India Potential Dims as Skidding Investment Tests Singh: Economy

India’s growth outlook is waning as the longest fall in capital-goods output since 2009 signals weaker investment, adding pressure on Prime Minister Manmohan Singh to salvage his development agenda.

Capital-goods production, a gauge of corporate expenditure on factories and machinery, slid in July for a fifth straight month, the longest stretch since declines over most of 2009, a report showed yesterday. India’s economic growth potential may have fallen to 6 percent to 6.5 percent a year, below the Reserve Bank of India’s 7.5 percent estimate, JPMorgan Chase & Co. said.

Singh’s attempts to implement policies to revive investment have been derailed by his fractious ruling coalition and graft allegations that paralyzed Parliament. Inflation near 7 percent has limited room for interest-rate cuts to fight a slowdown in Indian growth that contrasts with the more resilient performance of Southeast Asian nations from Indonesia to the Philippines.

“India is seeing much slower growth and still persistently high inflation,” said Aninda Mitra, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “Southeast Asia is now growing as fast, or faster, than what India can expect to accomplish this fiscal year and next. That’s resulted in revaluation of where growth centers are.”

Indian gross domestic product rose 5.5 percent in the three months through June from a year earlier, holding near a three- year low of 5.3 percent in the previous quarter. Indonesia’s GDP climbed 6.4 percent in the same period, while the Philippines grew 5.9 percent.

Asia Rates

The trend growth rates of Indonesia and its neighbors are rising as governments boost spending and companies invest to tap younger workforces, providing a buffer against the impact of Europe’s debt crisis on the global economy.

Bank Indonesia held its reference rate at 5.75 percent today. The Philippines kept its benchmark at 3.75 percent, while South Korea unexpectedly held borrowing costs at 3 percent.

New Zealand left the official cash rate at 2.5 percent and the central bank signaled an 18-month pause in record-low interest rates may last through mid-2013 to help bolster an economy buffeted by weaker global growth and strained by one of the developed world’s strongest currencies.

Asian stocks were little changed today after rising a fifth day yesterday. The dollar dropped versus the yen amid speculation the Federal Reserve will announce it will buy bonds under a program of quantitative easing that tends to debase the currency.

Indian Output

The Fed will probably announce a third round of large-scale asset purchases today, according to almost two-thirds of economists in a Bloomberg survey, and may also extend the duration of its zero-interest-rate policy into 2015. In Europe, Russia decides on interest rates.

Indian industrial production almost stagnated in July, climbing 0.1 percent from a year earlier, while capital-goods output shrank 5 percent, yesterday’s data from the Central Statistical Office showed.

The rupee weakened 0.4 percent to 55.455 per dollar as of 12:52 p.m. in Mumbai. It has slumped about 14 percent in the past 12 months. The BSE India Sensitive Index (SENSEX) rose 0.1 percent. The yield on the 8.15 percent government bond due June 2022 declined to 8.19 percent from 8.20 percent yesterday.

The currency’s drop has made imports including oil more expensive, adding to price pressures from supply bottlenecks and rising food costs as a below-average monsoon crimps farm output.

Fiscal Deficit

Inflation probably accelerated to 7.1 percent in August, holding above the Reserve Bank of India’s comfort level of about 5 percent, according to the median estimate in a Bloomberg News survey ahead of a report due tomorrow.

Governor Duvvuri Subbarao is scheduled to announce his next rate decision on Sept. 17, with all 27 economists in another Bloomberg survey predicting he will leave the benchmark repurchase rate at 8 percent for a third meeting to damp prices.

While Subbarao has indicated the government needs to curb spending to damp inflation risks, Singh is struggling to contain a subsidy program ranging from diesel to fertilizers. The Reserve Bank has said the administration’s goal of narrowing the budget deficit to 5.1 percent of GDP in the fiscal year through March 2013 is in jeopardy.

Among other setbacks, India has foregone higher investment in industries from retailing to aviation in recent months because of policy logjams in the ruling coalition. Foreign direct investment fell 67 percent to $4.43 billion in the three months ended June from a year earlier, government data show.

‘Policy Reform’

“Domestic demand, especially investment demand, is suffering both due to global economic uncertainty and, importantly, lack of structural policy reform,” Leif Eskesen, an economist for India and Southeast Asia at HSBC Holdings Plc in Singapore, said in a report. Progress may remain slow due to political constraints from upcoming state elections, he said.

The budget shortfall and a deficit in the current account, the broadest measure of trade, led Standard & Poor’s and Fitch Ratings to say earlier this year that they may strip India of its investment-grade credit rating.

Subdued expansion has affected companies such as motorcycle manufacturers, with sales in an industry that includes Hero Motocorp Ltd. (HMCL) and Bajaj Auto Ltd. (BJAUT) down 4.5 percent last month, the first fall since January 2009, according to the Society of Indian Automobile Manufacturers.

India’s potential rate of economic expansion may have fallen to 7.5 percent, Subbarao said in July. That compares with an 8.5 percent estimate before the onset of the global financial crisis, he said. Morgan Stanley said this week GDP may climb as little as 4.3 percent this fiscal year if government inaction continues.

“Increasing India’s potential growth rate will need corporate India to start reinvesting, particularly in equipment,” Jahangir Aziz, an economist at JPMorgan Chase & Co. in Washington, said in a note. “Policy makers at home will need to reduce macroeconomic and regulatory uncertainly, resolve implementation bottlenecks that currently exist, and push through with key structural reforms.”

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.