The Effect of Inflation on Measures of Financial Performance on Indian Manufacturing Industry

Price do not remains constant over a period of time. They tend to change due to various factors like economical, social, political etc. This paper aims to demonstrate the disfiguring effects of inflation on the financial statement on Manufacturing Industry in India, and the corresponding effects on measures of profitability. The financial performances of 42 manufacturing companies covering 7 industrial sectors have been restated in current purchasing power for a period of 5 years (2004-05 to 2008-09). The Current Purchasing Power method and different tools of financial statement analysis like comparative and common-size statement analysis have been employed for study the impact of inflation on financial performance. It is observed that after inflation adjustment, the level of profitability in Indian manufacturing industry is lower (overall) with respect to profitability measures calculated using historical cost based on financial statements. In addition to the impact of inflation on manufacturing industry varies greatly for the study period. The result emphasizes the differential effects on manufacturing industry with varying inflation rates.