Mixed results

No sign yet of demand revival

In some ways, the first indications coming in from the corporate results for the July-September quarter of 2015-16 reinforce the impression that the economy is recovering. The results of 156 companies, analysed by the Business Standard Research Bureau, showed an aggregate growth in profits of 3.9 per cent over the corresponding quarter of last year. This compares favourably with the 0.4 per cent growth in profits among the same companies during the April-June 2015 quarter and a decline of 0.8 per cent in the quarter before that. Importantly, when just two companies are excluded from the sample, one a crude oil producer and the other a steel manufacturer, the profit growth rate climbs steeply to 11 per cent year-on-year. While the sample of companies declaring early results suggests significant inter-industry variations, it is admittedly too small a number to make definitive judgements. However, this trend is decidedly more positive than a large cluster of forecasts that anticipated flat or negative growth.

The other side of the coin, though, is the sales growth picture. Toplines for this sample have actually been declining for four consecutive quarters. In the most recent quarter, the decline was 9.5 per cent, matching the number of two quarters ago and significantly worse than the 4.4 per cent decline in the April-June 2015 quarter. To the extent that the Wholesale Price Index (WPI) is a reasonable proxy for the price component of corporate topline performance, a decline per se should not be too surprising. However, when the WPI is declining at a rate between four and five per cent, this quarter's topline decline suggests some volume decreases as well. Once again, specific sectors might be biasing the picture, but it certainly should concern policymakers that sales growth is lagging behind profit growth. The reason for this pattern is quite obvious; sharp declines in energy and commodity prices are helping shore up profit margins for most companies. However, demand in real terms continues to be sluggish, in both domestic and export markets. This situation, in combination with the emergence of significant global excess capacity in many important industries, augurs rather poorly for any investment revival. No new capacity will be created if the prospects for a significant expansion in demand don't look bright.

It is true that India is better placed than most economies to insulate itself from global sluggishness because of the size of the domestic market. But what policymakers need to remember is that this insulating factor is neither spontaneous nor guaranteed. Domestic investment slowed down for some rather obvious reasons; high interest rates, infrastructure bottlenecks, policy uncertainty... the list could go on and on. Some of these deterrent factors, like interest rates, are now turning favourable. But others, like infrastructure, are still some distance away from providing the required opportunity and stimulus to private investment. Progress on these fronts is slow and, in an increasingly delicate global situation, could lead to a half-baked domestic recovery with every risk of slippage. Under the circumstances, it is worrying that there is an apparent lack of urgency on the structural reform agenda. Early corporate results suggest that time may be running out.