Indian investment slowdown has been, to a large extent, reflective of deteriorating confidence and rising policy uncertainty-IMF

The recent Indian investment slowdown has been, to a large extent, reflective of deteriorating confidence and rising policy uncertainty, an International Monetary Fund (IMF) working paper- 'India's Investment Slowdown: The High Cost of Economic Policy Uncertainty', authored by Rahul Anand and Volodymyr Tulin, said. Some widening of interest rates has accompanied these developments; however, only a portion of the investment slowdown can be attributed to the increase in financing costs. Furthermore, a simple regression analysis that builds on the conventional macroeconomic variables over-predicts investments in the past two years, suggesting that other factors, such as supply bottlenecks have been at play.

We find that heightened policy uncertainty has had a particularly pronounced link with the decline in new investments as well as with the rising value of investments that were postponed or cancelled. After controlling for these factors, financing costs do not appear to be a critical factor in explaining the decline in new investments, stated the paper.

 

It was further stated in the paper, Therefore, it appears that the current Indian investment slowdown is primarily driven by weak business confidence and policy uncertainty, though factors not explicitly captured in the regression analysis, for example supply bottlenecks, are also at play. In the short term, lowering nominal interest rates may provide some relief in terms of a reduced interest burden, especially to corporates with high leverage. However, in the medium term, lower rates with little slack in the economy would stoke inflation further and exacerbate inflation trends across sectors, hurting investment. In addition, simply lowering nominal rates without tackling deep structural issues is unlikely to lead to a sustainable revival of investments. Continued progress on structural reforms and resolving supply side bottlenecks, therefore, remain critical to shore up confidence and revitalize investments and economic growth.

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