Businesses in India are treading cautiously as they navigate through an uncertain summer, grappling with ongoing geopolitical tensions, muted rural demand, and a pause on policy decisions and investments due to the General Elections. So even as the growth predictions for the economy remain around 7% for this fiscal (FY25), the record-breaking performance of the equity markets and India Inc.’s confidence seem to have abated to some extent, at least for the time being. This is evident in the BT-C Fore Business Confidence Survey of 500 chief executive officers (CEOs) and chief financial officers (CFOs) for the January to March 2024 quarter, which dipped marginally from a record high in the October-December 2023 quarter.
The Business Confidence Index (BCI) dipped to 54.3 in the January-March 2024 quarter from 56.5 in the previous quarter. It was at a similar level (54.1) in the July-September 2023 quarter.
Recent readings of high-frequency indicators, such as GST receipts and exports data, suggest that the growth momentum of India’s economy remains strong. The Reserve Bank of India’s (RBI) recent monthly bulletin also highlights the sustained global growth momentum in the first quarter of 2024 and the positive outlook for global trade.
Devendra Kumar Pant, Chief Economist at India Ratings and Research, says there is unlikely to be a significant slowdown in global growth. “However, if the conflict between Iran and Israel continues, it would impact crude oil prices as well as trade in case of a blockade of the Strait of Hormuz. India also has a trade surplus with Iran, and its exports may get impacted,” he says.
Businesses across sectors and sizes seem to have dialled down on some of the optimism they had exuded earlier and are tightening their belts. Amid subdued global demand that is affecting exports and causing a slowdown in revenue growth for IT firms, companies in the services sector registered the sharpest decline in their business confidence at 51.5 during Q4FY24. On the other hand, light industries, which comprise businesses related to food products, beverages, textiles, wood, furniture, paper, publishing, and leather, remained the most optimistic with a reading of 56.1. The business confidence for all three sectors—services, light industry and heavy engineering—remained lower than that recorded in the previous quarter.
Similarly, even across business sizes, business confidence took a hit compared to the October-December 2023 quarter, with small and micro businesses registering more dampened readings of 52.2 and 51.4, respectively.
According to a recent report by QuantEco Research, activity momentum may slow in FY25 due to the lagged impact of tighter fiscal, monetary, and regulatory policies, as well as the firming up of input price inflation vis-à-vis its deflationary state in FY24. “Although global demand conditions appear resilient for now, adverse spillover risks from the ongoing geopolitical disturbances would need to be assessed,” it says, adding that it estimates FY25 GVA (gross value added) and GDP growth at 6.6% and 6.8%, respectively.
The BCI also revealed that firms remain confident about the overall economic prospects for their business in the current quarter (April-June 2024), with a reading of 5.7 on a scale of 10 (slightly higher than the 5.5 in the previous quarter), while expectations on hiring conditions are significantly down at 5.1; sentiments around profits are also marginally down at 5.6 (see graphic).
But worries abound for India Inc. and a rate cut by the RBI is not expected anytime soon. Only 29% of respondents surveyed are of the view that a rate cut may take place in the first half of the current financial year by September 2024. With retail inflation remaining stubbornly above the 4% mark and the ongoing tensions between Israel and Iran, analysts expect a prolonged pause. Inflationary pressures may also continue in the first quarter of FY25, as 41% of respondents are considering raising prices during this period.
Other challenges for India Inc. centre around concerns about rural demand, and only 35% of respondents expect favourable demand conditions to continue, with the RBI expecting rural demand to pick up. Pant notes that weak monsoon rains in FY24 impacted rural demand. The India Meteorological Department’s (IMD) prediction of an above-normal monsoon this year raises expectations that agri GVA will grow at a higher rate. Meanwhile, with inflation likely to trend down, nominal wage growth will also increase. All this will have a positive impact on rural demand,” he says.
QuantEco Research is also of the view that despite the anticipated moderation, the overall growth momentum would stay close to its medium-term trend, with support from the likelihood of a surplus monsoon season later this year. The ongoing General Elections also loom large on the minds of businesses, and 73% of those surveyed believe that they will impact business conditions this quarter.
The coming months could, however, help revive sentiments if the Israel-Iran crisis get resolved. The prediction of an above-normal monsoon could lift rural demand. The formation of a new government by June and work on the Union Budget could also help India Inc. feel more confident about prospects. @surabhi_prasad