With the economy slowing down dramatically and the growth in the Index of Industrial Production down to just 3.8 per cent in May 2008 as compared to 10.6 per cent in May 2007, you'd think corporate sales would be plummeting.

However, thanks to consumer demand built on five years of high GDP growth, and a sharp spurt in inflation, especially in commodities, corporate India's sales are rising as never before.

A sample of 1,248 companies saw net sales rise a whopping 39 per cent in the quarter ended June 2008 over that a year ago, as compared to 28 per cent in the quarter ending March 2008 and 16 per cent for the quarter ending December 2007. Just how dramatic this growth is can best be judged from the RBI's latest Expectations Survey where  just a fifth of those polled expected selling prices to increase in the quarter.

This sharp hike was seen pretty much across sectors - so while FMCG firm Hindustan Lever [Get Quote] saw at 21 per cent hike in top-line growth, infrastructure majors like Larsen & Toubro and BHEL saw a 53 per cent and 34 per cent hike respectively.

There were, of course, exceptions and engineering major ABB saw a disappointing 15 per cent hike (on the back of an equally poor 17 per cent increase in the March quarter) and retailing giant Shoppers Stop saw same-stores sales growth fall to just 7 per cent (in comparison with a 16 per cent growth in the March quarter).

Commodity producers like Reliance Industries [Get Quote] saw an 41 per cent growth in topline, SAIL [Get Quote] 37 per cent and Tata Steel [Get Quote] 47 per cent, while revenues for Hindalco [Get Quote] were flat.

The rise in sales, however, have been accompanied by an even sharper hike in expenses, and not just those on raw materials like steel and petroleum products (contrary to popular perception, petroleum prices for the industrial sector have risen dramatically since items like aviation fuel and furnace oil are sold at market prices) � salaries too have increased significantly. As a result, expenses in this quarter rose 42 per cent as compared to 31 per cent in the previous quarter.

Raw material costs for Tata Motors [Get Quote] (as a percentage of sales) rose by 230 basis points to 72 per cent in the June quarter. For Mahindra & Mahindra, the increase was 130 basis points to 69.7 per cent; for NTPC, fuel costs as a percentage of sales were up nearly 200 basis points at 64.8 per cent; and for Ambuja Cements, the cost of key materials and freight rose 370 basis points to 48.3 per cent.

As a result, net profits are up a miserable 6 per cent in the June-ending quarter; while that's not much worse than 9 per cent for the March-ending quarter, they're less than a fourth of that in the quarter ending December 2007.

So, while L&T's net sales were up 53 per cent, its net profits rose just 33 per cent; Maruti Udyog's [Get Quote] sales rose 20 per cent but net profits fell 6 per cent; profits at Tata Motors too fell 30 per cent on higher revenues of 14 per cent.

Foreign exchange losses have added to the problems of firms like Ranbaxy [Get Quote] and Mahindra & Mahindra, though this could just as well reverse if currency movements are favourable - most of these losses have been incurred since these companies have foreign currency exposures.

High interest rates have added to companies' woes, and for our sample of 1,248 companies, interest costs rose by almost double that in the previous quarter. Interest costs in the quarter ended June 2008 rose 86 per cent as compared to just 44 per cent in the March-ending quarter.

Too much, however, shouldn't be made of this since interest costs comprise just 1.5 to 1.7 per cent of sales for most companies. In the case of the banking sector, of course, high interest costs have resulted in a sharp decline in credit offtake.

According to Seshadri Sen, strategist at Macquarie Securities, with loan growth tapering off, so will fees. There's already some moderation in credit growth which is expected to come off to around 20 per cent this year in line with RBI's targets. While credit growth is currently at around 24-25 per cent, a part of it can be attributed to higher borrowings to pay for oil purchases - which is why bond yields have been climbing quite steeply.

Says Andrew Holland, MD, strategic investment group, Merrill Lynch, "The kind of margin pressure seen this quarter is quite unbelievable and more severe than expected." For our sample as a whole, PBIT margins are down to 15.7 per cent  in the quarter ended June 2008 as compared to 19 per cent a year prior to this; in the case of PBT margins, they're down from 17.7 per cent in the June 2007 quarter to 14 per cent in the June 2008 quarter; net profit margins are down from 10.8 per cent to 8.2 per cent in the same period. As the RBI Expectations Survey shows, this decline was also quite unexpected. While 61 per cent of those polled in April expected margins to remain the same, this fell just marginally to 60 per cent in the July poll.

If this isn't bad enough, many are expecting a lot worse in the months ahead. High interest rates, for instance, have meant that Maruti Suzuki's sales volumes in the home market  rose just 0.1 per cent  in July; ICICI Bank [Get Quote] says its retail loan portfolio will grow by just 5-10 per cent this year. As Hoshedar Press, managing director, Godrej [Get Quote] Consumer, says, "The mood is clearly worsening and we may well see a round of down-trading." With interest rates hardening, weaker consumer demand is a foregone conclusion.

While the performance of infrastructure majors like L&T and BHEL suggests the investment momentum in the economy remains largely unaffected, according to HDFC Bank [Get Quote] Chief Economist Abheek Barua, there is some moderation in investment demand. "We're seeing some evidence in sectors such as auto ancillaries and textiles," he says. Barua adds the investment cycle cannot remain immune from high interest rates, so if rates harden, demand is bound to slacken. Goldman Sachs has lowered its GDP forecast for 2009-10 to 7.2 per cent from the earlier 8.2 per cent due to weaker investment outlook caused by higher interest rates. And Merrill Lynch's Holland feels not all capital goods firms are bagging the kind of orders they were last year.

Though there is no immediate correlation between macro variables like the Index of Industrial Production and corporate performance, the similarity in the trends is quite striking. So, the manner in which the IIP behaves over the next few months, may give a pretty good indication of how corporate India will fare over the next few quarters.