Worry. Deep worry. That’s the clear vibe seeping through the latest edition of the Business Today-C Fore Business Confidence Survey, for the first quarter (April to June) of 2022-23. While the Business Confidence Index (BCI) settled above the halfway mark of 50 (on a scale of 100) at 51.2, it was way lower than the 55.2 of the previous quarter, which was the highest level it attained in seven years. The sentiment echoed across industry types and sizes (see charts ‘On a Slippery Slope’). That the survey encapsulates the views of 500 companies across all sizes and industries only underlines India Inc.’s sense of unease with the current economic environment.
The broad reasons are well known—the Russia-Ukraine war, rising inflation, fuel prices on a roller-coaster ride, commodity prices shooting up and then cooling off, foreign exchange reserves dipping, trade deficit (or current account deficit) widening, and so on. Greater clarity on the survey’s core message comes from top economists that Business Today spoke with. Says Abheek Barua, Chief Economist and Executive Vice President of HDFC Bank: “The domestic situation is pretty good on the sales or revenue side. The problem is really in input costs. Apart from fuel, coal has been a big problem for steel users, for instance. Then this sudden shift in the monetary environment both globally and domestically has proved to be difficult. It has meant that raising money abroad has become more expensive. The rupee has depreciated, so for importers it’s been a problem. And there’s huge uncertainty about where things are headed.”
Agrees Omkar Goswami, Founder of CERG Advisory: “No one is worried about a recession in India. They are worried about costs, no question. Most manufacturing companies have had to deal with relatively high costs. They are worried about cost of finance and interest rates, and there is a general sense of worry about the rate of growth of the economy.” Cost—of inputs and capital—is certainly seen as a matter of concern by most economists and business leaders. The latter, especially, impacts long-term loans as well as working capital loans for industry, and with the RBI raising interest rates to bring inflation under control, that cost has risen. In fact, 86 per cent of the survey respondents said that input costs had risen for their business.
Says Rajiv Kumar, former Vice Chairman of NITI Aayog and currently Chairman of Pehle India Foundation: “This quarter has been marked by all the news that have caused a great amount of uncertainty in the environment. Whether it is the fear of recession [in the US], Fed raising rates, Ukraine war, inflation, oil prices going up and down, etc. All of that has generated a lot of uncertainty in investors’ minds.”
So, it’s not a surprise that the survey respondents’ sentiments changed dramatically from what they had themselves predicted for Q1. During the survey for Q4 of FY22, when the respondents were asked about their projections for Q1 of FY23, they were bullish on all parameters—overall economic conditions, financial situation, demand conditions, hiring conditions and profit margins. But their actual sentiment for Q1 when captured in July, showed their disappointment on all fronts (see chart ‘Hopes Dashed’). And the survey respondents’ expectations for the current quarter (July-September 2022) seem to have been coloured by the deep worry they faced in Q1. On all parameters (as mentioned above), their predicted index value is lower than that of the April-June quarter.
The economists, though, have quite the opposite view, and in one voice, they feel the next quarter would be better. “Looking ahead, with commodity prices having corrected, this would be a net positive for the Indian economy and possibly would result in better confidence in the current quarter,” says Aditi Nayar, Chief Economist of ICRA Limited. “CPI inflation has peaked and now with the correction in commodity prices, it should translate into lower inflation over the next few months. And with that the confidence of both businesses and consumers should start to improve. It won’t improve sharply right away, but at least we should see some glimmer of pickup in confidence levels.”
That inflation has peaked is a common refrain among the economists. CPI has moderated from a high of 7.79 per cent in April to 7.04 per cent in May and 7.01 per cent in June; and WPI has moderated from 15.88 per cent in May to 15.18 per cent in June. That may seem marginal, but it still signals a move away from the rising inflation curve, and possibly indicates early signs of success of RBI’s strategy to raise interest rates. Says HDFC Bank’s Barua: “The inflation situation [in India] is much better than abroad. In terms of the dent on consumer incomes and so forth, it really hasn’t been that significant.” Interestingly, 63 per cent of BT’s survey respondents don’t think the government and RBI have done enough to curb inflation. But the economists whole-heartedly disagree. Says Kumar: “This time the inflation is not so much about excess demand but about disruption in supply. And monetary policy, interest rate hike, etc. work only in curbing excess demand. Having said that, I feel the government and RBI have taken substantial steps both on the supply and the demand side, and therefore we might see inflation having peaked.”
In fact, the economists say that many of the concerns of the first quarter are getting moderated now especially because of the fall in commodity prices, because crude oil prices have softened considerably in recent weeks, and because the RBI has taken measures to fight inflation, which seem to be working.
On the other hand, the increasing gap between imports and exports (see chart ‘The Trade Deficit is Widening…’) does cause some concern, despite the notion that a low current account deficit is actually good for the economy because it means less inflow of money into the system and, therefore, less impact on inflation. “It depends on the size of the trade deficit,” says Goswami of CERG Advisory. “If you have a balance of payments (BOP) deficit that crosses 2.5 per cent of GDP, which it has, then there is a concern. As long as trade is increasing, a marginal trade deficit of half a per cent or even 1 per cent of GDP is not a big deal. But our trade deficit and BOP deficit are now becoming larger. So, there is a concern.”
ICRA’s Nayar, though, is slightly more positive: “With commodity prices coming down, the trade deficit should now be somewhat smaller than what it was earlier, although weaker global growth would dampen exports. That is also a positive going ahead. For the balance of payments, we are expecting a deficit in FY23. But specifically to FII outflows, the worst will certainly be behind us. Even the rupee may now enter a period of consolidation, and subsequently if global sentiment improves, we could see a mild appreciation as well.”
What the economists agree on, across the board, is the economic situation in the US. The 75 bps interest rate hike by US Fed Chair Jerome Powell was on expected lines, and he did say he did not believe the US is currently in a recession. But Indian economists believe the country is certainly headed that way. (Caveat: These interviews were taken before Powell’s announcements.) Says Kumar: “The US will most likely slip into a recession. That is because the Fed acted too late and now will go the other way.” Adds Barua of HDFC Bank: “Even if it’s not a deep recession, there will be a shallow recession.” That will certainly impact US market demand for Indian companies engaged in business in that country.
But back home, all metrics point towards slow improvement in the ground situation and, hopefully, a much improved business sentiment next time.
@alokeshb