Right signal but not enough: India Inc

More needs to be done to revive the country's falling economic growth, say chief executives

With a series of projects stuck due to high cost of funds and factory output showing signs of distress, India Inc is hoping banks will now cut interest rates and help revive investor sentiment. Chief executives across sectors say with the Reserve Bank of India (RBI) now choosing growth over inflation, the rate cut is welcome but more needs to be done to revive the country’s falling economic growth.

“Over the past few months, growth has clearly bottomed out and the slowdown in manufacturing is a concern. Today’s combo of a repo as well as CRR cut is a welcome announcement and, hopefully, this will help revive investments in the core sectors, which the economy needs. Coupled with the recent policy announcement by the government, I see this as a good beginning,” says Mahindra & Mahindra (automotive business) President Pawan Goenka.

Adi Godrej, chairman of Godrej Group, is expecting the rate cut to stimulate growth. “I am expecting further rate cuts during the 2013 calendar year. I feel a 200-basis point cut in policy rates, including the current one of 25 bps, will go a long way in boosting investment demand.  With every rate cut, the average cost of funds comes down for companies,” he said.

The Index of Industrial Production (IIP) or factory output contracted 0.1 per cent in November against six per cent growth in the same month in 2011. During the April-November period, the IIP recorded just one per cent growth, down from 3.8 per cent in the corresponding period a year before. This had alarmed policy makers into trying to spur growth, even as inflation is still high at seven per cent.

RBI statistics show new projects from the corporate sector have fallen consistently in two years, while annual economic growth is expected to fall below six per cent.

Some corporate leaders are still not enthused by the rate cut. Harsh Mariwala, chairman & managing director of Marico Ltd, says today’s move is too little. He says, “I see a marginal impact on cost of funds as a result of the move. For cost of funds to come down for companies, there has to be at least a 100-bps reduction; then, there will be an impact. I am not sure the current rate cut will stimulate investment demand. Nonetheless, it is a good signal.”

S Mahalingam, chief financial officer (CFO) and executive director of India’s largest software exporter, Tata Consultancy Services, says the finance ministry needs help in the overall management of the economy, not just in containing inflation.

“The policy, therefore, has expectedly addressed the twin issues of promoting investment and enhancing liquidity. India is still an attractive destination for funds flow from overseas, looking for good returns. I think the impact of measures taken both by the government and RBI will result in improved prospects for India’s growth.”

Interest rate-sensitive sector such as real estate and automobiles are hoping that with interest rates showing signs of going down, customers will again start home-hunting and buying cars and two-wheelers. Says Rahul Bajaj, chairman of Bajaj Auto, “The reduction will certainly have a positive impact, but we want results. It’s important for India to control inflation; at the same time, growth cannot be sacrificed. The government will have to now come up with more fiscal measures and other economic reforms so that the country can be back on track.”

Companies in the capital-intensive infrastructure sector, which face the highest brunt of high interest rates, say growth is certainly on the RBI agenda. Says R Shanker Raman, director & CFO of Larsen & Toubro, the country’s largest infrastructure firm: “There is a need for big, coordinated effort from the government and from companies to get back to work. With RBI choosing growth over inflation, the time has come for companies to restart work.”