Oil, Rupee, Unemployment Could Sink The Current Dispensation
Of, perhaps, greater concern is the growing evidence indicating a slowdown in investment. Growth of the key construction sector had slumped to 1.2 per cent in April-June, 2011. Capital goods growth plummeted to minus 6.8 per cent in September. Project finance data from financial institutions show a halving of the rate of commitments in the first few months of 2011-12 compared to the previous year. Numerous major projects are stalled or delayed due to regulatory setbacks and uncertainty relating to land acquisition, environmental rulings, cancelled coal linkages and so forth. Rising interest rates and falling corporate profits have tightened financial constraints on investment. Uncertainty over global economic conditions and a near paralysis in domestic governance cast a heavy pall over investment plans.
The outlook for production and investment is darkened by growing macro imbalances. The foreign trade deficit widened sharply in October to an unsustainable $20 billion, with the ratio of merchandise exports to imports dropping to barely 50 per cent for the first time since the 1980s. As the negative fallout from Europe grows and oil prices stay high (as most expect), external imbalances could easily worsen. Inflation remains stubbornly high, constraining the scope for investment-friendly monetary easing. The fiscal deficit is running well above budgeted levels, fuelling inflation and pushing benchmark 10-year government bonds close to nine per cent. The banking sector is beginning to feel the stresses of a faltering economy. Debt restructuring exercises and non-performing loans are on the rise. The situation will worsen as the credit cycle turns south. It's not a pretty picture.
The biggest and darkest cloud is the government's apparent failure to appreciate the gravity of the economic situation and do something effective about it. Reforms, which should have been undertaken long ago, could be initiated now. Untimely populist programmes could be shelved, or at least postponed. Day-to-day administrative decision-making could be greatly improved. None of this is happening. And if the newspapers are to be believed, stasis is likely to continue from a weakened and fractured coalition government. But then let us be clear about the economic costs, which are already palpable. They will cumulate in the months ahead and further undermine investment, growth and macro stability. We could be in for several years of below-seven per cent growth; and worse if the Europe suffers a full-blown crisis.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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