5 biggest worries for India Inc

The picture is getting gloomier and gloomier. Indian companies are getting hit by a barrage of problems, ranging from high interest rates and high inflation to a plunging rupee and slumping exports. And there’s no light at the end of this dark tunnel as yet.

As the results season for the September quarter winds down, it’s clear that most companies have very little to celebrate. Profits and margins are under greater pressure and the outlook doesn’t seem to suggest that things will change significantly in the three months to December.

So what’s keeping India Inc up, worrying at night?

One, slowing demand in the Indian economy. That’s one of the biggest worries for companies because the economy is highly consumption-driven (consumption accounts for 60 percent of the economic activity). We’re in the middle of festival season right now, which is one of the peak periods for retailers. Yet, demand for most retail categories has been lukewarm at best. “Diwali sales in many regions have been inconsistent,” Kishore Biyani, chairman, Future Group (which owns the Pantaloon Retail chain of outlets), told Business Standard. “They have slowed. There were weaknesses in certain categories.”

More from Business

Hyundai India’s Rs 27,870 crore IPO oversubscribed by 2.28X, largely driven by institutional investors How Indian fintech startups are driving Malaysia’s UPI-like digital payments revolution

[caption id=“attachment_135567” align=“alignleft” width=“600” caption=“Despite generous discounts, buyers are not shopping as much as before. Reuters”]  [/caption]

He’s not the only one feeling the slowdown.From car makers to gold jewellery sellers, everyone’s noticed that shoppers, disturbed by high interest rates and high inflation, aren’t buying as much as before, despite generous dollops of discounts and other freebies.

Continues on the next page

Two, high interest rates, which are not just forcing retail consumers to postpone decisions that require bank loans such as car and home purchases, but also preventing companies from making fresh investments in business. The Reserve Bank of India has raised interest rates 13 times, or 375 basis points, since March 2010, in a bid to tame inflation. Yet, inflation, represented by the wholesale price index, remains above 9 percent. _Firstpost_ recently argued that trying to tackle inflation is a lost cause now because of various factors.

Impact Shorts

More Shorts

Tata Harrier EV vs Mahindra XEV 9e: Design and road presence compared

As Trump weaponises tariff, Fed sees a bigger worry: Not jobs, but rising prices in America

[caption id=“attachment_135572” align=“alignleft” width=“600” caption=“We could soon be entering a long phase of stagflation - stagnating economic growth and high inflationReuters”]  [/caption]

Sadly, even as inflation remains at elevated levels, industrial activity continues to slow, hit by poor investment and demand. In September, the index of industrial production slowed to 1.9 percent, the slowest rate of growth in two years. That means, we could soon be entering a long phase of stagflation - stagnating economic growth and high inflation - if nothing is done to correct the situation.

Continues on the next page

Three, a falling rupee is making things worse on the inflation front. With the rupee plunging to 51 against the US dollar, the price of imports in local currency has soared. The biggest impact will be on India’s oil bill, which accounts for one-third of imports.

[caption id=“attachment_135574” align=“alignleft” width=“600” caption=“A volatile rupee, which is down 14 percent against the greenback this year, is also causing large forex losses and increasing the cost of imported raw materials for companies. Photo:SiddyLam/Flickr”]  [/caption]

Unfortunately, don’t expect exports to get a boost from the falling rupee because they will be hit by the sovereign debt problems afflicting Europe, which is a major destination for Indian exports.Exports grew by about 11 percent in October from a year earlier, the slowest rate in the past two years, while imports expanded by 22 percent because of the rising price of crude oil and other commodities.

A volatile rupee, which is down 14 percent against the greenback this year, is also causing large forex losses and increasing the cost of imported raw materials for companies, which is affecting profit margins.According to recent Firstpost analysis , until 9 November, forex losses totalling little over Rs 5,200 crore were incurred by 82 companies during the September-ending quarter.

Continues on the next page

Four, the state of Indian infrastructure remains appalling. A Standard and Poor’s report recently noted the country needed to reform policies concerning project execution and long-term funding to fix its creaky infrastructure.

[caption id=“attachment_135578” align=“alignleft” width=“600” caption=“ithout addressing the basic issue of infrastructure, how likely is it that India will achieve the targeted 9-9.5 percent annual growth during 2012-2017?Reuters”]  [/caption]

India’s road, railway, and port expansions are falling far short of targets while the power projects are facing major fuel risks, and the delays in government and regulatory decision-making have caused several infrastructure projects to fall way behind schedule, the report said. The power sector, especially, is reaching a crisis point. Without addressing the basic issue of infrastructure, how likely is it that India will achieve the targeted 9-9.5 percent annual growth during 2012-2017?

Continues on the next page

Five, the policy paralysis that has gripped the government has disheartened investors and businesses alike.Pessimism about the prospects of the economy has already dampened foreign investor interest, at least in the stock markets. It is also partly the reason why the rupee is getting battered. With the government not in any position to spend crores on another fiscal stimulus, the government has no option but to introduce another round of big-bang reforms to allow foreign investments, as it did in 1991-92.

[caption id=“attachment_135589” align=“alignleft” width=“600” caption=“In recent days, there have been media reports about the government planning to ease foreign investment rules in aviation . Code Martial/Flickr”]  [/caption]

In recent days, there have been media reports about the government planning to ease foreign investment rules in aviation and retail, as well as other reforms. Will the government live up to those hopes? We’ll soon find out.