A little less steam

provides several indications that the rate of economic growth may be losing momentum. Profits have grown at a slower rate of about 17 per cent for the sample of 1,137 companies, compared with over 33 per cent a year ago. This should not come as much of a surprise. Manufacturing companies, in particular, have been dealing with severe pressure on their costs for a number of quarters now, with energy and commodity prices continuing to climb and the prices of manufactured products as a whole simply not being able to keep pace. It is to the credit of these companies that they managed to protect margins for quite some time. This was partly due to some favourable external changes, like declining borrowing costs, falling airfares and lower telecom costs. Continuing internal emphasis on productivity has also contributed significantly. The numbers for this latest quarter suggest that this balancing act is becoming more and more difficult to sustain. If this is indeed the case, investors, policymakers and other interested parties had better prepare for a less buoyant scenario in the months to come.

An important reason for slower profitability growth is that revenues have also slowed down. Top line growth for this sample of companies dropped from about 25 per cent a year ago to around 19 per cent in the latest quarter. Slowing sales figures are a concern because they could reflect a macroeconomic tendency towards slower GDP growth. The GDP numbers for the first quarter of this year were very positive, showing 8.1 per cent growth. While the corporate sector does not represent the full range of economic activities, significant movements in its indicators in either direction will be reflected in the broader aggregates. Come December 31, when the advance GDP estimates for the second quarter are released, we could be looking at some unflattering numbers.

That said, however, there is little cause to push the panic button. Growth in both top line and bottom line may have slowed, but the actual numbers are still respectable. Sustaining such growth is difficult enough in the best of circumstances. In an environment of rising costs and a dwindling number of easy avenues for productivity enhancements, it is an even greater challenge. From a policy perspective, the question is: what measures can the government use to offset today's growth-dampening tendencies? The Reserve Bank of India has already played its hand by, quite legitimately, choosing to address inflationary threats rather than leave the growth momentum undisturbed. In doing so, however, it took a relatively optimistic position on GDP growth for the current year, estimating that it would be in the 7-7.5 per cent range, despite the higher interest rates that its actions would entail. Perhaps it should change the timing of its quarterly announcements to capture the trend in corporate results. As for the government, it could do no better than administer a sharp dose of reforms.