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This article was first published 1 year ago  » Business » 'Corporates will have to absorb inflation impact'

'Corporates will have to absorb inflation impact'

By Arup Roychoudhury
May 11, 2022 09:17 IST
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'Top lines will grow, volume growth will be there, but margins might also be impacted.'

Kindly note the image has only been published for representational purposes. Photograph: Rupak De Chowdhuri/Reuters

Sumant Sinha, chief executive officer, ReNew Power and president of the industry body Assocham, says private sector capex has already started picking up, especially in sectors like power.

In an interview with Arup Roychoudhury/Business Standard, Sinha explains that rising inflation will impact the margins of companies who will be unable to pass on all of the higher input costs to consumers.


How would you assess the economic environment in FY23?

Macro-economically, we are in a pretty enviable position right now.

We had structural issues that we have spent time and effort and energy resolving over the past seven years.

And we are now at a point where we can reap the benefits of that through the next several years of rapid growth.

Now, of course, there are some external risks, which include the Fed increasing interest rates, and all the other geopolitical issues that are going on around the world.

And, therefore, there is an impact of that on things like commodity prices for the future.

And if none of these external risks come to pass, then I would think that we should be well positioned for many years of very good growth rates of 6-8 per cent per annum.

While India is expected to register better growth compared to peer nations, inflation seems to be a bigger worry. How do you think it will impact corporate India?

The reality is that not all cost increases can be passed on to consumers, because it tends to have an impact on demand as well.

And so, therefore, corporates will have to absorb some of this inflationary impact.

And that will impact margins going forward.

It is not just inflation in goods, it's also interest rates going up, which will also impact corporates' bottom lines.

So I think top lines will grow, volume growth will be there, but margins might also be impacted.

Now, how much of the entire impact remains to be seen.

There will be attrition to bottom lines.

But whether it is at the same level as volume growth, or at a lower level because of margin reduction in the middle, really something we'll have to wait and see.

My feeling is that in all probability, you will see corporates having to shrink some of their margins.

By when can we see private sector investment bouncing back?

Private sector capex is already picking up right now, there are investments happening certainly in the infrastructure space.

There's a lot of capital that has continued to come into the country.

So that is also allowing corporates to leverage their investment capability by raising capital from outside.

I would hazard a guess and say that we are, at this point, getting into a situation where excess capacities have been worked through.

As demand grows, we need to create new capacities.

And to me, one of the best examples of that is the power sector.

You're seeing that demand is growing very robustly, and demand for power only goes up while the whole economy is growing.

And within the power sector, we need to add to meet this demand growth, and frankly, we are not being able to do that fast enough.

And also we need to obviously mine more coal as well, because ultimately more than 70 per cent of India's power consumption is made from coal.

Similarly, in the real estate sector, you're seeing prices begin to thicken up a little bit.

The sectors which have been worst hit by the pandemic are touch services like tourism, leisure, hospitality and others.
We are again seeing a rise in Covid cases. Has the government done enough for these sectors, and what more can be done?

These sectors have been the worst-hit, yes.

But there is only so much that the government can do.

Ultimately, we need the economy to pick up.

What we have now is a much milder version of Covid and as long as hospitalisations do not go up, there is no cause to panic.

If we are able to focus on that, then there is no need for us to stop economic activity.

So I suspect people are just going to carry on in the normal way.

And then we'll see a massive pent-up demand surfacing in these sectors.

You're already seeing that right now.

So I think that hopefully continues.

Slowly pricing power also begins to come back and this entire sector starts doing a lot better.

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Arup Roychoudhury
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