Mumbai: Business leaders in India have rounded on the government, urging a halt to interest rate rises, amid fears that inflation and lack of institutional reform could hit investment and cut economic growth.
The Reserve Bank of India hiked rates by a quarter of a percentage point this week — the 10th rise in 16 months and longest streak of monetary tightening in a decade — to battle inflation of more than 9%.
“The latest rate hike may not achieve the desired results unless the government comes up with basic reform,” Rajiv Kumar, secretary-general of the Federation of Indian Chambers of Commerce and Industry, said on Friday.
The president of the Associated Chambers of Commerce and Industry of India, Dilip Modi, warned that “high input prices, rising finance costs and global uncertainties are adding to negative sentiments”.
“A high interest rate environment will most certainly put brakes on new investments,” he added.
Government predicts that the economy will grow at between 8.5 to 9.0% in the current financial year but economists are revising estimates downwards to between 7.2 to 7.5%.
The economy grew 8.5% last year.
The negative mood has already had an impact on stock markets and foreign investment.
Shares on the Bombay Stock Exchange have been down for two straight weeks, as domestic concerns combine with wider fears about Greece’s debt crisis to make fund managers cautious.
Shares are down near 13% this year, making it the worst performing market in Asia. Bellwether firms Reliance Industries and Infosys — the most weighted stocks on the Sensex — are at near one-year lows.
On Friday, the Sensex closed at almost its lowest level this year.
By this time last year, foreign investors had bought $5.6 billion of Indian stocks but this year they have sold $139 million.
Global fund managers now consider India to be one of the least-favoured investment destinations, according to a recent Bank of America-Merrill Lynch survey.
The country was ranked underweight at -20% — its lowest reading in the last six months.
In contrast, India’s great economic rival China is one of the most preferred markets, the study suggested.
“Business confidence in India is low,” admitted Phani Sekhar, a fund manager with Mumbai-based Angel Broking.
“(The lack of reform) is taking the sheen out of India’s growth story,” added Sonam Udasi, head of research at brokerage IDBI Capital.
Experts say the government has dithered on pending reforms in infrastructure development, retail, banking and the fuel sector.
Meanwhile, inflation — up to 9.06% in May and well above the RBI’s “comfort level” of 5 to 6% — driving up the cost of funds and risking a delay in investment in key sectors.
The latest interest rate rise comes at a time when fewer cars are being sold, cement sales are slowing and steel imports have dipped.
Economic growth slowed to 7.8% in the three months to March — its weakest pace in five quarters — while growth in industrial output in April halved compared with the same period last year.
IDBI Capital’s Udasi said the government’s disinvestment plans are unclear and with fuel subsidy burdens rising, the fiscal deficit target of 4.6 percent looks “grim”.
“Investors are disappointed by the lack of tough decisions from the government, adding to the nervousness,” said Angel Broking’s Sekhar.
Government has deregulated petrol prices but continues to offer widely-used diesel fuel, cooking gas and kerosene — known as “the poor man’s fuel” — at heavily-subsidised rates to the public.
The government has dithered on hiking diesel and cooking fuel prices, possibly fearing a backlash from opposition and the millions of India’s poor, who are already struggling to cope with high food prices.
That comes on top of a series of corruption scandals, including a multi-billion dollar telecom licence scam, that has put the government on the defensive and troubled foreign investors.