India's economy is still waiting for a revival of 'animal spirits'

Easing credit supply won't fix deficient private sector investment

- ANDY MUKHERJEE

There's plenty of talk about how India's 600-million-strong workforce gives it a unique edge in the US-China spat over trade and technology. But to be the world's next factory, the most-populous nation will need a strong domestic investment impulse.

The data doesn't show any evidence of that. Nor does the response of authorities inspire confidence. When it comes to large, long-gestation projects, a handful of tycoons will do the heavy lifting, and it will take more than cheaper borrowing costs to sway their decisions.

The private sector's capacity-expansion intentions have fallen to a three-year low. Banks' exposure to industries that used to be some of their biggest borrowers—roads, power, telecommunications, ports, airports, construction, property builders—is down to 11% of their loan book, half what it was a decade ago.

Sanjay Malhotra, the new Reserve Bank of India governor, has thrown the kitchen sink at what is basically a problem of comatose animal spirits. Within six months of his appointment, he slashed the benchmark interest rate by 1 percentage point to 5.5% and flooded the banking system with liquidity. He also eased norms for small individual borrowers that rely on microcredit, or loans against gold jewellery.