What with the rupee tumbling to new lows and no convincing solution to the euro zone in sight it?s not surprising stocks are being hammered out of shape. The news flow has been negative for a very long time now the headline being the government?s inability to push through new legislation and reforms and it?s complete failure to tame inflation which have resulted in the economy slowing down. Factory output grew at a miniscule 1.9% y-o-y in September following a 3.6% rise in August.
The government?s finances are in a mess: revenues in the first half of the year have come in at just over Rs three lakh crore, down 24.4% y-o-y whereas the government has spent Rs six lakh crore11% more than it did between April and September 2010. And the Rs 40,000 crore collection from disinvestment unlikely to materialise. So if the government is not done with spending, which doesn?t seem to be the case given the large fuel and food subsidy bills, the fiscal deficit for the current year will end up way beyond the 4.6% of GDP that was targetted.
By splurging on employement guarantee schemes, the government has only boosted consumption and inflation.There?s little hope that the rise in food prices will moderate soon; as has been pointed out, ad nauseum, it?s a supply side issue and so far the government hasn?t told us how it plans to take care of the problem.
Over the last week the government seems to have woken up and has been making the right noises: the Cabinet is expected to discuss the opening up the multi-brand retail space to foreign direct investment, three major infrastructure ventures worth $5 billion including a power plant, a metro rail and a highway have been given the go-ahead.
While this is a start, it doesn?t mean that the projects will take off overnight. For one prices of commodities remain high and for another, there is uncertainty on sourcing some commodities locally, as in the case of iron ore. More important, the slowdown globally as also in the local markets has dented the confidence of companies to go ahead and add fresh capacity. They may have taken the plunge had debt been cheaper but these days it?s hard to mop up money without paying a premium and interest rates don?t look like they?re heading down in a hurry; moreover, few promoters would venture out into the equities markets. In short, it will be hard to undo the damage that has been done and to reverse the sharp fall in investments by the private sector. Project starts in the three months to September were at their lowest levels in nine quarters and banks too seem to have less of an appetite to fund infratsructure: loans to the sector were up 20.3%y-o-y in September this year, compared with a growth of 47.4 % y-o-y last year. Although consumption spends have been holding up, the economy clearly cannot get back to an 8% growth level unless there?s investment. The capital good sector contracted 6.8% y-o-y in September suggesting lower growth in capital formation in the three months to September. The growth momentum has been hit and a few clearances here and there can?t help; for industry to get going the government needs to do much more.