'Indian economy unmoved by reforms'

By pruning fuel subsidies, and announcing its decision to open up retail, aviation and insurance industries to greater foreign participation, the government has stoked expectations of an investment-led revival in an economy that grew as little as 5.5 percent in the June quarter, its worst fiscal first-quarter performance in a decade.

But recent economic data from New Delhi belie expectations of a quick recovery. Capital goods production, which has been lacklustre for almost a year now, collapsed in September even as the country's trade deficit widened to a staggering 14 percent of GDP on an annualized basis last month. With consumer prices rising about 10 percent year-on-year in October, investors are not expecting more than a couple of quarter-percentage-point interest rate cuts in the first half of next year.

A token reduction in the central bank's policy rate of 8 percent will have some impact on borrowing decisions; but it will be small and come with a considerable lag. Meanwhile, more existing bank loans will go bad. By March next year, 10 percent or more of Indian lenders' loan books will consist of either non-performing or restructured debt, according to Fitch Ratings. It isn't easy to revive investments when lenders, especially state-run banks, are struggling to cope with past mistakes.

Borrowers, too, are in dire straits. The most intrepid investors between 2004 and 2007 were home-grown entrepreneurs and business families. They behaved very differently from government-owned

... contd.