It has become expensive to live in India but probably even more expensive to do business in India. A look at the rising costs of setting up business over the last 3 years – asset, capital and services based – suggests “business inflation” could be as high as 10-35% p.a., well ahead of 7-8% headline inflation. This could be meaningful, given India’s growth is primarily investment led.
The report further adds that Business inflation is raising break-evens and capital intensity, lowering returns.
Citi estimates, ballpark by nature, suggest that in cases, break-even periods are up 20-80% over the last 3 years, capital intensity is up 10-60% and distribution requires 2x sales to generate the same returns. A part of this pressure is global, and this does not apply to all but raises questions on the direction of returns.
Citi raises 4 questions 1. Growth rates – where will they settle? 2. Government/RBI policy stance, in the face of inflation and election [frequent elections, a dampener] . 3. Earnings momentum – slowing, but faltering? 4. Retail investor – will he come back and when ?