A year ago, India Inc was gearing up for a double-digit GDP growth, taking cues from low inflation, long bull market run, low interest rates, plans for massive investment in infrastructure and a stable political regime. The same macro indicators don’t look attractive any more. With inflation hovering over 11% and the Central bank tightening the liquidity with various monetary instruments, the government may have no other option but to officially scale down its GDP numbers to sub-8% level.
The slowdown is already taking a toll on corporate India’s future outlook. With inflation rising unabated and growth slowing down, the performance of companies in sectors such as steel, automobile, realty, consumer durables, financial sectors have taken a beating.
India Inc has already resorted to its first line of defence by moderating their production. However, if the phase of weak growth prolongs, then some of the companies may be forced to even close down a few production facilities.
The best response in such a situation is to focus on increasing productivity, cutting costs and making the organisation leaner. Although Indian companies operate at high efficiency levels, there is still scope to raise productivity and some industries are seen doing just that in the present situation.
The government, however, hopes that the double-digit inflation and subsequent high interest rate regime may not immediately translate into a slowdown. The finance ministry still feels there will be no major impact on investment demands, though consumer demands may come down. The investments are still taking place as most companies are investing from their internal resources. The impact on inflation hence will be subdued.
The truth is that corporate India has been feeling the heat both on its top line and bottom line. The moderation in demand will place many companies in a tight spot to maintain their margins even if they marginally increase prices.
India Inc by and large will not be impacted much. It is still heard from the policy-makers that India will still achieve 8% GDP growth which is not bad at all. Also, the flow of investment is continuing, and there is no dearth of capital as yet. If we witness a slowdown, some sectors such as automobile and realty may be hit hard. But the demand for consumer durables will rise further as the purchasing power of rural Indians has increased substantially.
The government’s continuing social expenditure in the form of Bharat Nirman and National Rural Employment Guarantee Act (NREGA), to name a few, will boost more economic activity in rural India which, in turn, will drive consumer demands from unexpected quarters. These challenging times may present an opportunity for the government to push through policy reforms. During the past, critical reform measures were introduced when there were limited options available. Let us utilise the present situation and introduce reforms in areas of labor laws, infrastructure, power, disinvestment, insurance and banking.
The million-dollar question, however, is whether the present government will be able to undertake such challenges amid inflation and Nuke deal arithmetic.
The slowdown is not only visible on the stock market but overall the financial sector is reeling under the pressure of rising inflation, sky-high oil prices, increasing trade deficit and weakening of the rupee.
While banks are expecting the Reserve Bank of India to once again raise the repo rate, it is also expected to further hike the cash reserve ratio, the amount of cash banks must hold in reserve, by 25 basis points. The repo rate, which currently stands at 8.5%, has already put pressure on interest rates.
Major lenders such as SBI, HDFC Bank, ICICI Bank and PNB have raised their lending rates.