Corporate India would not have had a Diwali like this one before. For starters, there is the nicely timed announcement about Corus accepting the Tata Steel offer, thus creating three memorable records: the largest overseas acquisition by an Indian firm, the strange record of outgoing investment being more than incoming investment in 2006, and the creation of another global giant with an India base""Corus ranks 352nd on Fortune's list of the world's 500 largest corporations (for those following the Tata-Reliance rivalry, Corus is a few steps behind Reliance at 342). If Corus' accounts are consolidated with those of Tata Steel, after it becomes the subsidiary of a subsidiary, it would create India's largest private sector giant. (But wait now for the next Mukesh Ambani move!) |
The Corus deal is only the icing on the cake. The good news all round is the surprising strength of company results for the July-October quarter. If you take out two oil giants who have been hit by the aberrations of official pricing policy, profits for some 270 companies which have reported their numbers so far are up by an eye-popping 60 per cent and more. That being the average, there are many companies that have done much better""with growth of 80, 90 and 100 per cent. At a time when energy costs have risen and interest rates have climbed, this defies all predictions of a slowdown and beats what most analysts had been saying. Amazingly, the big software companies are not at the head of this race, despite reporting profit growth of 40 per cent and more. There is a sectoral breadth to these numbers, backed by strong top line growth of more than 30 per cent, which suggests greater buoyancy in markets than most people had suspected. |
The macro-economic story underpinning this is continued rapid growth. The corporate sector straddles both manufacturing and services, on top of which the monsoons have been good this year, so agriculture should do well and shore up rural demand. Companies continue to be on a hiring spree and salary hikes have been generous. Bank lending shows no signs of slowing down despite higher interest rates, and the stock market is getting ready for a new flood of share offerings to the public. At one level, all this says that spending power is still there with the consumer, even as investors seem to have a healthy appetite for sound paper. Investment demand (for capital goods) is still to peak as company after company announces expansion plans, and new opportunities open up""whether it is infrastructure projects like the airports and rail corridors, or special economic zones and retailing. |
In short, there is every reason to believe that the financial year's second-quarter GDP numbers will be no worse than those for the first quarter (8.9 per cent). The year as a whole is now certain to register more than 8 per cent growth""for the third time in four years. That is matched by 40 per cent growth in direct tax collection, leading to the expectation that fiscal correction this year will be even more than budgeted. The celebratory mood at festival time is underlined by the stock market ruling at record levels, matched by real estate prices that continue to climb long after some experts have warned that this now looks like a bubble. |
In the face of all-round good news, it is hard to think of what might go wrong, especially since oil prices have been softening and the world economy continues to perform nicely. The only danger that one can foresee is overheating of the economy""and one indication will be a surge in interest rates as liquidity tightens and banks run out of money to lend. But there are no macro-economic imbalances (like a large current account deficit, a big fiscal deficit, or a significant uptick in the rate of inflation), and the only worry point would be runaway asset price inflation. The task of policy-makers should therefore be to try and cool the real estate market while facilitating the expansion of productive credit. If that is done, the party will go on well beyond Diwali. |
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