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India Inc bracing up for tough times

Indian companies are facing a litany of woes. Profit margins are under pressure from high prices of oil, metals and other raw materials as well as interest rates, even as demand is faltering under the impact of high inflation. What is more, there is little chance of respite on any front 
any time soon.

Advance tax receipts for the April-June quarter rose 19 per cent compared with 33 per cent growth in the same period last year, indicating a sharp impact on corporate bottom lines. Advance tax payments by companies, based on expected profits for the year, are seen as an advance indicator of corporate performance and overall economic health. Companies and large tax payers are required to pay advance tax in four installments with the first one due on June 15, when assesses pay 15 per cent of their annual payment.

Even as margins are under pressure, high prices food and fuel and high interest rates are impacting demand. Car sales and property deals are just crawling. Uncertainties and official inertia are taking a toll on investments. Says an industrialist, “we do not know for sure whether the government letter that gives clearance for a project or acquisition of land or coal linkages is valid and implementable.” South Korean steel major Posco is unable to proceed with its plant in Orissa despite getting clearance from the government, as land acquisition remains a tricky issue.

Business confidence is slipping. Weak US data, a debt crisis in the euro zone and worries about inflation and tighter monetary policy in Asia have clouded the global outlook, denting sentiment. According to a Reuter survey, business sentiment at Asia’s top companies fell in the April-June quarter, hitting its lowest since the third quarter of 2010. Six out of nine Indian companies were positive or very positive about the future, compared with seven out of seven in the last survey.

Inflation as well as measures to combat it has added to the companies’ troubles. Companies, which benefited from the early stages of inflation that translated into higher sales and profits, are now feeling the pinch as the same effect is retarding consumption and making raw materials costlier.

As things stand, there is little prospect of any relief soon on interest rates front. The Reserve Bank of India has placed itself in a policy bind of its own making. It has made it very clear that it will continue to raise key policy rates till inflation is tamed to its satisfaction. On June 16, it hiked key policy rates by 0.25 per cent. It was the tenth rise in 15 months.

RBI simply refuses to admit the futility of fighting with monetary tools inflation which is rooted in supply side factors. Its announcements mean only one thing: the economy has to be prepared for further rate hikes in the coming months and their consequences.

More galling than the failure of RBI’s measures to tame inflation is the abysmal lack of actions by the central government against the systemic weaknesses of the economy. It has to persuade the G20 to initiate action on reining in global commodity prices as they ride a wave of gushing liquidity flowing out of developed economies. It has to support fiscal consolidation and take initiatives to restore investor confidence, kick-start investment and remove the supply bottlenecks that 
feed inflation.

The inflation buck does not stop at the Mint Street, but at the North Block. Sadly, both are unwilling to recognise it.

Views expressed by the author are his own and do not reflect the newspaper’s policy.