Corporate sector and the Indian economy

With inflation continuing its upward climb and commodity and energy prices ruling high, it is now well accepted that the Indian economy is set for a slowdown. But the quarterly revenue (Q1 2008-09) figures for India Inc bears out no signs of any slowdown in economic growth or any relation to the weak industrial output (IIP) figures. The revenues of the Rs 4000 Cr plus club have grown by 33% this quarter, as against 24% last year, while that of a sample of over 4000 companies (analyzed by the Economic TImes) was 24% (against 16% last year). The performance was the best among the last four quarters.



However, the inflationary pressures and rising interest rates have squeezed the bottomlines. While net profit growth for the large firms fell from 30% last year to 10%, it was much weaker for the entire sample at a mere 6%. Raw material costs surged 26% in the quarter (against 13% in Q1 2007-08), while interest costs rose 34% (against 25% last year).

These figures highlights the robust demand in the economy, and signals that the conditions for sustaining the high economic growth rates continue to exist. The overflowing work orders of the infrastructure and construction equipment makers is another encouraging factor. No Indian corporate group has deferred or cancelled new investments plans due to the weak economic conditions.

Recent trends appear to indicate that commodity and energy prices may have touched their peaks and are on their way down. The economic slowdown and consequent weak demand in US and Europe, will surely reduce imports from emerging economies, thereby lowering the demand for commodity inputs. With the commodity and energy prices stabilizing and even falling, inflation too may have touched its peak, and there may be no further need for monetary tightening.

In the context of strong domestic demand, the corporate sector will do well to heed the aforementioned signals and tide out the temporary difficulties by going ahead with their investment plans. The present difficulties are the result of global economic conditions (demand-supply mismatches and financial market crises) and are not a reflection of the economic fundamentals of the Indian economy.