Despite muted GDP growth, India Inc will look better

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SummaryNearly 60% of the net profits for the BSE-30 comes from sectors that have overseas revenues, regulated profits or those influenced by government policy

The performance of corporate India and its earnings in CY2014 (and beyond) will largely depend on the new government’s ability and willingness to provide a new economic vision for India, improve India’s governance and implement certain structural reforms. Corporate India’s performance is inextricably tied with India’s economic performance. GDP growth, interest rates, currency are a few variables that influence the profits of companies and a government’s policies and performance can influence these parameters significantly.

The formation of a stable government after the 2014 national elections and continuation of economic reforms is, thus, critical for the performance of corporate India in CY2014/FY2015. However, the composition and nature of the government is less relevant than its commitment to address economic and social issues that have plagued India’s economic performance over the past few years. Any new government will have to embark on economic reforms in two areas—one, fiscal consolidation to improve India’s weak fiscal position and, two, investment reforms to reverse India’s feeble investment climate. The former will help reduce high interest rates in the economy while the latter will address supply-side issues that have contributed to a persistently high inflation and help bring down inflation to more manageable levels eventually.

Fiscal consolidation will entail reforms in the areas of taxation and subsidies that will result in gross fiscal deficit (central government only) declining to a more manageable figure of 3% of GDP in the next 3-4 years from 4.8% in FY2014 BE. However, GST is unlikely is implemented before April 1, 2015, and food and fertiliser subsidies will increase in FY2015 with the implementation of the Food Security Act and increase in domestic natural gas prices. Thus, any new government will have to target reduction in fuel subsidies aggressively in FY2015 to contain fiscal deficit to a reasonable level (GFD/GDP of 4.5% or lower). Investment reforms will require structural reforms in all the inputs of investment in general, and in particular in areas covering government-industry interface such as approvals from various government agencies and allocation of natural resources.

CY2014 is unlikely to be a strong year economically but could be a year of transition for the Indian economy and corporate India if the new government implements measures that will propel the economy to faster growth in the future. FY2015 will see a modest economy recovery (5.1% GDP growth) given several constraints—(1) continued high inflation, anaemic job creation and fiscal tightening will hurt consumption demand,

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