Business is booming

An analysis of the July-September quarter results for over 400 companies by the Business Standard Research Bureau, reported yesterday, does give the impression that business is on a roll for most sectors. An earlier analysis of 100 companies had indicated net sales and profit growth of over 40 per cent and 60 per cent, respectively. As the sample size has expanded, the magnitude of the growth numbers has declined a bit from those explosive levels. For this sample, sales have increased by about 31 per cent, while operating profits and net profits have increased by 26 per cent and 36 per cent, respectively. But, as the report emphasises, a significant contributor to the slowdown in numbers is the petroleum sector. The sector, dominated by the two giants ONGC and Reliance, showed a 27 per cent increase in sales over the corresponding period of last year, but only a 6 per cent increase in operating profits and a 4 per cent increase in net profits. Pricing policy over the entire supply chain is clearly responsible.

Looking at companies beyond this set, most companies, and correspondingly most sectors, have performed exceedingly well. Cement and banking are two sectors whose fortunes are closely related to the overall state of the economy. Particularly for the former, when construction has been such an important contributor to economic growth, one would expect sales and profitability to be buoyant. Although the collective performance of cement companies in the sample is somewhat below that of the previous quarter, it is a significant improvement over the corresponding quarter of last year. While sales have increased by a little over 50 per cent, operating profits have increased by 1.6 times and net profits by over 3.7 times. Banks have not done as spectacularly, but their collective financials reflect the buoyancy in the economy as a whole. Revenue has increased by almost 30 per cent over the corresponding quarter of last year, while net profits have increased by over 50 per cent. Going beyond the sector comparisons to individual companies, a large number of them have shown profit growth of over 100 per cent, while several companies that reported losses last year are back in the black, some with a very substantial swing from negative to positive.

These patterns have a number of implications for the macroeconomic scenario. First, the growth rates of sales, operating profits and, particularly, net profits""all point to a very favourable investment environment. New investment at the rates of return implied by these numbers remains rather attractive. The positive trend in corporate investment looks set to continue for a while. Second, these levels of profitability across the board augur well for revenue collections by the central government, whose finances are under pressure because expenditure has exceeded budget estimates by a wide margin. Third, the difference between growth rates of operating profits and net profits is of course partly due to depreciation from recent investments kicking in, but also because interest costs have declined. Companies appear to have unutilised borrowing capacity, which also bodes well for persistence in investment. Finally, the one negative implication is that a slow growth rate in operating profits relative to sales suggests that productivity growth in the corporate sector may be slowing, although this has to be a tentative conclusion at this stage.

The question is what view the Reserve Bank governor will take when he surveys this picture. Will he conclude that all is well? Or will he see the dangers of over-heating and asset price inflation? On balance, it would seem that there is merit in recognising the fact of faster growth and raising the preferred limit for monetary growth, simultaneously with raising short-term interest rates by another 25 basis points so as to signal the need for caution against runaway optimism.