Gaurav Kapur, a senior economist at the Royal Bank of Scotland in India, discusses the slowdown in economic growth and what needs to occur for India to revive its fortunes.
What is the real impact of slowing growth on businesses in India?
Slower growth combined with higher inflation has negatively affected the financial performance of the corporate sector. Profitability has been squeezed sharply over the last two years on the back of higher wage, interest and material costs on one side and tapering sales on the other. This along with domestic policy uncertainty, tough global economic environment and weak business sentiment has led to a sharp slowdown in private capacity expansion plans.
Significant weakness of the rupee following the growth slippage has also increased the pressure on the corporate sector through higher cost of imports and cost of servicing their foreign debt.
What needs to happen for India's growth levels to recover?
Recovery of growth will have to be driven by a pickup in the investment activity (both public and private).
To drive that recovery the investment climate has to improve, which in turn would require curbing inflation, cutting down on government's budget deficit, softer interest rates, implementation of policy reforms like the introduction of the goods and services tax, attracting greater foreign direct investment and a stronger currency.
Are there other factors?
Better administration and governance would be crucial in reviving investments, especially those pertaining to environmental and mining clearances and land acquisition.
The recent rounds of reform measures announced since mid- September do hold promise for reviving growth over the next year provided effective implementation.
A National Investment Board is also being mooted by the government to provide a single window clearance mechanism for large projects.