India’s economy seems to be well-placed compared to other major economies. GDP growth is expected to clock an impressive 7 per cent in FY23. Exports in the fiscal, too, were the highest ever at more than $450 billion. In March 2023, consumer price inflation (CPI) moderated to 5.66 per cent from 6.44 per cent in February, and wholesale price inflation (WPI) dipped to 1.34 per cent in March compared to 3.85 per cent in February. Plus, GST collections were the highest ever in April 2023 at Rs 1.87 lakh crore, indicating high business activity, as per data from CMIE Economic Outlook.
Still, the business community appears unconvinced about growth prospects, with the BT-C Fore Business Confidence Survey (of 500 CEOs and CFOs) receiving increasingly negative sentiments, captured in the clear fall in the Business Confidence Index (BCI). After peaking at 55.2 in January-March of 2022, the BCI slipped to 50.9 in January-March 2023 (see chart Dip, Dip, Dip…).
What explains this dissonance? “The pessimism is likely to have been driven by the ongoing weakness in India’s merchandise exports, led by the slowdown in the global economy,” says Aditi Nayar, Chief Economist of ICRA. “The country’s non-oil merchandise exports fell by 5.6 per cent YoY in Q4FY23, amid a sharp fall in exports of several items including leather and leather products, chemicals, engineering goods, ready-made garments, textiles, and gems and jewellery. ICRA expects merchandise exports to contract by around 6-7 per cent in FY24.” Adds Dharmakirti Joshi, Chief Economist of CRISIL: “A combination of 250 bps cumulative rate hike since May 2022 and tightening of liquidity has pushed the nominal lending rates above pre-pandemic levels, with some more transmission left. As interest rate movements impact the economy with a lag, the peak impact will play out through this fiscal.”
Looks like strong underlying headwinds. No wonder the fall in business confidence is seen across industries and company sizes (see chart BCI Slips for Two Successive Quarters…). However, Richa Roy, Partner at Cyril Amarchand Mangaldas, feels that while there are multiple causes of concern likely reflected in the responses to the BCI—war, commodity prices, supply chain constraints, inflation and rising interest rates, possible recessionary trends in international markets, financial sector vulnerabilities in the US—there are multiple factors indicating cause for optimism as well. “The World Economic Outlook released by the IMF in April indicates a rocky recovery for the world, but indicates high growth rates for India,” she says. “RBI also marginally increased its growth estimate for FY24.”
Expectations for the AprilJune 2023 quarter are bleaker than Q4FY23. Businesses are low on confidence especially in hiring conditions and profits, with both indices logging less than 5 (on a scale of 10). With layoffs continuing across sectors and tech in particular, this is no surprise. In fact, 46 per cent of the BCI respondents said they planned to downsize their workforce in fiscal 2023-24, with another 18 per cent sitting on the fence. Roy expects tech to see more layoffs going forward, but manufacturing and services may remain strong.
So, what really are the primary concerns of businesses going forward? The top two worries are, expectedly, persistent inflation and a possible recession in developed countries (see chart). ICRA’s Nayar says that she expects inflation to moderate to an average 5.3 per cent in FY24 compared to 6.7 per cent in FY23. “However, the potential development of El Niño conditions and its impact on the southwest monsoon, and thereby crop output and food prices, poses upside risks to our inflation projections,” she cautions.
As for possible recession in the West, Joshi of CRISIL says: “Global growth is projected to slow to 2.7 per cent in 2023 with advanced countries (particularly the US and Europe) pulling growth down, while China’s growth is expected to accelerate to 5.5 per cent due to relaxation of Covid-19-related restrictions.” Adds Roy: “Internationally, the next quarter is likely to be tough, given recent indications, including tightening labour conditions, the outlook for export-led- or externally facing-businesses will be tough.” ICRA’s Nayar says the slowdown has already manifested in a decline in India’s merchandise exports, which is likely to exacerbate further with continued monetary tightening in several advanced economies and their lagged impact on output.
Economists also worry about the southwest monsoon’s performance this fiscal. Nayar feels that if the monsoon turns out to be below normal amid fears of an El Niño effect, “it could shave off up to 50 bps from the GDP growth, even as the ongoing spike in Covid-19 cases is emerging as a renewed risk to the near-term growth outlook”. Most survey respondents also don’t expect India’s GDP growth in FY24 to be higher than FY23. “ICRA expects India’s GDP growth to ease to 6 per cent in FY24 from the 6.9 per cent expected in FY23, owing to the expected drag from exports amid slowing global growth, as well as normalising base,” says Nayar. Adds Joshi of CRISIL: “We expect gross domestic product growth to slow to 6 per cent this fiscal from 7 per cent last fiscal as slowing global growth, domestic interest rates, and messy geopolitics bite.”
Is there any good news to look forward to? Roy feels India has some inherent strengths, including the China+1 policy benefitting certain pockets of manufacturing, trade agreement discussions improving certain export prospects, and the services sector growing. Nayar adds: “We expect consumer sentiment to improve in FY24, auguring well for consumption demand, although it would remain uneven.” She also expects the sizeable expansion in the budgeted capital spending by the Union government and several state governments to provide support to economic activity, amid signs of an uptick in private capex, “although execution remains key”.
Some consolation there? Well, go figure.
@alokeshb