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D. Sampathkumar

CHENNAI, May 7

INDIAN businesses may find the `near term' rather daunting, what with the heightened competition and a squeeze on profit margins. But they well might be viewing the `long term' with greater optimism. Or so it would seem, if the fact of their writing off ever-larger sums of money by way of depreciation in their accounts were anything to go by.

Financial performance of a sample of nearly 400 companies for fiscal 2001-02 shows that these companies have written off approximately a Rs 1,000 crore more in depreciation charge in this year compared to the previous year. A higher charge prima facie reflects a larger base of depreciable assets.

Now, a larger base could only mean that companies have been investing higher sums of money in plant and machinery and other productive assets. That would be an entirely rational response if business enterprises believe that conditions in the long term are likely to be a lot more favourable than is the case at the moment. And rationality is the bedrock of business behaviour.

But the phenomenon of a higher depreciation charge is not in itself something new. Companies have been writing off larger sums of money in depreciation year after year. So it could be argued that `confidence' has always been there. But what marks the performance of this year different from all the earlier years is that the quantum of increase is much larger. That the charge this year is higher can be seen from the fact that it is a much higher percentage of sales than in earlier years. An analysis of a larger sample of companies has revealed that such percentage has steadily grown from 2.8 per cent of sales in 1993-94 to 3.7 per cent in 2000-01 (Source: CMIE date of corporate financial performance of various years). But the figure stands at 4.8 per cent for the latest year.

Of course, the higher percentage in the latest year could well be because fewer goods have been produced and sold or sold for lower unit realisation. But manufacturing output has grown, albeit at a modest rate of around three per cent. Prices of manufactured output too have remained more or less static, with the wholesale price index for the year down only marginally at 143 from 144 a year ago. Of course, anecdotal evidence suggests that steel, chemicals, petrochemicals, paper, etc, have had a better year in terms of prices than in the previous year. Companies in these industries would not have had much to complain.

The ratio (depreciation to total income) in the latest year could have also been boosted by a change in the depreciation policy. Here too, available evidence suggests that there is unlikely to have been any major shift. The ratio of depreciation to gross fixed assets has consistently stayed in the 4.8 - five per cent mark in recent years.

Chances are then; the sharp rise in depreciation charge both in absolute number and in relative terms owes much to the larger base of depreciable assets this year than anything else.

According to the NCAER - an economic think tank, the business confidence in the country has shown an improvement during December 2001-January 2002, with an increase of 2.4 per cent over the previous year. The improvement, the agency noted, had been fairly broad based and responses relating to overall economic condition, investment climate and financial position of firms reflected greater optimism. They might well be putting their monies where their mouths are.

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