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