- The continued profitability of enterprises is all-important — for all legitimate enterprises operating in India, publicly- or privately-owned, in every sector. As for foreign-owned enterprises, there is a second-order benefit when they improve the quality of products and services, capacity, and efficiency in production, logistics and service delivery in ways that are beyond the ability of locally-owned enterprises. These improvements can act like a rising tide, making for better human resources and systems.
- Ensuring the implementation of projects in progress is a major driver of continued profit growth. This applies as much to infrastructure as it does to new projects and expansion, because it is when projects are completed that output and profits grow, whether directly in specific entities, or indirectly by the facilitating increase in infrastructural capacity, supply and efficiency.
- Another significant driver of profit growth is consumer spending (within reasonable limits) to absorb the existing and additional capacity and growth. This implies, crucially, to a continuation of high savings, which then fuels further investment.
Paradoxically, if consumer spending is restrained, it will not only hamper growth directly, it will also constrain project implementation and plans for future investments.
less appreciation, however, of just how important profits are to the government. We get a sense of that if we consider the enormous (government) investment needed in infrastructure, the effect of robust tax collections on the government’s ability to invest, and the likely effect of a slowdown.
A large and growing domestic market offers opportunities in this time of global turmoil. Strong continued growth in profits will elicit capital inflows reversing the weakness of the rupee, and help offset the increased costs of imported oil. The combination of profits and capital inflows will instil confidence in domestic and foreign investors to continue to invest.
If this happens apace, the rupee will strengthen. There should be clarity on the net benefits of the rupee’s strength or weakness: overall, it is most beneficial and equitable if we have a stable, strong rupee based on fundamentals and confidence in the economy, perhaps while seeking the benefits for some years of an undervalued currency through exchange rate management — that is, subsidising exporters at everyone else’s expense — to the extent possible.
Prospects For Profits
Interest rates affect both. Financing costs within a range are policy choices affected by perception, mindset and execution. The benefits from a reduction in borrowing costs have been estimated as a 30 per cent increase in profits-before-tax for every 10 per cent fall in interest rates, or an increase of Rs 25,000 crore in profits for a 1 per cent reduction in interest rates. Also, lower rates will help to increase consumer loans and therefore spending, provided credit is available. An improvement in both factors is likely to have a positive impact on project implementation.
Therefore, steps need to be taken immediately to accelerate enterprise profits by:
- Reducing interest rates for enterprises targeted for working capital and project investment with prudential norms, with close oversight.
- Restarting consumer spending by reducing interest rates for targeted retail lending (say, for specific categories of consumer loans such as first houses, vehicles, consumer durables and commercial projects with high equity participation and sound drivers), while anchoring lower inflationary expectations as is being done.
- Making credit available for productive use, rather than repressing bank credit growth. This is especially important when conventional credit is overstated because of oil bonds and loans to oil companies to cover losses from administered prices.
- Rationalising processes so that projects can be executed and not held up by convoluted regulatory and procedural impediments. This needs a focused ‘detoxification’ exercise for clearances, so that projects are not stalled.
Such changes mean a redesign of the RBI’s reporting and monitoring processes and systems, integrated with IT and communications, as well as in project clearances. They have the potential, if managed successfully, for major improvements in India’s approach to managing its economy, and for sustaining high GDP growth.
*Source: ICICI Prudential;