The Jas & Vaj show

FY2004 has been an exceptionally good year for the Indian economy. The third quarter GDP numbers show that it's now the fastest growing economy in the world, its stock market has been one of the best performers during the year, corporate profits are growing, exports are booming, interest rates are low, the currency is strong and foreign exchange reserves are getting fatter by the day.

To be sure, an important reason for the high growth is the rebound in agricultural production. But it's not just the good monsoons that are responsible for the surge in confidence. FY 2004 was also the year when India Inc. started enjoying the fruits of its cost-cutting strategies.

For several years, corporate India had been restructuring itself, lowering inventories and pruning staff. When demand rose, fuelled by a combination of good monsoons and consumer demand fed by rock-bottom interest rates, companies' operating leverage was very high, and top line growth was immediately reflected in a sharp rise in net profits.

The monetary stimulus-induced growth of the world economy led to rising exports in spite of a rising rupee, while China's insatiable appetite for raw materials led to a rise in commodity prices that turned around the entire steel sector (and some others too). The government's road building programme has been a boon. Bold new policy initiatives in banking and the power sector were a big help.

More significantly, the confidence of the Indian corporate sector stems from the ability of its leaders to become globally competitive. Apart from information technology and pharmaceuticals, where Indian companies had already won their spurs, companies in the auto ancillary sector, in textiles and even in engineering all learnt to play the global game.

Outsourcing has spread even to the second-rung of corporates, with many small companies becoming part of global supply chains. And finally, of course, there's been the BPO story, with job losses to India becoming an election issue in the US. Of course, all these changes took place over several years, but FY 2004 was the year when they reached critical mass.

Will the feeling of well-being be sustained? FY 2005 will pose several challenges. The stock markets will have to cope with the effect of a possible rise in US interest rates. The bond markets will have to get used to a drying up of liquidity. The rupee may see more volatility if foreign inflows drop off as a consequence of interest rates rising in the US. Commodity producers may have to cope with a slowdown in Chinese demand.

More importantly, despite FY 2004's excellent performance, long-term growth in agriculture has slowed down, as has employment growth. On the positive side, companies are planning capacity expansion, and once they start to invest, the economy will have the benefit of investment demand adding to the existing consumption demand.

But perhaps the critical factor making for corporate confidence is that Indian companies have been able to become part and parcel of the global production process, India has become a global destination, and it is this structural change that the world became aware of in FY 2004.