monopoly power (which has been plentiful in India) combined with a sufficient degree of competition (from imports in the first instance) could actually spur innovation because some of the rents from innovation can be captured by the innovating firm.<sup>23</sup> This is good news for future growth in India. Recent indicative economic trends and informal interviews with big industrial houses and commercial banks suggest that firms have restructured their balance sheets and assets prior to the current round of expansion. This time, it has very much been with an eye on the global economy.<sup>24</sup> In recent years, following a period of corporate restructuring, growth has become increasingly broad-based. After the manufacturing recession of the late 1990s, there has been a sustained and increasing resurgence of manufacturing activity, supported by domestic as well as export demand, strong corporate profitability and resilient business confidence. In the current year, manufacturing has been growing at nearly 12% of GDP. Strong service sector growth is now being supported by a rapid expansion in manufacturing, particularly of consumer durables, suggesting that the current upturn in growth might be more than just cyclical. The turnaround in the growth rate of corporate investment, which began in 2003/04, and peaked in 2004/05 and 2005/06, continues to be sustained in 2006/07.<sup>25</sup> Investment as a share of GDP now exceeds 30%, with infrastructure dominating the scene - its share in total capital investment being about a third in recent years. Investment in the manufacturing sector also remains strong, whereas the share of service sector industries in total capital expansion increased to about 15% in 2005/06.

Improved firm competitiveness is reflected in a number of ways. The financial performance of the corporate sector has improved dramatically in recent years, with the manufacturing sector in particular putting up impressive sales and profit performances. Corporate sector sales have been increasing at double digit levels annually since 2002-03. Profit after tax has been increasing several times as fast, by 60% in 2003-04 and 31% in 2004-05, indicating an improvement in the profit margin of corporates.<sup>26</sup> More recent data provide ground for continued optimism: Indian corporates report a robust growth in profits of 43% in the quarter ending September 2006, on the back of a buoyant sales growth of 28%. Other corporate sector data provide a consistent picture of improved firm performance: a steep decline in the inventory to sales ratio is observed suggesting improved efficiency in inventory management; and interest expenses have declined significantly as high cost debt has been retired. The stronger corporate balance sheets have had a positive effect on private investment in the economy. The booming industrial activity has led to a rapid rise in non-food bank credit, whose growth rate has exceeded 30% in recent years. As a result, private sector credit as a share of GDP has been rising rapidly, and the share of private sector banks in providing this credit has increased. The improved industrial performance has also translated into an increase in the share of industry in GDP, from 23.3% in 1999/00 to 24.9% in 2005/06.

23 Carlin et al. (2004).

24 One economist working for a major industrial group described the change in attitude thus: In the past, the key concern of Indian companies was how to keep foreign competition out. Now, the key concern is how to gain access to overseas markets. This is a profound change for a country where the economy was effectively closed up to 1991.

25 Based on data from the CMIE CapEx Database and “Corporate Investment: growth in 2005-06 and prospects for 2006-07” RBI Bulletin August 2006, pp. 971-977. Indian corporates started announcing huge new investments in 2003-2004 and outstanding capital investments have been rising ever since: the flow of fresh investments increased by 73% in 2004-05 and then more than doubled to Rs. 8,05,083 crore in 200506. Fresh new industrial investments worth Rs. 2,31,164 crore were announced in the quarter ending July 2006, suggesting investment growth is continuing apace this year.

26 CMIE, Monthly Review of the Indian Economy, November 2006.

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