India’s economy may have come out of the world’s worst crisis in eight decades, but high commodity prices and rising borrowing costs are showing signs of slowing down investment, the government said on Thursday.
“Insofar as the largest component of investment — private sector investment — is concerned, there is a slowdown in the corporate component,” said a background note shared with select journalists during an interaction with finance minister Pranab Mukherjee.
“Capital expenditure is led by the profit cycle, which was affected somewhat by cost escalation of inputs,” it said.The government has revised downwards the economy’s growth outlook to 8.6% from 9% earlier. "I would not say there will not be inflationary pressure in the economy. But we will maintain reasonable growth and keep inflation under control," Mukherjee said.
India’s gross domestic product (GDP) grew by 8.5% for 2010-11 as a whole, but the last quarter (Janruary to March) growth fell to 7.8%— the slowest in five quarters—pulled down by a sluggish manufacturing sector.
On the external front, there has been a surge in demand for exports from emerging markets and developed countries. This, however, “may not be sustainable due to debt crisis in Europe, India’s largest export market.
Greece is in danger of not being able to service its heavy debt, raising fears of a possible spill-over to other euro zone members including Italy, the continent’s third largest economy.
About a quarter of India's merchandise export of about $245 billion is towards the EU. This holds out the risk of upsetting the recovery in exports, that has grown in high double digits over the last few months.
As an embattled government fights a barrage of criticism that is not pushing through policy reforms in critical areas, Mukherjee said “there has been improvement in FDI but we need reforms in bond markets and debt markets.”
Several financial sector bills have been introduced in Parliament and Mukherjee said he could be able to “keep his promise to introduce a comprehensive direct taxes code (DTC) by April next year,” after the standing committee submits its report by the Winter Session later this year.