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Investment paralysis chokes GDP growth?
Thu, 22 Mar Pre-Open

The monetary policy last week was a crucial one as it was expected to set the tone for the interest rate scenario going forward. And set the tone it did! The central bank left things unchanged as it warned of the resurging inflation risks.

The high interest rate scenario is a concern for the government, especially when there is a need for pushing economic growth. And going by the investment outlay of some of the biggest state-owned companies, the same can be comprehended.

The combined investment made by Oil and Natural Gas Corporation Ltd. (ONGC), Coal India, National Thermal Power Corporation (NTPC), Indian Oil Corporation (IOC), Power Grid and Steel Authority of India (SAIL) - all behemoths in their respective industries - is estimated at Rs 1,113.6 bn in FY12. As compared to FY11, this is a steep rise of 35%. However, the budget estimates for investment by these firms for the next year i.e., FY13, stand at Rs 1,100.9 bn. While ONGC, SAIL and Power Grid would be spending more, the others will spend marginally lower amounts.

India's GDP is expected to grow by 6.9% in FY12. The Finance Minister expects it to rise to 7.6% in the next financial year. While growth estimates seem hunky dory, we cannot help but question the FM's optimism. We say this because investments form nearly one-third of India's GDP. This ratio in fact is believed to have come down over the past few years. To add to this, sluggish corporate investment would not only moderate growth from the demand side but also constrain growth from the supply side over time, thereby putting the economy in a vicious circle.

India's growth story definitely needs a shot in the arm. As PSUs themselves are not willing to invest on account of high capital costs, let alone the private sector, the growth could undoubtedly get choked. Furthermore, while the interest rate scenario is one thing, policy bottlenecks continue to dissuade companies from undertaking capital expenditures. We would not be surprised to see the growth estimates being reviewed if this situation continues for a prolonged period.

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