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The government needs to step in before the economy is caught in a tailspin of demand destruction.

india Updated: Nov 12, 2008 21:09 IST

Two of India’s largest industrial groups are tightening their belts. The Tatas, the country’s biggest shopper of companies abroad, and Reliance Industries, furiously ramping up its petrochemicals capacity to global scale, are now putting off acquisitions and delaying planned projects, according to news reports. If anecdotal evidence is still needed that a slowdown is well and truly upon us, look no further. Over the next three years, a pipeline of $700 billion investment planned by Indian corporations stands jeopardised by the crisis on Wall Street. Scary, considering India invests around a third of its income ($300 billion) a year, which in turn has been delivering a blistering 9 per cent GDP growth. Over the last five years Ratan Tata and Mukesh Ambani, through differing business strategies, were the life of corporate India’s coming-of-age party: what afflicts them now spares no one in India Inc.

The news from the previous quarter was grim. The net profits of 1,379 listed companies are a third less of what they were in June-September 2007. Costs, particularly the cost of money, have ballooned as the global credit tap ran dry. However, sales held out, growing 38 per cent, fairly in line with the previous year. Companies took it on the chin by not passing on the higher cost of production to consumers in an attempt to keep the top line aloft. Not any more. Official data for October show that sales are shrinking; collection of excise — a tax on sale of merchandise — is nearly 9 per cent less. Since half this tax is collected from oil, the picture does turn alarming.

There is a limit to which producers can absorb higher input costs, and we seem to be hurtling towards it. Household spending, fuelled so far by credit, is held hostage by the global liquidity crisis as Indian companies return home to borrow. The government needs to step in before the economy is caught in a tailspin of demand destruction. China has thrown a quarter of its foreign reserves to take up the slack in a slowing economy. There is little to recommend our not doing likewise. Why wait for GDP figures later this month to state the obvious?