CII - State of the Economy Report

On almost all parametres ,the corporate sector is doing better during Q4, in comparison to the same quarter in the previous financial year. Bulk of this growth and high performance is on account of the efficiencies and productivity of the service sector.

According to the recently released 2007 CII “State of the Economy Report”, the impressive performance of the corporate sector is consistent and is led by the services sector. It surveyed and analyzed results of 3283 firms comprising 1971 firms from manufacturing and 1312 firms from services.

The analysis showed that net sales has recorded a growth rate of 19.35% in the fourth quarter (Q4) as compared to a growth rate of 17.86% achieved during the same quarter in the financial year 2005-06. The profit after tax (PAT) has registered a significant increase in growth from 13.68% in Q4 of 2005-06 to 19.12% in Q4 of 2006-07, owing to a lower rate of growth in input cost and operating expenditures.

It is mainly the performance of the services sector that has resulted in the overall increase in the profits growth of the corporate sector. It recorded a significant decline in the growth of operating expenditure from 16.33% to 10.41% while showing an increase in the growth rate in net sales from 16.48% to 24.74%.

Though interest payments increased significantly, showing a growth from 21.63% to 47.68% in Q4 of 2006-07, service sector companies registered growth rate in PAT to the extent of 45.68% against the growth in profit at the rate of 10.32% in the Q4 of 2005-06. The growth rate of PAT of manufacturing has declined during the same period from 15.17% to 7.91%.

However, oilseeds production was found to be dragging and rupee appreciation continued to impact manufacturing negatively. There has been an overall decrease in agriculture, especially with regard to oilseeds production which registered a negative growth rate of 14.79%.

This is likely to lead to increase in the import of edible oil due to its reduced domestic production and rising demand. The demand is rising owing to the rising income levels and growing popularity of fast foods among the rich and upper middle class.

The report recommends a restructuring of domestic pricing policy of various crops as farmers are switching from oilseeds crops like mustard to more lucrative alternatives like wheat and gram.

The recently released Index of Industrial Production has shown declining growth rate for manufacturing to 11.9% in May 2007 from 15.1% in April 2007. The ‘CII State of the Economy’ also reports the negative impact of appreciating rupee on profit margins of textile and leather sectors. The CII survey of textiles and apparel companies engaged in exports revealed that there has been a decline in total revenue, operating income and profit margin to the tune of 7.9%, 8.9% and 7.9% respectively and further, there could be an erosion of profit margins to the extent of 10.4% during the next six months only on account of appreciation of the rupee.

If the impact of rise in interest rates on the profit margin is considered, there is a further decline of another 1.5%. Impact of appreciation is worse in leather and leather products sector. Erosion of profits expected in the next six months is 13.7% and the industry is already facing an erosion of 8.8% on its profit margin.

On the whole, the report expects GDP growth to be 9.2% during 2007-08; with agriculture growing at 3%, industry at 9.4% and services at 11.2%.