Plenty of ditches still to dig, miles of cables still to lay

AMONG investors, confidence in India has taken a knock. The stockmarket is down by a tenth in dollar terms this year. That reflects higher interest rates, but also a sense that the government has lost the plot. It has, say its critics, failed to control corruption and public borrowing, fallen behind on infrastructure and proven unable to make decisions. Vedanta, a London-listed resources firm, has been waiting for almost a year for ministerial approval to buy control of the Indian unit of Cairn Energy, which is also London-listed.

On June 28th, during a trip to America, India's finance minister insisted that things were on track. Many business folk are sceptical. “Reforms will happen—after the whole system collapses,” predicts a corporate oligarch. He is just talking about India's bankrupt electricity-distribution companies, which are a tiresome bottleneck. Overall, he remains an optimist on India, arguing that a “golden century” awaits the country.

But for many firms the usual jitters are now combined with a less familiar problem: falling profitability. Listed firms' return on equity, which was 21-23% in the five years to March 2008, was only 17% last fiscal year, estimates IIFL, a broker, using a sample of 140 companies accounting for two-thirds of the stockmarket by value. Data for the Nifty Fifty index of big firms paint a similar picture (see chart). Few analysts expect a quick recovery.

Part of the fall reflects transient factors. Acquisitions abroad have hit some companies' returns, for example. But deeper trends are at play, too. Labour costs have risen, particularly at some state-controlled firms: Steel Authority of India's staff bill rose by a whopping 41% last fiscal year. Indiscipline and slower-than-expected growth have wilted profits in sectors such as cement, construction, property and telecommunications.

Some industries, such as consumer goods, continue to prosper. But to motor along, India's economy needs not only shampoo but also new roads, shops, houses, factories and power plants. Lower returns and faltering reforms may make firms coy about sinking money into the ground. In the quarter to March, growth in gross fixed capital investment slumped, having been healthy for years (other than during the 2009 financial crisis).

The chairman of a manufacturing and retailing firm says he has recently tempered his expansion plans, just to play it safe. “I suppose everyone has done it,” he remarks, while acknowledging that this collective wobble risks becoming a self-fulfilling prophecy.