Driving demand

The ongoing earnings season should serve as a wake-up call on the need to support local industry as it struggles with tough external and domestic conditions. Of the companies that have declared their September quarter earnings, more than half have recorded a decline in revenue compared to the corresponding period last year. The pressure on the top-line is now beginning to impact profitability, and close to half the companies have recorded a contraction in net profits as well. The fall in sales at an aggregate level has been among the sharpest in recent quarters, at 7 per cent, compared to the same quarter last year. It is true that the fall in commodity prices is providing some relief to beleaguered companies, allowing many to protect their operating profit margins. But while some sectors such as auto have managed to show a strong earnings growth, helped by a decline in input cost, for most others, the decline in realisation has eroded this benefit.

Companies that derive a chunk of their revenue from overseas have been impacted by slowing global growth. IT companies have been struggling to show decent growth in their top-line as overseas companies cut back their spending. The commodity meltdown due to lower global consumption and higher surplus from excess capacities in China has affected the sales of producers of commodities such as steel and metal. Besides these external pressures, there are a host of country-specific issues such as the demand-supply mismatch in real estate, deficit in the monsoon, regulatory delays in infrastructure projects, slowing loan growth and stressed assets of banks that are impacting the revenue growth in other sectors. Sluggish demand is further compounding the trouble, impeding the ability of companies to hike selling prices to protect margins. Producers of consumer non-discretionary goods, and two-wheeler and tractor makers have already been hit by slowing rural demand. Now, urban demand too is beginning to experience some pressure due to high interest rates. While there is little that can be done to salvage external conditions, the onus lies with the Centre to ensure that domestic demand does not slacken too much. After all, one of the strengths of the Indian economy is that it is largely driven by local consumption.

Some recent measures will certainly help towards this end. Reductions in interest rates will help reduce the finance cost of companies over the coming quarters and will encourage the revival of retail demand for discretionary items. It is, however, unlikely that real estate demand will pick up due to these rate cuts, unless developers drop property prices. The seventh pay commission package will boost consumption, when implemented next year. But it is unlikely that private investment will pick up in the near future as promoters are likely to be unwilling to spend on capacity expansion in an uncertain environment. It is, therefore, up to the Centre to increase its infrastructure spends to revive investments. Pushing through key legislations such as the land Bill and GST will help stoke demand and give a leg up to struggling companies.

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