for the collapse
in investment spending after the Lehman bust was the lack of available
financing as local bank lending tightened, international capital markets froze,
and stock prices plunged. Demand dynamics now are compelling and a new
investment upturn is already under way that should be the start of a
multiyear upturn in investment spending. Indeed, in the first half of the
current fiscal year (2010-11), gross fixed capital formation (GFCF) increased
14.9% YoY relative to GDP growth of 8.9%
Corporate capex will also pick up. The slowdown in some infrastructure
contracts, such as in roads, this year is likely to pick up next year. Also, India
remains a supply constrained economy that has not added significant capacity in
the past couple of years. With headline GDP growth running at 8-9% annually,
further capacity additions by the private sector will have to occur.
Credit availability and bureaucracy are the key risks. Additionally, it is
important to bear in mind that India has the second-highest GDP growth rate
despite having the third-lowest loans-to-GDP ratio in Asia, indicating that the
economy is relatively less reliant on bank credit compared to other countries,
partly because of higher dependence on the service sector for growth and a
large informal economy. Still, it would be important for the government to
ensure that there is no slowdown in either the pace of infrastructure contracts
being awarded or in credit disbursal to the infrastructure sector so as to avoid
any downside risk to economic growth.
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