Indian rupee's slump has shattered business sentiment

The new financial year has started on a low note for Indian businesses. And any hopes that last year's reforms would turn around the Indian economy have evaporated into thin air. The Business Today-C fore Business Confidence Survey for the April-to-June period of 2013 found that sentiment among corporate leaders turned for the worse for the first time in four quarters, due mainly to a steep drop in the value of the rupee. On a scale of 100, the confidence level is at 48.7 in the first quarter of 2013/14, down from 54.5 in the previous quarter.

Market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey. Not only has the trend changed, the confidence level is the lowest ever since the first survey was carried out in 2011. Business confidence touched a high of 74.8 in the quarter ended March 2011, before falling steadily. Sentiment picked up in the first quarter of 2012, ahead of the Budget.

Confidence levels plunged after the Budget proposed tax rules that riled investors. Subsequently, the government diluted several of those proposals. It also kept the fiscal deficit under control, nudged the central bank to cut interest rates, eased foreign investment limits and raised fuel prices. Those measures initially lifted confidence levels, but the lack of additional steps and the weakening rupee have soured sentiment again.

"Many companies and investors are either holding back or postponing their investments, waiting for the rupee to reach the right level against the US dollar," says Shekar Viswanathan, Vice Chairman and Whole-Time Director at Toyota Kirloskar Motor. "But no one has any clue as to which
is the right level."

The rupee depreciated 9.86 per cent during the April-to-June period and closed below the psychological mark of 60 to a dollar in July. The local currency has been weighed down by a wide current-account deficit and massive capital outflows from the country's capital markets.

In the gloomy situation, 66 per cent of the executives surveyed said the state of governance has made them look abroad for investment. Large conglomerates are not the only ones scouting for opportunities overseas. Rahul Bhasin, Managing Partner at Baring Private Equity Partners (India), recalls how he was taken aback when a textile maker from Tirupur in Tamil Nadu approached his firm with a proposal to shift his unit to Oman. "If the government were to create a systematic plan to dent confidence, it couldn't have done a better job," says Bhasin.

The fall in confidence has spilled over to expectations for the July-to-September quarter. In the preceding survey, which was carried out a few weeks after the Union Budget was announced, companies were upbeat.

A significant proportion of executives expected economic prospects to improve. This was in line with the survey results of the preceding two quarters, where the government's decisions to encourage foreign investment in September 2012 triggered a wave of positive sentiment.

In a reversal, only three per cent of executives polled in the latest survey expect economic prospects to get better, compared with 39 per cent who were upbeat in the preceding quarter. On the contrary, a fourth of the executives expect economic prospects to get substantially worse.

The depreciating rupee has been accompanied by a series of negative developments. The Reserve Bank of India (RBI), which had reduced interest rates three times in 2013, decided to pause in its June policy announcement. The weak rupee is also impacting trade. In the survey, three in five said they expected imports to fall in the quarter through September. Only 18 per cent felt the same way in the previous survey. "Given that we import most of our products, we end up paying almost 30 per cent more to factories outside India," says Rajiv Mehta, Managing Director, Greater India, Puma Sports India. "Moreover, we cannot pass on the burden (of increased prices) to the consumer because… people are tightening their wallets with the prevailing uncertain economic conditions."

The only benefit of the rupee's slide will likely show up in exports. Expectedly, 46 per cent of the executives surveyed felt exports would pick up in the current quarter. The survey also shows nearly half the executives expect the availability of finance to worsen in the current quarter.Bhasin says the government is not acknowledging the problems businesses are facing. "You cannot fix it without acknowledging," he says.

The negative developments in the foreign-exchange market have also outweighed positive news elsewhere. Global credit rating firm Fitch has upgraded India's rating outlook to stable from negative. Towards the end of the quarter, the government decided to increase the price of locally produced natural gas. The move followed a series of other measures taken over the past year to increase prices of fuel products such as diesel.

Why haven't these developments offset the rupee's drop? Hemant Kanoria, Chairman and Managing Director of Srei Infrastructure Finance, feels it is because the focus has been on reform measures that are of lesser importance.

"It has to be thought through simply," says Kanoria, whose company is one of 26 applicants for a new banking licence. He says immediate reform measures needed include resolving problems in infrastructure development, fuel supply to power companies, and land acquisition.

"Prioritisation and addressing simple issues will help [in reviving business confidence]," he says. What stands out in the survey is the significant proportion of respondents who feel the overall economic environment and business situation will substantially worsen. Between 25 per cent and 30 per cent of the respondents expect the situation to substantially worsen. They are not alone in expecting things to get worse on the macro front. In a report on financial stability released in June, the RBI said that macroeconomic risks facing the Indian economy have increased during the past six months. Toyota's Viswanathan is even more pessimistic. "The present situation, in my opinion, is no different from what India faced in 1991," he says.


Additional reporting by K.R. Balasubramanyam