The Hindu Business Line : Unmistakeable signals

Corporate India is slowing down. Rising commodity prices that have pushed up input costs across sectors, higher cost of funds and a strong rupee that has hurt exporters, appear to have exerted pressure on revenues and earnings. An analysis by this newspaper of the performance of over 1,500 major companies during the October-December quarter shows that revenue and earnings grew 19 per cent each in the latest quarter. This is compared to a 30 per cent growth in revenues and 56 per cent in earnings in the same period last year. This is the second consecutive quarter of a slowdown in earnings growth. More important, about a third of the companies have reported a decline in earnings compared to the same quarter last year. This proportion is also on the rise; about a fourth of India Inc had recorded a fall in earnings during the July-September quarter.

The slowdown signals are unmistakeable. Companies have had to seek recourse to the time-tested strategy of boosting ‘other income’ to show a respectable rise in earnings. Operating margins are falling across major industries with automobiles and auto components being among the worst hit. High interest rates are not only affecting the bottom-lines of Corporate India but also its top-lines as consumers, put off by the high cost of loans, postpone purchases, and some industries grapple with capacity issues. With commodity prices showing no signs of relenting in their upward journey, input cost pressures are beginning to show up in the margins of most manufacturing companies. The strong rupee has cut the ground from beneath the feet of exporters, especially the software companies, who are also confronted with recessionary trends in their biggest market, the US. What should cause concern is that the slowdown has accelerated in what is usually the start of the busy season for the economy. Suffice it to say that tough times await Corporate India, at least for the next two quarters, if not more. But the all-important question is: where does Corporate India go from here? No matter how murky the near-term outlook is, nor indeed how stressed internal cash accruals are, it would be a folly to go slow on fresh investments. The pause in the growth momentum can be seen as inevitable given the robust pace at which the economy had grown in recent years. During such a phase, productive capacities across sectors often tend to get misaligned and a correction is needed. Sustaining the pace of investments at such times often translates into profits when economic fundamentals reassert themselves. This, of course, presupposes a certain adroitness on the part of the Government in managing political contradictions so that crucial decisions on several policy fronts are not delayed. Business confidence cannot be kept up for long in the face of administrative dithering.

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