One saving grace for India’s economy is that consumption demand is highly correlated with agricultural output, and that won’t be affected by the current slowdown. This is one of the reasons most economists still expect growth of 5-6% in the next fiscal. But the outlook on investment is as bleak as ever.
According to Cem Karacadag, regional economist at Credit Suisse Group AG, the rate of growth in investment will be the swing factor as far as gross domestic product (GDP) growth next year is concerned. “We expect real GDP growth of 4.9% in FY2010, with investment likely to decide where in the range of 4.5-5.5% the economy will grow,” he says.
In a recent report titled India: The Financing Tightrope, Karacadag and co-author Devika Mehndiratta say that financing constraints will limit investment growth and challenge the country’s growth, apart from bond yields and ratings. The outlook for investment is weak not only because of lower credit supply due to the tightness in overseas credit markets, but also because of a drop in demand for credit owing to the weak sentiment prevailing in the economy.
Credit Suisse estimates that financing of corporate investments has fallen in the second half of this fiscal and expects it to fall in FY10 as well. Since financing through the capital market route remains weak, dependence on bank credit is set to rise. Credit Suisse puts the realistic rate of bank credit growth at around 20%, based on which corporate investment would fall by a wide margin in FY10. The firm’s equity research team estimates that the 80 non-financial firms it tracks will cut capex (capital expenditure) by 6%, after a 4% growth in capex this fiscal year.
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