Time and again we have talked about the worsening global economic scenario. But if we turn back and have a glance over our own domestic business environment, the picture looks equally bleak here as well. At least, that is what is indicated by experts in the corporate world in the industrial outlook surveys done by different institutions such as Reserve Bank Of India (RBI)
and Federation of Indian Chambers of Commerce and Industry (FICCI). Even if we look at the advance tax payments by the big corporates, the gloomy picture is more than crystal clear. The advance tax payments are mostly flat for the December quarter on a year-on-year basis. In some cases, there are significant declines as well. And the Indian stock markets which do not govern the business directly, but certainly reflect the hope of the investors for the future, are at their two years lows.
Why is the situation the way it is? Well, most of major governing factors which influence the business growth of any economy are in bad shape. Take a look at the demand environment, domestic as well as exports. Exports are suffering due to the sluggish global demand environment. Now people on the street have already started talks of job cuts. In some cases, downsizing is actually happening. Higher interest rates are adding to the woes. All this is adversely affecting the revenue growth of the companies.
But it is not the topline growth which is the only pressing concern. Even the profitability is expected to be hurt badly in the current quarter ending in December, 2011. Due to continuous slide in the rupee value, import bills for raw materials are skyrocketing. Stubborn inflation is adding pressure on the raw material costs. Hence, margins at the operating levels would be under extreme pressure. Further, rising interest rates for the past 18 months would leave very little at the net level as the companies are reeling under high interest burden. This has also made working capital management a herculean task for the companies.
RBI has just paused hikes in key lending rates. However, it has not lowered the interest rates. Please note that the interest rates were moving up for the past 18 months. Hence, this current move by RBI would be of no help for the third quarter of the current financial year (December quarter) due to the already high interest burden. Government's inability as well as inaction on the reform front is proving detrimental. The whole business environment is now in a state of limbo. The fiscal deficit targets are going wayward.
Well, expectations from the third quarter are definitely not high. However, steps need to taken to boost the business confidence for the future. RBI has started doing its bit. It has taken some steps to control rupee slide. So far, it has tried to control inflation; and now it is thinking on the growth front as well. Government, too, needs to take concrete steps towards policy decisions as well as removing supply side constraints. Else, we would be losing our so-much-talked-about growth story.