The recent string of fourth quarter results indicates two things: that corporate sales growth is higher than ever before, and that profit growth is slowing down. The former is the impact of overall inflation while the latter signifies that costs are rising faster than product prices. That means the industry can’t pass on the higher cost to consumers—at least not fully. Added pressure from an inflationwary government will further mute the rise in product prices. I expect sales will increase at a faster pace than profits for a few more months.
In the past few years the Indian industry has had a dream run with growth near double digits. That has benefited us all—as consumers, as income earners and as investors. But this year the gross domestic product (GDP) growth will slow down by one percentage point, down from 9% to 8% or, perhaps, even lower. This will be manifested across sectors. How does that impact industrial growth and investors?
The global economic slowdown led by the US recession is certain to cast a shadow on the Indian economy. The domestic economy has also been hurt by higher interest rates caused by rising inflation. Sale of consumer durables like two wheelers has already taken a hit. In the coming months, we can expect a marginal dip in credit card spending as well as a decrease in the demand for home, auto and consumer loans. Though home loans did need to slow down from the frenzied growth rate of 50% over the past year, to a more sustainable 25%. Construction activity is slower this year, but only marginally.
Thankfully, there is a timely fiscal impetus for consumer spending this year. Income and excise taxes were cut in this year’s budget. The Sixth Pay Commission’s hike in wages and pensions is sure to give additional fillip to spending. This will partly negate the impact of higher interest rates and inflation.
On the industrial spending side, investment projects have continued momentum, even though the capital expenditure spending cycle may be past its peak. Projects tend to have long gestation periods and investment cycles. Hence, unlike consumer spending they don’t respond to slowdowns instantaneously. Government supported infrastructure spending is an added stimulant to industrial growth.
The two propellants of growth— consumption spending and industrial spending—will thus be strong enough to ensure a reasonable healthy economic growth in the years to come. Corporate India is not overly concerned, even though business confidence may be down a couple of notches. Industrial capacity utilisation is very high, and most of the projects are on course.
Clearly, the domestic prosperity train is chugging along. Why, the spending binge by the Indian middle class is strong enough to worry even the US president.
—Ajit Ranade is chief economist, Aditya Birla Group