India Inc has weathered rising fuel and wage costs to grow profits by 12-17% since the Lehman crisis, but it has cut back investment sharply, the annual survey of industries showed, even as it painted a bleak picture of the economy in coming years.
Gross capital formation, a gauge for investment, fell 8.7% to R4,07,251.39 crore in 2011-12 after growing 23.2% in 2010-11 and 38.3% in 2009-10.
In contrast, the cumulative profit of manufacturing units grew 15.7% to R4,51,210.60 crore in 2011-12, after growing 17.2% in 2010-11 and 12.1% in 2009-10 even as the number of factories went up from 1.55 lakh before the Lehman crisis to 2.1 lakh.
Whatís surprising, however, is the rise in profit despite the rise in input costs, including fuel and wage costs by 14% in 2009-10, 26.9% in 2010-11 and 24.7% in 2011-12. While wage costs rose 13.6% in 2009-10, 24.7% in 2010-11 and 17% in 2011-12, fuel costs rose over 20% between 2010 and 2012.
A sharp fall in gross capital formation by manufacturing units has a bearing on the future growth of the industrial sector and the GDP. Moreover, the slow growth in capacity expansion is likely to constrict supplies and fan inflation if demand picks up in the coming years, experts said. "You already have a demand problem, which coupled with lower capacity utilisation provides little invectives for fresh investment in the manufacturing sector. High interest rates have also dampened sentiments," said Madan Sabnavis, chief economist of Care Ratings.
While the picture is bleak for the manufacturing sector, the services sector has been expanding capacity ó for instance, banks are opening more branches and ATM outlets. This may offset the lower capital formation in manufacturing. There could be a downward revision in the manufacturing sector growth for 2011-12, which may drag down GDP growth rate below 6.2%. With industry remaining in the gloom during 2012-13, the GDP growth estimate of 5% can also be lowered when the ASI data for the last fiscal come.