Murphy couldn't have planned it better. Or timed it so. Galloping inflation, a patchy monsoon, and a global spurt in the price of crude (oil) are threatening to remove some of the cheer from the financials of India Inc. Each of the three is a handful and it is a rare year that sees them joining hands as they have now. Conventional logic would seem to suggest that 2004-05 is a write-off for business. India Inc, however, will have none of this: displaying the kind of insouciance that hasn't been seen since a certain Alfred E. Neumann dug a finger deep into a nostril and famously declared "What, me worry?" it is looking forward to an increase not just in revenues, but in earnings too. Nor is its confidence misplaced: the new Government at the centre has, despite the influence the communist parties exert over it, indicated its commitment to economic reforms; India still remains among the fastest-growing economies in the world; the domestic market, in categories as far removed as cars, credit cards, and computers, is booming; new jobs are being created and salaries are booming; and the great Indian outsourcing story is still very much alive. Enough reason to term India Inc. invincible? Maybe.

10. A Benign Interest Rate Regime

Money for hire: A low interest rate regime is conducive to investments

Interest rates, as most people who can read the yield curve and quite a few that cannot, claim are certain to increase appreciably. For instance, the yield on 10-year Government of India bonds increased from 5.06 per cent on April 20 to 6.44 per cent on August 20. "Interest rates," goes the popular refrain, "will soon increase enough to adversely affect the economic recovery in the making." Fortunately for India Inc, this is far from the truth. Much of the hysteria comes from a misinterpretation of the phenomenon: what India is going through now isn't as cataclysmic a thing as a change in the interest rate structure, but a more mundane correction of the yield curve. Short-term rates remain stable, while the yield on long-maturity paper has shot up. "The yield curve in India was way too flat for a long period of time," says Conrad D'Souza, General Manager (Treasury), HDFC. "It has just got corrected now."

Some analysts insist that spiralling inflation is one reason why interest rates will have to move North. Aditya Puri, the CEO of HDFC Bank, doesn't quite agree. "There is too much misconception about inflation," he says. "Nowhere in the world is the policy or long-term direction (on interest rates) based on the wholesale price index (WPI); WPI is a flawed measure as it has a base effect." Puri's reference is to a phenomenon where the inflation rate (always measured on a point-to-point basis) is exaggerated when a stable index a year ago is complemented by spiralling prices now. That is just what has happened: between end-April and end-August last year, the WPI was almost static. It started moving up from September 2003; that means, starting this September, the inflation rate should start tapering off.

There are other reasons why inflation will cease to be a factor soon. "Commodity prices move in their own cycles and come September, we expect them to ease," says Nilesh Shah, Chief Investment Officer, Prudential ICICI Mutual Fund. Ergo, the interest rate regime will continue to remain benign. And given the liquidity in the system (banks are choked to the gills with cash), any increase in interest rate will likely be marginal.

-Narendra Nathan & Roshni Jayakar

Exporter heaven: Weak rupee in the near term and strong rupee in the long-term

9. A Weak Rupee in the Near Term

And a strong one in the medium and long term. That's the prognosis of foreign exchange experts and it couldn't be better for India Inc. "Our view is that the rupee will weaken initially on oil price and inflation concerns to 46.70/47, but subsequently recover," says V. Rajagopal, Chief Dealer (Forex), Kotak Bank. "We expect it to be in the 45.25, 45.65 band by then." A strong currency usually hits corporate profitability (imports become cheaper and companies cannot increase prices in the domestic market), but it comes with several positives: it curbs inflationary tendencies and attracts capital investment from other countries, thereby stimulating economic growth. And a weak rupee in the short term will help the cause of exporters. "Around a third of our cost is in rupees," explains Deepak Sogani, Chief Financial Officer, Patni Computer Services. "If the rupee depreciates by 1 per cent, our margin will improve by 33 basis points."

-Narendra Nathan

8. The Fastest Growing Economy in the World

The boom is on: And word is out on the streets

Well, India was actually the 18th fastest growing economy in the world in 2003 according to the CIA World Fact Book, 2004. Then, it ranks only behind China (the 11th fastest growing) and on par with Argentina (the 15th) in the pecking order of economies that matter. Even by Chinese standards (a 9.1 per cent growth rate in 2003), India's growth rate of 8.2 per cent in 2003-04 is nothing to be sneered at. After all, the US grew by 3.1 per cent in 2003, Japan by 2.5 per cent, Brazil by a negative 0.2 per cent, and Asian Tiger Thailand by 7 per cent. IMF predicts that India will grow by 6.8 per cent in 2004-05. Says Anil Singhvi, Executive Director, Gujarat Ambuja: "Six per cent growth on the back of 8 per cent growth isn't bad at all." India Inc is justified in hoping that some of that growth will translate into foreign investment and domestic demand.

-Ashish Gupta

FM P. Chidambaram: It is reforms as usual

7. Reforms

The initial assault of the communist party of India and the communist Party of India (Marxist) on the reforms process seems to have subsided. Today, the trio of Prime Minister Manmohan Singh, Finance Minister P. Chidambaram, and Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, are back to doing what they are best at-furthering the cause of economic reform. If India Inc isn't unduly worried about the influence the communists exert in the corridors of power, it is because it knows what Surjit S. Bhalla, a Delhi-based economist, articulates: ''Except on two contentious issues, privatisation of profit-making government companies and labour reforms, the Left (the communist parties) will allow the Congress to follow its economic agenda, kicking and screaming maybe, but it will never precipitate a constitutional crisis.''

-Ashish Gupta

6. Demand

Up, up, and away: Changing aspirations and higher salaries are inducing people to buy more

A billion people is a huge market, irrespective of purchasing power. And if that number is backed by high growth rates and a decrease in the number of the poor, marketers have no reason to complain. That's the enviable position India Inc finds itself in today: since the 1990s, the number of poor in India has declined from 35 per cent of the population to 26 per cent. The Indian middle class, by some estimates, numbers between 200 million and 250 million. In good times-with the economy set to grow by around 7 per cent this year times are good-all this translates into vibrant domestic demand.

That's exactly what happened in 2003-04. India, for instance, produced 36.19 million tonnes of steel that year, 30.27 million tonnes of which were consumed by the domestic market (the construction, automobiles, and consumer durable sectors, all boomed). And the consumer durables business grew by 11.6 per cent in 2003-04: all told, some Rs 32,000 crore worth of refrigerators, televisions, washing machines, motorcycles and the like were sold. The Rs 48,000-crore fast moving consumer goods market shrunk by 5.7 per cent but that can be attributed to downtrading (replacing high-priced products with low-priced substitutes) motivated by recurring monthly expenditure on pre-paid mobile telephony cards (almost 80 per cent of the country's 41.5 million mobile subscribers uses this) and equated monthly installments (EMIs) on consumer durables, especially motorcycles. Much of the demand was backed by consumer credit. Some Rs 63,000 crore of housing loans and Rs 23,000 crore of car loans were disbursed in 2003-04.

That scenario is unlikely to change: backed by increasing aspirations and rising salaries (see Salaries Have Zoomed, Even At Senior Levels on Page 46) consumers will likely spend more, not less this year on cars, consumer durables, and homes. Will inflation hurt? Not really says Bajaj Auto Chairman Rahul Bajaj. ''It may lead to higher input costs for manufacturers but it will not be passed on to consumers.'' Utpal Sen Gupta, President, Agrotech Foods, concurs. ''Manufacturers will absorb the higher input costs and trade it off with better efficiency at the manufacturing and sourcing-end.''

-Ashish Gupta

Can you identify the salaried employee? Answer: It's both

An increase in salaries results in a consequent increase in discretionary spends

5. Zooming Salaries

Partly in anticipation of better times to come, and partly in response to the good times that are already here, India Inc has started spreading the rewards. Salaries, even at senior levels (think vice president and the like), are up, and by anything between 10 per cent and 25 per cent. Across levels, an increase in salaries almost always translates into a corresponding increase in discretionary spends. High-growth and high-attrition industries such as it, it-enabled services, telecom, and banking and financial services, have, expectedly, clocked the highest increases in salaries. ''In banking (for instance), there is a lot of churn happening because the talent pool is limited, especially in niche expertise areas,'' explains Ashish Arora, CEO, Search Works, the Indian arm of a Singapore-based hr firm. ''This is resulting in a salary growth of up to 50 per cent in some cases.'' ''The salary boom, as such, can be attributed to the high attrition level,'' concurs Louis B. Joseph, Head, Regional Operating Units (ROU), MphasiS. And even sectors that have been slow to show significant increases in salaries are making up for it by creating more jobs. ''Fresh job creation in the software sector will be around 50,000,'' says Gautam Sinha, CEO, TVA Infotech, a Bangalore-based it recruiting firm. ''And that in it-enabled services, in excess of 70,000 by the end of the current year-it is a brilliant time to be in the it sector.'' ''Manufacturing has picked up, particularly the auto companies,'' adds Sonal Agrawal, Senior Director, Accord Group (India), a Mumbai-based search firm. Even the fast moving consumer goods industry, which somehow contrived to miss out on last year's boom, is back on the recruitment circuit. More jobs and higher salaries: surely, that should make companies happy?

-Shilpa Nayak & Amanpreet Singh

4. Global Opportunities

Steel Citizen: Tata Steel has gone global with the acquisition of NatSteel

We will continue to do what we have been doing,'' says Rahul Bajaj, Chairman, Bajaj Auto, when questioned about his company's strategic response to challenges brought about by inflation, the hike in global oil prices, and a patchy monsoon. ''We will drive costs lower, innovate speedily, and increase our international presence.'' The last, going global, is rapidly becoming India Inc's mantra of choice. Companies are discovering that a global presence can help insulate them from the vagaries of the domestic market. ''Going global is the best way to spread your risks,'' says Praveen Kadle, Executive Director (Finance), Tata Motors, which acquired Daewoo Commercial Vehicle Company of South Korea in November 2003 and is investing $2 billion (Rs 9,200 crore) in Bangladesh. Another company belonging to the Tata Group, Tata Steel, recently announced its acquisition of Singapore's NatSteel for Rs 1,313 crore. In many ways, the global foray of companies such as Tata Steel and Tata Motors is the culmination of India Inc's efforts to establish a presence outside India. In the 1990s, Indian manufacturing companies were considered not competitive enough to compete globally. Today, in areas as diverse as forgings, water pumps, commercial vehicles, and a range of auto components, Indian companies cater to the global market. That is in addition to businesses such as it and pharma where Indian companies have already established themselves on the global stage: Ranbaxy has a significant presence in the US; Aurobindo, and Dr Reddy's boast manufacturing facilities in China; and the better Indian software companies operate in more countries than the typical well-educated Indian can name without the assistance of an atlas. Already, for instance, Ranbaxy makes more money outside the country than it does within.

-Swati Prasad

Yes or No: Kerry (left) or Bush, outsourcing will continue

3. The Outsourcing Boom

Forget it and it-enabled services, India is rapidly emerging a hotspot for outsourcing pharmaceutical products, engineering design, R&D, clinical research, textiles, even auto components. The obvious thing going for India is cost. However, studies on outsourcing it have shown that companies also stand to gain from reduced investments in physical and telecommunication infrastructure (this increases their free cash flow) when they offshore work to India.

Big Pharma is now waking up to the fact that it can save as much as 30-50 per cent by outsourcing manufacturing and R&D to India. "Our skills in chemistry coupled with internationally approved manufacturing facilities are a big plus for pharma outsourcing," says Kishore Babu, Chief Financial Officer, Divi's Lab, a Hyderabad-based contract manufacturing company. Divi's is betting on its US FDA-approved manufacturing facilities to help it bag manufacturing contracts from Big Pharma once the product patent regime comes into effect in India in 2005. The other area waiting to explode is clinical research services. Pfizer, Novartis, Astra Zeneca, Eli Lilly and GSK have announced their resolve to make India a global hub for their clinical research.

If the product patent regime will help pharma, the dismantling of the textile quota system from 2005 will accelerate the outsourcing of textiles production to India. Already global retailers such as JC Penny and Wal-Mart have announced that they are stepping up their outsourcing activity in India. The government has targeted textile exports of $50 billion by 2010, from around $14 billion now. Backlash or no backlash, recession or boom, rain or shine, these numbers can't but increase. And that is why India Inc is smiling.

-Sahad P.V.

2. Productivity & Competitiveness

Moser-Bear's disk factory new Delhi: Globally Competitive

First, the numbers: India is ranked 34 in IMD's World Competitiveness Report, 2004. That's 16 ranks higher than its 2003 rank of 50. There's more: in terms of business efficiency, its rank has moved from 51 to 22; and in terms of economic performance, from 22 to 12. The ranking shouldn't surprise anyone (India's rightful position is probably in the top 10 or 15): the dismantling of the industrial licensing system, the rationalisation of the tax regime, and the removal of competition-stifling tariffs haven't just contributed to faster economic growth; they have made India Inc competitive.

Not convinced? In terms of cost-competitiveness, India's steel industry ranks among the top 10 in the world (it is ahead of the US). Nalco and Hindalco are among the lowest-cost producers of aluminium in the world. Indeed, claims Jalaj Dani, the man spearheading Asian Paints' global foray (it boasts a presence in 22 countries), the much-talked of investment boom of 2003 didn't really happen because "India Inc was able to de-bottleneck its existing operations". And the country is emerging as a preferred destination for outsourced pharma, textiles, and auto component manufacturing.

Apart from resulting in a natural increase in profitability, efficiency gains also help in terms of increased business, either through outsourcing opportunities or access to new markets. India Inc's surge in profitability-net profit margin for the BT 500 has increased from 6.02 per cent in 2001-02 to 8.85 per cent in the first quarter of 2004-05-can largely be attributed to this. Understandably, an industry with strong fundamentals has little to fear from changes in the macroeconomic environment.

-Sahad P.V.

Reliance Energy's Anil Ambani: He is investing Rs 11,000 crore in a power plant in Uttar Pradesh

1. Investment-led Growth

To economists, this, the return of investment-led growth, is nothing short of a second coming. Between 2004 and 2006, says a report on infrastructure put out by Mumbai brokerage ICICI Securities, India will see $51 billion (Rs 234,600 crore) of investment in the sector. ''After six years of policy fine-tuning,'' says the report, ''India is poised at an inflexion point in developing infrastructure.'' It adds that 43 per cent of the spend will accrue to the power sector, 20 per cent to roads and the rest to other sectors of the economy with a consequent multiplier effect. Circa April 2004, the outstanding investment in manufacturing was 18 per cent higher than the corresponding figure in April 2003, according to a recent report published by Centre for Monitoring of Indian Economy (CMIE). ''The upward curve in investment now being observed-for the first time since 1997-is likely to sustain in the near future,'' sums up the CMIE report.

So is this a return to the irrational exuberance of the mid-1990s, when Indian corporates added a whopping 76 per cent fresh capacity only to pay a heavy price later. Not really, argues Sunil Sinha, a consultant with National Council of Applied Economic Research (NCAER), a New-Delhi based think tank, pointing to the obvious difference between the last investment boom and the new one. The earlier investments, he explains, were fuelled by unrealistic hopes about the size of the domestic market and the opportunistic motive of making a killing behind high tariff walls. The expansions were mostly financed through debt (now sitting as Non Performing Assets in the Indian banking system) or money raised from public issues. This time around, the bulk of the investments is being made by India Inc's A-list, largely financed through what accountants term internal accruals, and motivated by the need to meet growing domestic and international demand.

''Indian economy has entered an investment phase,'' says Siddhartha Roy, Chief Economist, Tata Group, adding that there is nothing that can impact investment sentiments negatively. ''Capacity expansion is always based on a long-term view of the economy that continues to remain positive.'' Expectedly, a clutch of companies have lined up significant investments. Tata Steel is investing Rs 10,000 crore in expanding capacity from 4 million tonnes to 7.4 million tonnes; Raymond is investing Rs 127 crore in increasing its denim capacity from 20 million metres to 30 million metres; and Reliance Energy is investing Rs 11,000 crore in a 3,500 mw plant in Uttar Pradesh. While actual figures on capital creation are not available, the fate of the capital goods sector is a clear proxy of the wave of investment activity waiting to happen. After growing at a decreasing rate between 1998 and 2001, and actually declining in 2001-02, the sector has grown at an increasing rate since 2002-03. That should silence the cynics who believe India's economic performance in 2003-04 is not something that can be sustained because it isn't based on investment.

-Ashish Gupta