What revival?

Recent revisions to GDP data suggested that the economy didn’t witness as severe a downturn as most people thought. This makes it all the more surprising that the latest quarterly results show that India Inc is barely hobbling along. The aggregate sales growth for over 500 listed companies in the quarter ended December 2014 dwindled to less than 1 per cent from 4 per cent in the September quarter, showing weak demand drivers across sectors. Though recent declines in input costs have lifted operating profit margins, sluggish sales have undermined the bottomline. Net profits for the firms expanded less than 2 per cent — the lowest pace since this recovery began.

The results have thrown up some unexpected, even counter-intuitive, trends. Though conventional wisdom suggests that larger firms are better at handling downturns, the ‘biggies’ staged a weaker show than their smaller rivals this quarter. This is evident in Hindustan Unilever faring worse than Marico or Hero Motocorp delivering poorer results than TVS Motors. Companies with a national footprint and sizeable operations in rural areas have suffered from sluggish sales volumes, even as niche players operating only in urban markets have fared better. This is a sign that sharp falls in the global prices of agri-commodities are beginning to take a toll on rural incomes. Companies and sectors with a sizeable global leg to their operations have also reported better numbers than those with a focus on the domestic market. Consumer goods and banking firms, for instance, reported disappointing profits, while auto ancillaries, software and pharma, with substantial export revenues, beat street estimates. Clearly, despite recent downgrades to the global growth outlook, some Indian firms have been able to retain their export competitiveness. The recent steep falls in industrial commodity prices have begun to hurt profitability for Indian oil, metal and mining names, which make up a significant portion of the large-cap space.

These trends may offer some pointers to the Centre as it sifts through the long corporate wish-lists for the Budget. The weakness in consumer goods is symptomatic of problems in the rural economy, which has so far received limited policy attention. Kick-starting rural demand may call for higher targeted public spending in rural areas. To protect against cheap imports, there’s a clamour for import duty hikes on a range of finished products from steel, tyres and paper, to sugar and cooking oils. But it would be best to grant such hikes selectively, as the interests of these firms have to be balanced against those of consumers. What is needed to stimulate flagging consumer demand today is price reductions; these cannot co-exist with duty hikes. Instead, a quick rollout of the Goods and Services Tax may help reduce costs for manufacturers across the spectrum. The Centre should consider incentives for export oriented sectors, so that home-grown multinationals can sustain their recent run.

COMMENT NOW