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Economic indicators that will drive 2013
High and stubborn inflation has clouded the outlook for the financial services industry.
IT IS TIME Indian policy makers realised that generating inflation can pay-off only in the short run in terms of higher growth and better industry prospects. Inflation expectations once entrenched can undermine all achievements.

Decelerating output growth marked by volatile investments and stubbornly high inflation in consumer prices are the key economic indicators which will have a bearing on prospects for the Indian financial services industry in the coming financial year.

Investment activity is under strain as optimistic forecasts of real returns to projects are not being realised due to inflation pressures. After a period of robust earnings growth in the second half of the last decade, real returns to investment projects are slowing down because of the pick-up in aggregate price level pressures.

Robust corporate profits during 2000-08

Market participants will recollect how robust the profitability performance of the Indian corporate sector was between 2000 and 2008. This was the time when macro-economic policy was setting the stage for a strong pick up in underlying inflation in the country. During that inflation pick-up process, the profitability of the corporate sector was strong as many sectors of industry witnessed surging demand for their products and services and consequently enjoyed strong pricing power. But, once high inflation set in and turned stubborn, it dawned on the corporate sector that the period of relative price increases (that is, price increases in only the goods & services they produced and sold) was well and truly over. And, it was generalised, widespread inflation they had to reckon with. Pricing power has consequently come under strain and profitability has fallen by several notches.

Labour costs under pressure...

Some of the recent industrial relations disputes in the manufacturing sector in India can also be understood in this broader context as labour costs are under upward pressure. The gridlock in the policy making environment marked by some contested moves on taxes, tariffs, pricing of natural resources and environmental regulations has also contributed to the strains on investment confidence.

Unfortunately, much of the debate in the mainstream media places almost all the emphasis on these last named factors – the gridlock in the policy making environment and the contested moves on taxes, tariffs, pricing of natural resources and on environmental regulations. As if, dealing with these and eliminating any perceived obstacles would clear the way immediately for strong and sustained double-digit growth.
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