Corporate India is spooked, and there are plenty of reasons for that. The rupee is in a free fall and soaring crude oil prices are widening the current account deficit, or CAD, hitting government finances. This has created a problem for policymakers and uncertainty for India Inc. The latest Business Confidence Index (BCI) survey conducted in the July-September quarter reflects a drop in confidence levels of business leaders. Market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey. Based on the results, the BCI is 48.7 - on a scale of 100 - lower than 49.3 in the previous quarter and 50.6 in the quarter before that. It is also lower than the 51.4 in Janury-March 2014, just prior to the Modi government coming to power.
The index has been falling this financial year, though it is still higher than it was the previous year. In the quarter ended September 2017, the BCI had fallen to its lowest level (45.1) since the survey began more than seven years ago.
"Many external factors that Indian corporates were taking for granted, have begun to hurt. The consequences of radical changes such as the tariff war between China and the US, sanctions on Iran and withdrawal of the super-accommodative monetary policy in the west have become more pronounced," says Abheek Barua, Chief Economist at HDFC Bank. After a series of steps taken mid-September, finance minister Arun Jaitely recently allayed investor fears by promising to take more steps to stabilise the rupee and bring down CAD.
The survey, however, found that there are many parameters on which the respondents are pessimistic. These include economic prospects of their business, the overall economic situation, the financial situation, cost of external finance, order books, cost of raw material, utilisation of production capacity, investment in business operations, imports and profits.
For instance, 31 per cent respondents expect the financial situation to worsen in the quarter ending December 2018, as compared to 25 per cent in the previous survey. Experts say regulatory crackdown on banks has affected liquidity, which further worsened after the IL&FS crisis. This means corporates that were raising money through various instruments - banks and commercial papers - are now finding it difficult to do so. There's fear that something is lurking at the next corner.
The concern expands to other aspects too. More business leaders are expecting the cost of raw material to go up in the current quarter - 56 per cent versus 42 per cent in quarter ended September 2018. The survey points out that 48 per cent respondents expect worsening CAD to affect economic fundamentals while another 68 per cent expect oil prices to go up even more over the next few months. Brent crude oil prices have risen significantly over the past two years - from $27.67 a barrel in January 2016 to $84.3 a barrel on October 5, 2018. D.K. Joshi, Chief Economist at ratings agency CRISIL, says if crude oil crosses $100 a barrel, the country will face a big problem. CRISIL pegs crude oil to be at $80 for the second half of this financial year.
"Crude oil will swing between $80 and $85 per barrel. There's a strong resistance at $85. Three years ago, it was half the current price. Oil is a major input. It is not just petrol and diesel that are used in transportation. Even courier costs tend to go up when oil prices rise. It's one of those inputs that filters through to everything. It's a major source of concern," says HDFC Bank's Barua.
Respondents indicated a dimmer outlook for production as well. Close to 36 per cent expect utilisation of production capacity to worsen in the October-December quarter as compared to 26 per cent expecting the same in the previous survey. About 29 per cent corporate leaders expect investment in business operations to slow down in the current quarter while only 23 per cent said so in the previous survey.
There are, however, some parameters that registered improvement in the current quarter over the previous one. These include production level, availability of finance, sales, exports and selling price. Indian exports have been a beneficiary of rupee depreciation, but some economists say the temporary gain coincides with uncertainty. "Exporters want to know where the rupee will settle. They are unsure at which price they should book orders," says an economist.
Some are hopeful though. "The micro-indicators are in good shape. Short-term indicators don't suggest any slowdown. Inflation and fiscal situation are not too bad, and credit growth is still healthy - better than last year," says CRISIL's Joshi.
As a supplement to the BCI survey, we carry out an assessment of other indicators of economic growth. These include macroeconomic conditions such as export/import, index of industrial production (IIP) and consumer price inflation (CPI). IIP grew 6.6 per cent in July with manufacturing sector, capital goods and consumer durables contributing heavily to the spike. The growth in July was in line with the growth in the previous month (6.8 per cent).
Even as fuel prices soar, wholesale (WPI) and retail inflation (CPI) remained largely under control. CPI fell below 4 per cent - 3.69 per cent to be precise - for the first time in August 2018. This has given a breather to the Reserve Bank of India (RBI), which kept rates unchanged in its October monetary policy. But it said its stance has shifted from 'neutral' to 'calibrated tightening', which corresponds to the BCI survey results where 52 per cent respondents expressed a belief that the RBI will remain hawkish on account of high crude oil prices.
For several quarters, India's economic growth has been led by consumption and public sector investments. But fast growth cannot continue for long unless it starts to walks on two legs - private investment and consumption.