Opinion Green shoots

In Indian Express analysis of BSE-500 firms that have so far declared their results for the quarter ended in June reveals an 18.1 per cent fall in raw material expenditures over the same quarter last year. (Source: PTI)

The benefits of lower commodity prices — the average cost of crude imported by Indian refiners has fallen below $50 per barrel — are beginning to show on company results. An Indian Express analysis of BSE-500 firms that have so far declared their results for the quarter ended in June reveals an 18.1 per cent fall in raw material expenditures over the same quarter last year. As a result, despite their net sales declining by 5.3 per cent year-on-year, the net profits of these companies have risen by 6.4 per cent for the quarter. This is good news. When the economy isn’t doing well, both firms and households see their incomes rise slowly, or even fall. But as the costs of what they consume — be it petrol, palm oil or coal — come down, it leaves more money in their hands. Such boosting of bottom lines, even without real top-line growth, has a positive impact on private spending and overall sentiment, which could, in turn, presage the next recovery.

The main concern before the economy today, however, has to do with a complete drying up of investments, without which there can be no new jobs or incomes. A recent Crisil report has projected an 8 per cent decline in private investments across 22 major sectors in the current fiscal. The reason: capacity utilisation rates in many industries are wallowing at five-year lows. When poor sales growth is making it difficult for companies to run even their existing plants at optimal levels, why would they want to add fresh capacity? In other words, profits alone aren’t enough. Ultimately, there has to also be top-line growth to justify putting up new plants.

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If one were to look at the growth drivers of the economy, private consumption — on account of low commodity prices and a better-than-expected monsoon — is the one that holds out some hope. But on the negative side, there is export and private investment demand; given the state of the world economy and domestic capacity utilisation, the prospects for recovery of both seem rather weak in the immediate future. That leaves the only other potential growth driver, which is public investment. Although there is some sign of a pick-up in the pace of execution and also award of national highway projects, clearly much more needs to be done. Moreover, the government must be seen to be doing more — especially in big-impact projects such as the Dedicated Freight Corridor and the Delhi-Mumbai Industrial Corridor — to inspire confidence among private investors. Rahul Bajaj’s recent comment about “the shine wearing off” the current government is indicative of a growing perception that it isn’t doing enough.