Is Indian economy slowing down?

Time for some revisionism, before the old year runs out. The last three years have been great for Corporate India, right?

Well, look at the figures: the average annual increase in sales for 184 of the 200 most commonly traded shares on the stock market (for which comparative figures are readily available) was 15.68 per cent, for the three years that ended last March.

That's not such a lot, when you consider that GDP at current prices grew at about 11 per cent (6.5 per cent plus inflation) in the same period. Surely, you will say, profits have done better. Not so.

According to the figures put together by BG Shirsat of the Business Standard Research Bureau, operating profits for these firms grew slower than sales - by 13.93 per cent - almost certainly reflecting cost increases, on the one hand, and the inability to pass them on to the end consumer, on the other, because of intense competition in the marketplace. And this is what we have been calling boom times?

Where's the trick, you will ask. It's easy to guess: interest costs in this period fell each year by an average of 2.38 per cent. And that made all the difference. For, net profit shot up as a result, by an annual average of 33.79 per cent (though tax collections rose slower each year, by 24.06 per cent).

The stock market looks at net profit numbers, and it is no surprise that these companies' returns to shareholders (including dividends) went up annually by an average of over 30 per cent.

Some companies did much better than what these numbers show, and we can all name our favourites. But others clearly did worse. The average picture therefore is a good one, but not a great one. And now we have to look for a new picture, because the interest windfall has already been encashed and there is no new cheque in the mail.

So, and this is the nub, what does the New Year portend?

Let me stick my neck out and say that the economy is slowing down. And will slow down further if oil prices don't fall by the end of 2006.

The early signs of a change of tempo are already there: single-digit export growth in September, followed by an absolute decline in November; more modest growth numbers for the infrastructure sectors; slower sales in most automobile categories (always a bellwether industry); and murmurs about slowdowns in other areas.

To be sure, sugar is doing well, textiles is growing, software is sustaining its tempo, and everyone in every industry seems to be investing in new capacity. So it's not that there is no fizz left in the system.

Nevertheless, it would be foolish to not recognise that the graph may be flattening.

Interest rates have risen by 1 percentage point and more in the last year, and however much the finance minister may want to keep them low, that's not what the outlook suggests. In other words, don't expect 2005's 30 per cent growth in bank credit to be repeated.

Then there's that spreading oil slick. Domestic oil production has been stagnant for years, and if you believe the petroleum minister, will fall from now on. More imports mean more money going out - and the deficit on the trade account could be as much as 3 per cent of GDP, which this country has not seen for at least a quarter century.

It is foolhardy to expect that growth will continue on a rapid track when this is the case; if oil prices don't fall by the end of 2006, they will start affecting the exchange rate, make imports more expensive, cash more scarce, and…

So, for the fourth time in three decades, oil could put a black spot on the system. Unlike the previous three occasions, however, this time the economy may not head for a crisis.

Which will then mean that the economy can stay on course even when the winds are blowing the wrong way. It's not the most obvious thought with which to close a buoyant year, but it may well turn out to be the relevant one for what is to come.