India Inc. delivers, but speedbreakers ahead

India Inc. seems to be on a roll with a stellar performance in the third quarter of the 2009-10 financial year. And, by all accounts, the recent earnings season indicates that economic recovery is well on track. On a host of parameters, Indian companies have delivered the goods.

Crucially, almost twothirds reported improved profits helped by an increase in sales, a contrast from earlier quarters when cost cuts and cheaper inputs were the main drivers. Automobiles, auto ancillaries, metals and FMCG companies were the outperformers. The recovery comes amid sharp tax cuts and stimulus measures, put in place a year ago, to boost confidence in Asia's thirdlargest economy in the aftermath of the economic turmoil.

However, Indian firms are now staring at a new set of worries: Inflation that could crimp margins and tax hikes, which may dent demand. Raw material prices are on the rise after staying benign in 2009, interest rates are hardening and record-high food prices could spill over to the broader economy and force firms to hike wages, eroding profit margins. And the other signs of the economy's robustness like rising exports and a jump in the pace of manufacturing growth further weaken the case for continuing the stimulus. These could pose fresh challenges for companies in the coming quarters.