Slowing growth

Slowly but steadily the straws in the wind foretell a slowing down of the growth impulse, something that policymakers had hoped this last twelve months, wouldn't happen. Ever so often officials from New Delhi's North Block and other policy units would predict more than 8 per cent growth all through the early weeks of the new financial year. This was surprising since the evidence of the third quarter suggested, and the fourth quarter confirmed, that capital goods and investments were not as gung ho as would be expected of a cresting economic revival. Then the Reserve Bank of India, in its April monetary policy, confirmed the slowing down of key economic indicators and suggested a moderation in business confidence about growth. Now the evidence on the ground confirms the drop in optimism among producers.

Anecdotal evidence from select corporate performance only tended to reinforce this perception as in the automobile major Mahindra and Mahindra reporting a less than expected rise in profits forcing, in the process, its share price downward. The reason for the less-than-anticipated results despite a healthy jump in revenues: high input costs of steel, rubber and other commodities that spiked more than 30 per cent. The results conform to a general trend of declining profitability noticed by rating agency Crisil in its report on corporate earnings for the January-March quarter. Barring upstream oil companies and integrated metal producers that are accessing natural resources much in demand across the globe, the final consumption-driven firms in the steel, cement, automobiles and real estate sectors, significantly just the driving force of growth, would, Crisil said, witness pressures on margins. This is so despite the growth in revenues. Policymakers wishing to keep to a surface view of things may find in this growth in revenues evidence of expansion but the fact that margins are under pressure will force many firms to mull the immediate future more sombrely. A report in this paper notes that FMCG players will cut back on adspends on account of input costs, and that is just the beginning. Soon, firms will cut back on plans for additional or fresh capacity and that may affect an already depressed capital goods sector and, more ominously, affect the investment climate — a foretaste of which the RBI has already warned about. As if that were not enough, with cultivation costs on the rise, the minimum support price of most kharif crops have risen some 15 per cent, and that will further fuel inflation.

Moderation in industrial growth and effective demand could help tamp inflation and input costs but if food prices do not drop, the overall effect on growth could become more than just worrisome.

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