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Modi faces reality check as India investment approvals slow

Those waiting for a surge in Indian investment should get comfortable - it will be awhile.

[MUMBAI] Those waiting for a surge in Indian investment should get comfortable - it will be awhile.

New project proposals announced in the three months through June were the lowest since Prime Minister Narendra Modi took power in May 2014, according to the Centre for Monitoring Indian Economy Pvt, a Mumbai-based research company. Of another 540 stalled projects valued at US$432 billion, three-quarters are either substantially completed, unviable or lack funding, UBS Group AG said in a July 2 note.

"If investors are looking at this being a sharp uptick in growth in the next 12 months, that's where the hopes are misplaced," said Gautam Chhaochharia, a UBS analyst in Mumbai. "It will take time." The data show that falling interest rates and Mr Modi's pro- business rhetoric have yet to prod companies into spending more, pressuring his government to pick up the slack. Financial markets are dialing down expectations raised after Mr Modi's sweeping election win, with the benchmark index gaining 2.4 per cent so far this year after a 30 per cent climb in 2014.

The numbers bolster the case for central bank Governor Raghuram Rajan to further lower the benchmark interest rate after reductions totaling 75 basis points so far this year. UBS expects another 75 basis points of cuts in the year through March 2016, differing from swap traders and most economists who predict he'll keep the rate at 7.25 per cent.

Lower borrowing costs could aid the private sector, which is struggling to clear stalled projects. Either way, Modi's administration will have to fast-track clearances and ensure raw material supplies that have held up more than half of the stuck projects, HSBC Holdings Plc said in a July 3 note.

"Several more quarters of hard work is needed," wrote Pranjul Bhandari, HSBC's chief India economist. The government also has an expenditure constraint as it looks to narrow the budget deficit to the smallest since 2008, she said.

The shortfall reached 37.5 per cent of the full-year goal in the first two months of the fiscal year started April 1 as the government spent almost 15 per cent of its budget, government data show. While initial figures show a revenue surge, it's unclear if the trend will continue.

V.P. Joy, head of Modi's Project Monitoring Group, wasn't immediately available for comment when called on his office phone.

Some see room for optimism. "Early signs" of a revival in private capital expenditure are apparent in CMIE data showing that projects under implementation rose for the first time in eight quarters, Morgan Stanley economists led by Upasana Chachra wrote on July 3.

The government's steps to encourage entrepreneurship will help boost early funding to companies, according to a June report from research and consulting company Frost & Sullivan Inc.

Even so, it's "unusual" for the government's investment in April-June to be lower than that of private companies, Mahesh Vyas, CMIE's managing director, said by phone.

"The promise they made that they will de-bottleneck has turned out to be a lot more difficult," he said. "It signifies that the problems are a lot more intricate, complicated than they were made out to be."