Corporate India has suddenly woken up to the lack of reforms by the UPA government. The farce over the retail FDI issue has all corporate bodies up in arms on the lack of political will on reforms. Corporate India is worried about the government’s commitment to the economy given its political infighting.
The reason corporate India is worried is that the economy is suddenly looking vulnerable in the face of global and domestic issues. Capital markets are in the fourth year of a bear phase, the Indian Rupee is down 15% over the last four months and corporate profitability is under severe strain with many sectors reeling under pressures of inflation, debt and lack of demand. Operating profit margins and net profit margins for second quarter 2011-12 have fallen by 442 and 527 basis points respectively on a year on year basis as per a study of over 3000 companies by Moneycontrol.com.
Corporate India deserves what it gets from this government, as the current form of the government is the making of corporate India. The frenetic bull run post the election of the UPA government in 2004, saw a flood of money coming into the country and the corporate sector lapped up this money, thinking it was cheap. FII’s brought in close to USD 40 billion in the 2004-2008 period while Indian corporates raised USD 20 billion though FCCB’S (Foreign Currency Convertible Bonds). The government basked in the glory of an economy growing at close to an average of 9% over the 2004-2008 period. Reforms were put in the backburner while corporate India praised the government for its pro market stance (read forcing the RBI to go easy on inflation and liquidity flows). The prominent newspaper the Times of India flagged off an India shining movement. India and the Indian government could not do anything wrong at that time.
The most telling of all was the time in January 2005, when the then RBI governor, DR. Y.V. Reddy mentioned some form tax on FII flows. The same evening the then Finance Minister, P. Chidambaram came on television saying that no tax was being considered. The sensitiveness to FII flows by the government was driven by corporate India, which was the beneficiary of the flows at that point of time.
The 2008 credit crisis originating in the US, threw light on where the strong flow of foreign liquidity came from. The liquidity flows into emerging markets were driven by massive leveraging by banks across the globe and the collapse of this liquidity forced the world into a financial crisis. The current woes of sovereigns in Europe are due to the same liquidity that drove markets pre 2008 crisis.
Macro factors have taken a U turn now and the blame is on the government. GDP growth is set to fall below 7.6% for 2011-12 against 8.6% seen in 2010-11. The government is fighting inflation, which has averaged 9.3% fiscal year to date (October 2011). Government is unable to control its expenditure as subsidies are rising and there is no political consensus on hard core subsidy reforms. Telecom scams, mining scams, land grabbing scams are all involving corporate India. Corporates that bid at unrealistic prices for UMPP (Ultra Mega Power Projects) at Rs 1.2 a unit against cost of producing power at Rs 2.7 (for NTPC) are now complaining about the lack of feasibility of the projects given costs. In short the government is unable to do anything about the current state of affairs.
Unfortunately corporate India is equally to blame for the current state of affairs, having been carried away by liquidity driven flows and in the process throwing away economic sense. The government and the corporates have to reform before the economy strengthens again.