Q4 Corporate Scorecard Hints RBI Monetary Policy On Course To Make India Second Largest Economy

Corporate India trends exhibit earnings improvement in its fourth quarter scorecard. Finally, there is evidence of a turnaround in economic prospects in India – after the economy witnessed sustained periods of economic downturn following the global economic meltdown, declining private investments, and fragile consumer spending. The economic revival in India is clearly visible and evident as the Q4 scorecard should suggest demand and profit revival with a neutral repo rate as India Inc seems to be stabilizing and becoming more broad-based. The sustained improvement in global commodity cycles augurs well for commodity-specific sectors, and unabated progress of the automobile industry airs optimism. However, IT and pharma sectors face strong headwinds as export growth remains muted.   

Corporate India’s performance in Q3FY18 was reasonably good. As Q3FY17 was the demonetization quarter with 2,600 companies, excluding oil marketing firms and banks, exhibited a rise by 11% through year-on-year net sales. The stress in India Inc during Q3 has seen high leverage in Q4. The interest cover ratio (ICR), defined as the ratio of PBDIT to interest payments, was more or less stable at 3.90 for the nine months to December 2017 compared with 3.92 in FY17. Around 44 percent of the companies, which had an outstanding debt of Rs 8.75 lakh crore, reported a better ICR; the remaining 1,042 companies saw a decline in ICR and had a combined outstanding debt of Rs 11.27 lakh crore.

The negative impact and setbacks of demonetization and GST introduction appear fading away, witnessing a distinct phase of the economy rebounding with higher than anticipated corporate earnings. The economic atmosphere before Q3 scorecard saw a perceptive reaction to demonetization with a sentiment that the economy was reeling under a huge capital crunch thus negatively impacting consumer spending and investment. The effect of GST destocking prompted organizations to trim inventories at reduced prices allowing levy of GST on the fresh stock. 

According to estimates, the Q4 FY18 earnings for the Sensex set of companies may grow in double digits owing to few key sectors, like state-owned banks and telecom, being under pressure. An appreciative aspect is that most companies have settled down in the new GST regime. However, exporters are still struggling because of delays in refunds. FMCG sector promises growth, with supply chains running smoothly as they benefit from GST credit. In general, top lines indicate a positive growth to about 15% year-on-year for India Inc as prices of most commodities should remain fairly stable. 

The revival of the investment cycle will be crucial to kick-start economic upswing in order to sustain India’s GDP growth momentum. Private investment played a moderate role in the growth during the third and fourth quarter of the last fiscal.  An appreciable increase in Gross Fixed Capital Formation and FDI would induce economic growth through money supply. Here, “Make In India”, the flagship scheme would be effective as the government could focus on inviting foreign investors, and stress on providing speedy approvals for completion of projects in sectors like Defense, Power, and Railway Infrastructure. An influx of FDI/ Private sector investments, given the capital constraints and capacity shortfalls in these sectors, will help create employment opportunities, inciting consumer spending and boosting aggregate demand induced improved corporate performance.  

For stock market investors, it would certainly be good news if the earnings recovery at India Inc finally gets underway as expected. There are big risks which can still scuttle the expected revival, which seems to be on the cards owing to the neutral repo rate.  However, the revival is dependent and incumbent on aspects like global cues, disputes in trade across nations, banking sector frauds. The expected inflationary tendencies due to escalating input costs seem to be contained owing to the neutral repo rate. The present isn’t proving easy to pass on to consumers.

Now the fundamental question which arises here is whether it would be possible to revive and sustain the pace of economic acceleration? There is a need to carefully analyze the challenges and constraints which are being encountered and the solutions to these experiments which would pave the way for sustained economic growth momentum. 

India's revenue receipts have been estimated to touch Rs 28-30 trillion (US$ 436- 467 billion) by 2019, owing it to GoI's measures of strengthening infrastructure and reforms like demonetization and Goods and Services Tax (GST). In the automobile sector, makers of CVs, passenger vehicles, tractors and two-wheelers have reported reasonably good volumes indicating rural India’s demand to be fairly strong. However, the agricultural sector rides the WTO stalemate on subsidy issues which might disrupt the export potential of agricultural items and processed food. The agriculture ministry is trying concerted efforts for higher productivity of food grains but land tends to get scarce owing to infrastructure expansion. Also, the waiver of loans for farmers does not pose as a solution as it exerts further pressures on the capital adequacy situation of banking sector. There is need for enhancing capital investments in agri-sector with thrust on developing PPP (Private-Public-Partnership) model and aid inflow of funds from the private sector towards modernization and progress of the agricultural industry. 

India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025. This estimate is based on the assumption that presently there is a shift in consumer behaviour and expenditure pattern and would continue to increase, according to Boston Consulting Group (BCG) report. According to a report by Price Waterhouse Coopers (PWC) India is estimated to surpass USA to become the second largest economy in terms of Purchasing Power Parity (PPP) by the year 2040.

Soumitra Mookherjee

Guest Author Professor Soumitra Mookherjee graduated from St. Xavier’s College, Kolkata in the year 1987, after which he obtained his B.Sc. Degree in Economics from University College London (UCL), University of London. Thereafter, Prof.Mookherjee completed his M.Phil in Economics from Darwin College, University of Cambridge. He has also completed an Executive MBA from University of Exeter in UK, and participated in Harvard University’s executive education program, “Strategy Alignment and Execution”. Soumitra has been in the academic field and has delivered lectures in different streams in renowned educational institutes like New Delhi Institute of Management, Pearl Institute of Business Management, Stratford University, Fore School of Management, International Management Institute over the last 10 years. He is currently Associate Professor at Indian School of Business and Finance, an institute affiliated to University of London and academic direction provided by LSE.