Inflation, high interest rates main worry for corporate India…

Two, infrastructure plans are on stream. Even though core sector growth has not been promising for the past few months, the government’s intentions to spend and attract up to $500 billion in the next four-five years can itself be an incentive not to abandon production plans. CEOs have called for a special budget for infrastructure on the lines of the railway budget for kick-starting 20 national projects on a high-priority basis to boost core sector growth.

Such optimism stems from their drive to scale up productivity and efficiency. A recent CII study revealed that in the last eight quarters, manufacturing companies had been able to lower costs of power and fuel, raw materials and manpower as a proportion of sales. This has enabled a slight rise in net profits-to-sales margins, and driven a 32 per cent rise in corporate tax collection in 2007-08. It is estimated that investments in the pipeline for the next three years could be as much as $700 billion. Manufacturing companies are also seeing opportunity for overseas investments as producers in Europe and China face cost pressures.

Despite these trends, there is cause for concern due to rising inflation emanating from global prices along with domestic interest rates. Corporate leaders feel that oil dependency needs to be curtailed through alternative energy sources such as nuclear power, incentives for using public transport, and increased cost pass-through. Small sector needs to be protected through initiatives such as bulk public purchases at lower costs.

Downside risks to the economic outlook remain worrisome on account of rising input costs, fuelled by the rise in global commodity prices. 39 per cent of respondents said that their cost of production had increased by 10 per cent while 32 per cent said the increase was 10-20 per cent. This cost appears to have been equally shared by producers as well as a pass-through to consumers. High interest rate regime and the increasing cost of consumer finance have affected specific sectors such as real estate, consumer durables and automobiles, particularly two wheelers.

With investments being significantly sensitive to interest rates, the industry would be hard-pressed to absorb further increases. Maintaining corporate performance is central to ensuring continued GDP growth. Growth is being primarily led by investment rather than consumption. To conclude, it can be said that unless interest rates go up further, the economy will not face any significant slowdown in the near term.