Big bang reforms needed to dig economy out of investment hole

For all the bullishness gripping Indian markets since the election of Prime Minister Narendra Modi six months ago, the prospect of better times ahead has not yet persuaded firms to invest, judging by the slack demand for earth moving equipment.

Busy construction sites would be a sure sign of a revival in capital investment, needed for India to make a full fledged recovery from its longest economic slowdown in decades Stock Market Tips

"You have to go out there and see backhoe loaders and earth moving equipment moving earth," said Anand Mahindra, one of India's leading industrialists.

"When you see that happening, when there is a real revival on the ground, that's when people will start to get confidence that things are going to turn around," the managing director of Mahindra Group told a World Economic Forum meeting in New Delhi last week.

It doesn't appear to be happening yet, even though India's stock market has been Asia's best performer this year thanks to belief that the strong parliamentary majority held by Modi's Bharatiya Janata Party (BJP) will make it easy to pass far-reaching reforms Free Share Tips

Sales of equipment to the construction industry, which fell 15% in 2013, are stuck in the rut they have been in for the last two years.

During the past six months, Mahindra, a conglomerate whose revenues totalled nearly $17 billion in the last fiscal year, has seen little improvement in sales of its backhoe loaders and construction kit products.

Sure, the economy picked up in the June quarter, when growth hit a 2-1/2 year high of 5.7%, but, with factories running nearly 30% below capacity, industry's utilisation rates are at their lowest for at least seven years Intraday Trading Tips

LONG FUSE FOR BIG BANG

Unsurprisingly, firms are not rushing to invest in new plants and machinery, particularly with high interest rates, needed to reduce inflation, dampening consumer spending.

"I'd rather wait a couple of months than suddenly come up with a new factory only for demand to come down again," said Sunil Mathur, who heads Siemens' Indian arm . "I won't set up a new factory based on a few large orders."

Capital investment, which accounts for around 35% of the economy, has barely grown since 2012-13. It posted an annual jump of 7% in the June quarter, but was down 7.4% quarter-on-quarter Commodity Trading Tips

Output data and corporate earnings suggest there was little change in investment activity in the quarter that ended in September. Industrial output data for September is due on Wednesday, and September quarter GDP data is due out on Nov 28.

The better showing in the June quarter had led some economists to forecast growth of 6% in the fiscal year to March 2015, higher than 5.5% that the Reserve Bank of India projected. But lacklustre industrial production has forced a few of them to revise forecasts down again Nifty Trading Tips

The median revenue growth of Indian corporates, which have reported their September quarter earnings so far, is the lowest in nearly five years and is expected to worsen this quarter, according to Thomson Reuters StarMine data.

Yet, portfolio inflows have gushed into India's stock and bond markets on hopes that Modi's reform agenda will unleash a new era of growth. Steps taken so far, however, have been conspicuously modest.

Gita Gopinath, an economics professor at Harvard University, says Modi will have to urgently overhaul laws related to land acquisition, labour and tax to galvanise capital investment.

"There are no ifs and buts," She said. "The government can't escape the 'big bang' reforms for long Free Stock Market Trading Tips