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A Time To Get Real

Omkar Goswami

Any Okay. The crazy party’s over. After closing 2007-08 with GDP growth being at 8.7 per cent — which will be eventually upped to 9 per cent — India may be looking at 7.5 per cent growth for 2008-09, like what we achieved in 2004-05. Manufacturing sector growth is expected to be less that before: probably at around 8 per cent, instead of the 10 per cent plus annualised growth that we achieved for 18 straight quarters right up to Q3 2007-08. WPI inflation will also be higher. My sense is that for an economy with woeful physical infrastructure and numerous supply side constraints, we are unlikely to see average annual inflation of less than 5 per cent in the near term. I expect it to hover at somewhere between 6 per cent to 6.5 per cent.

Is this a cause for gloom? I think not. At a macro-level, barring China, no other major economy will achieve a real GDP growth rate even remotely close to 7.5%. India will still be the second fastest growing continental sized economy of the world. It is hardly the stuff for weeping.

At a corporate level, too, things may be worse that what we have seen over the last three years. Instead of the top line growing at an average annual rate of 23 per cent— as 1,542 listed manufacturing companies did for three years up to 2006-07 — we may see revenue growth coming down to somewhere around 17 per cent to 18 per cent. Except for some businesses, it is more likely that earnings will grow in line with revenue. Also, higher raw material and wage costs could pull down the average EBITDA from 16 per cent of net sales to more like 14 per cent. And higher interest costs and depreciation — since many have increased capacities over the last two years — may bring the average PAT margin down to around 7.5 per cent to 8.5 per cent, instead of the 9.7 per cent that we saw in the first half of 2007-08.

Yes, these numbers are lower than before, but hardly anything to get apoplectic. Anywhere else in the world, CEOs would salivate to attain such numbers. Equally, this is a warning bell. It tolls to tell us that good times don’t last for ever; and countries have its cycles. It tells us to get real. To shed the extra flab that corporate India unwittingly accumulated during four years of feasting. To get back to what we know best — reducing costs, increasing productivity and optimising returns on capital employed; and to keep scanning for accretive acquisition opportunities while consolidating the existing lines of business. Corporate India realises these things. It also knows that the slowdown is nothing compared to what happened between 1997-98 and 2001-02, when high interest rates and reduced domestic demand growth forced industry to painfully reinvent itself. Just to remind the reader: in the 36-month period between April 1998 and March 2003, the growth rate of the Index of Industrial Production was above 8 per cent for just three months, and fell to a low of 1.6 per cent in May 2001. Nobody expects that to happen again. Hence, there is no doubt that India’s corporate sector will tighten its belt, cure itself of this little hiccup and move on to greater things.

The deeper worry is the awful state of the country’s economic governance. For all the fanfare, Indian highways are in a mess, with a completion rate of less than 5 km per day. The power situation has worsened every year over the last six years. In 2007-08, the shortfall between peak demand and supply was a staggering 16.6 per cent, with states like Maharashtra reeling under a 26 per cent shortage. Pre-berthing and turnaround time in ports have increased; airports are air-lanes are so congested that we now factor in a three-hour flight between Delhi and Mumbai, instead of the usual two.

Then there is an exchequer going out of control. Thanks to not decontrolling petrol and diesel prices when crude was at $20-$30 per barrel, the centre is taking on huge below-the-line deficits with every passing day — which, if properly accounted for, will cross 4.5% of GDP. Add to that growing deficits on account of food and fertilisers.

India’s entrepreneurs have heard the warning bells and are getting real. India’s governments haven’t, and probably can’t. That’s the real danger to long-term growth. Because 7.5 per cent growth is not enough to lift India’s wretched out of poverty in the next 15 years. We can achieve 10 per cent. If we weren’t our own worst enemies.


Published: Business Standard, May 2008


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