Scale change needed

The quarterly corporate results season is on us again and the next few weeks will see a flood of results being announced.

One key question is whether the glowing numbers of the last few quarters will be repeated""readers will recall profit growth in the last quarter being between 35 per cent and 40 per cent, on sales growth of more than 20 per cent.

In an important way, though, the game has changed in that interest rates have stopped falling and have even moved up a bit, so companies will no longer have the boost this gave to bottom lines.

Indeed, banks will have to take a hit for this very reason as their treasury valuations take a knock.

More important, though, is the issue of whether companies will continue to show improvements in their efficiency parameters. There is the argument, for instance, that most companies have now exhausted much of the room that existed for improving operating efficiencies.

Further cost control and therefore improvements in operating margins will now have to come from scale change.

The anecdotal evidence of what businessmen are undertaking through fresh investment decisions, suggests that many of them are in fact seeking quantum changes in volumes, whether it is in cars or chemicals, textiles or auto components, and packing materials or TV picture tubes.

Underlying this trend is an important change: many companies hope to deploy a significant chunk of their new capacities for feeding export markets.

This suggests that the gains in operating efficiency that have already been achieved have made it possible for manufacturers to become internationally competitive in a way they were not till now, and so they now feel that the world is truly their market.

If true for more than a handful of headline-hitting firms, this is good news for exports and for reducing the current account deficit that has developed in recent months.

And all those who had argued that India has missed the manufacturing bus and must concentrate therefore on services, will fortunately have been proved wrong.

The government must play its part. It is not enough to change the rules on women working night shifts; there has to greater flexibility introduced into the labour market so that companies lose their inhibitions about recruiting large numbers, and to ensure that worker productivity does not take a knock as production units get larger.

Also, the infrastructure constraints must be tackled without delay because manufacturing efficiencies and competitiveness are more dependent on these factors than, say, software exports.

Many manufacturing firms have done the hard work to become competitive. Now the external environment needs to play its role.