January 11, 2012

Indian economy slides into danger zone

Investment proposals plunged to a five-year low in 2011 as companies such as GMR and Reliance Power halted projects due to administrative hassles, threatening to amplify the economic slowdown in 2012 and delay recovery even with rate cuts from the central bank.

A prolonged phase of weak investments could increase loan defaults by companies or call for restructuring of debt, denting banks' profitability.

New investment proposals in 2011 fell 45% to 10.46 lakh crore, from 18.88 lakh crore a year earlier, data from the Centre for Monitoring Indian Economy (CMIE) shows.

"If investment-led growth does not happen, we will manage to have a GDP of around 6.5% over the next 3-5 years," said A Subba Rao, chief financial officer, GMR Group, which runs airports and utilities. "Investment is weak and if the government does not act fast, it may come to a grinding halt. The government needs to work overnight and carry forward reforms and approve policies over the next 2-3 months for things to improve."

Companies have frozen investments as government flip-flop on policies are blurring returns, especially in the power sector that guzzles capital and needs scores of departmental approvals for smooth execution. State investments are also slowing as welfare programmes take precedence over asset creation.

With many projects stalled, banks are also reluctant to lend for fear of bad loans. The 13 rate increases by the RBI have made funds expensive.