- India's economy expanded at slowest pace in 3 years in June quarter
- Loan growth is languishing near the lowest level since 1992
- Companies are struggling with bad debt and idle capacity
Speaking at the Bloomberg India Economic Forum in Mumbai, Mr Jaitley and Amitabh Kant, the chief executive officer at Niti Aayog, the nation's economic think-tank, called for more private spending from local companies and said the banking system must get healthier to support that investment. Mr Jaitley told companies that there's "no need to panic," while R. Shankar Raman, chief financial officer at Larsen & Toubro Ltd., India's biggest engineering and construction company, said the environment is not conducive for adding investments.
Asia's third-largest economy expanded at the slowest pace in three years in the quarter ended June 30 as Prime Minister Narendra Modi's move to ban 86 per cent of the nation's cash and the country's biggest tax reform disrupted businesses. Meanwhile loan growth is languishing near the lowest level since 1992 as companies struggling with bad debt and idle capacity await evidence of a pick up in demand before they buy machinery or hire more workers.
"Private sector is going to be hard nosed when it comes to committing investment," Larsen's Shankar Raman said in an interview at the sidelines of the forum on Friday. "We have already committed investment and have not seen returns flow through, so no board in their right mind will like to sanction further investment, unless there is a viable business plan around it."
Indian factories were running at about 74 per cent of capacity in October-December, business sentiment in manufacturing worsened in the April-June period and consumer confidence dipped in June. The Nikkei India Composite PMI Output Index contracted for a second month in August, a report showed earlier this month.
"We have to push for more reforms. We have to set our house in order," Mr Kant said at the forum. "Government alone cannot create infrastructure. Private sector participation is a must."
The government's revenue may be threatened in the coming months by the new goods and services tax, implemented July 1. The reform -- one of India's biggest since the economy opened to foreigners in 1991 -- was a win for Mr Jaitley and promises to unite India's 1.3 billion people into a massive common market.
However, early hiccups include confusion about the method of filing receipts and the multi-layered tax structure, which contrasts with a single rate in most countries. Businessmen are also claiming hefty tax credits, which could drain government finances.
"I am concerned that after GST and cash ban, which were seen as reforms by investors, India is now seen to be slipping fiscally" said Priyanka Kishore, lead Asia analyst at Oxford Economics, Singapore.
Any deterioration in public finances risks the wrath of rating companies such as S&P Global Ratings, which last week downgraded China for the first time since 1999 citing soaring debt. India carries the lowest investment grade rating and a cut to junk status could force some investors to dispose their Indian assets.
"How do you maintain the balancing act between continuing to spend in an economy, continue to maintain your banks and support them, and how do you maintain standard of fiscal prudence?" Mr Jaitley said. "And this is the challenge we are facing."
Mr Jaitley also needs funds to inject fresh capital into India's struggling banks. The lenders are sitting on $191 billion of souring debt. Under-provisioned banks are also unwilling to lend more, which means investment by private companies may shrink this year.
Mr Jaitley has said he expected strong banks to take over weaker ones especially in the state-run sector. Earlier this year, the government gave the Reserve Bank of India greater powers to go after defaulters and recover loans through a new bankruptcy code.
"We are looking at both consolidation and strengthening," Jaitley said, without providing a timeline.