The abysmal industrial growth numbers for May that were released by the government at the end of last week are enough cause for worry. Even as growth in total industrial output fell to 3.8%, a six-year low, one detail was more disconcerting. Growth in capital goods production — an indicator of investment activity in the economy — fell from 11.4% in April to 2.5% in May. Little wonder the sell-off in the shares of engineering companies has continued unabated in the stock market.
Illustration: Jayachandran / Mint.
Mint reported in its Tuesday edition that some $800 billion worth of new projects could be at risk because of higher interest rates. Projects Today, a research firm from whom we sourced the data, says that the long-term prospects for investment activity continue to be bright despite the current crop of problems.
We agree with this view. There are few signs right now that companies and governments are pulling back their investment plans. Imports of capital goods and bank credit continue to grow fast. Even the May industrial growth numbers need to be taken with a pinch of salt. There is a base effect at play. Capital goods production had jumped to an eye-popping 22% in May 2007. It is but natural that the May 2008 numbers seem modest in comparison.
India can ill afford a severe investment slowdown, unlike China where there has been an over-investment binge for more than a decade.
Consumption was once the primary driver of economic growth in India. Investment took over the mantle a few years ago. It accounts for more than half of India’s economic growth today. In other words, an investment slowdown right now will do far more damage than a similar slowdown, say, five years ago.
Several industries are close to full capacity. A lack of good roads, ports and adequate power is hindering long-term economic growth. These problems can only be sorted out with the help of fresh investments.
There are huge challenges along the way. Higher interest rates will make some projects unviable. High inflation and financial turmoil can spoil the investment mood — temper the “animal spirits” of businessmen, to borrow John Maynard Keynes’ memorable phrase. Rising fiscal deficits will almost inevitably crowd out private investment.
There is bound to be a mild investment slowdown in the months ahead — a pause. But India cannot afford anything more severe right now.
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