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Inflation – Rising Cost of Doing Business in India

May 9, 2008

World’s leading banker, Citigroup has some harsh words for India in its report. Citi said,

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 ?

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