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Anxious Corporates

There has been hopeful cheer on the economic front, with the Indian GDP recording a growth rate of 8.2% in the first quarter of the current FY. This uptick in growth beat all street estimates which hovered at about 7.6% and exceeded expectations of even the most optimist experts. This GDP growth was fuelled by a growth rate of 13.5% in the manufacturing sector and 5.3% in the farm sector. These two sectors of the economy are employment generators and the growth therein gives an impetus to the creation of much-needed jobs, which will pass on the cheer to the household segment too. The Indian households, loaded with aspirations, continue to spend and spur economic growth, a much-needed substitute for growth based on government spending, which is presently running out of steam. With the government having already crossed the entire year’s fiscal deficit target in the first five months of the current FY, government spending is bound to be constrained and needs the support of household spending which has been burgeoning.

The overall view in the current GDP growth is that such growth was exceptional, because of the low base effect and with inflation inching up and private investment not picking up, the growth numbers for the next few quarters will be in the range of 7% to 7.50%, which may be a relative dip, but is certainly not bad (though it needs to be much better). India needs to do much more to maintain growth rates upwards of 8%.

The growth in the economy, however, is not directly reflecting on Indian corporate balance sheets, which remain stressed. There are going to be a number of headwinds to corporate growth in the coming months, which include a weakening rupee, rising inflation, an imminent interest rate hike, surging current account deficit, shrinking availability of bank credit and the unpredictable impact of USA-China tariff wars and the newly imposed American sanctions on Iran. These will be an adverse drag on company performance and profitability will suffer. With such uncertainties on the horizon, the much-awaited kickstart of private sector investment will only be delayed further. If the corporate growth will suffer, it will finally reflect on the overall national economic growth of India. The growth in corporate tax collections for June/July 2018, was a mere 1%, which confirms the disjoint between national growth and corporate growth.

The present challenge to national growth in India is more of consistency than the very phenomena of growth per se. An uneven growth trajectory, with major quarterly variations which India has been experiencing, is a matter of concern and must be resolved. There maybe cheer on the economic front, but corporates are presently in a state of cautious optimism.

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