Breaking the Fall
It's make-or-break time for the Narendra Modi-led National Democratic Alliance government. It's been more than two years of 'work-in-progress' for an administration that is yet to make a significant impact on the economy. Modi and his team are now keen to push the reforms agenda. On top of the priority list is the Goods and Services Tax (GST) bill that is likely to be tabled in the Rajya Sabha for voting in the last week of July. The GST bill is currently stuck with the ruling Bharatiya Janata Party struggling to win the support of Congress and other regional parties for ensuring its passage in Parliament. The indirect tax reform has the potential to raise India's GDP growth by one to two percentage points.
In anticipation of GST becoming a reality and good monsoon, business sentiments have marginally improved in the first quarter of 2016/17. The confidence levels, on a scale of 100, have jumped to 51.5 in the April-June period, up from 49.6 in the last quarter of 2015/16. The business confidence index had fallen for five consecutive quarters till March 2016. The survey was launched in the January-March quarter of 2011. Market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey.
The survey gauges the mood of business leaders across heavy engineering, light industries and services sectors. Sentiment is upbeat across all the three sectors. Take services. The confidence level moved up to 50.8 in the latest survey from 48.9 in the previous survey. The confidence levels have jumped across businesses of all sizes - big, medium, small and micro. The medium-sized businesses registered the highest improvement in business sentiment followed by big businesses, micro businesses and small businesses.
The improvement in sentiment highlights the hope that is building up in the business community. Most parameters of the survey have shown improvement as compared to the previous quarter. These include overall economic situation, overall business situation, availability of finance, cost of external finance, order book, cost of raw material, sales and profits. For instance, 29 per cent respondents expect overall business situation to improve in this quarter (July to September) as compared to 20 per cent in the previous survey. Similarly, more respondents (26 per cent) are hopeful that finance availability will get better in the current quarter vis--vis the previous survey (14 per cent).
Ajit Ranade, Chief Economist at Aditya Birla Group, says that three factors contribute to the rise in sentiment. The monsoon situation this year is much better than the past two years, he points out. Then, the implementation of the Seventh Pay Commission recommendations are going to improve urban demand, especially for housing finance. Finally, the World Bank has said that India will remain a bright spot in the global economy, which is likely to attract foreign inflows. "The uptick in consumer demand could trigger an economic turnaround," says Ranade.
More respondents are gung-ho about profits. In the latest survey, 33 per cent respondents say that profits are likely to improve in the July-September period. The corresponding figure stood at 25 per cent in the previous survey. Sales is another parameter that has shown improvement. Some 34 per cent of the respondents expect sales to improve in the current quarter. The figure was 21 per cent in the previous survey.
Some parameters such as investment in business operations and hiring have registered a marginal fall. For instance, hiring activities are likely to remain subdued in the July-September period. The number of respondents expecting hiring to pick up is lower in this survey (17 per cent) as compared to the previous survey (20 per cent).
The survey reveals that 66 per cent of corporate leaders believe that good monsoon and the implementation of the pay commission report will improve rural and urban demand in the second half of 2016/17. As on July 20, the country as a whole had a rain surplus of 2 per cent, according to Skymet Weather, a private weather risk and analysis firm.
As a supplement to the BCI survey, we have carried out an assessment of the leading indicators of economic growth. These include exports-imports, Index of Industrial Production (IIP) and Consumer Price Inflation (CPI) data. The situation has remained largely the same on the exports front whereas imports have shrunk in the past six months - from $33.92 billion in December 2015 to $30.69 billion in June 2016. CPI inflation has marginally moved up, from 5.6 per cent in December 2015 to 5.8 per cent in June 2016. D.K. Joshi, Chief Economist, CRISIL says that inflation will remain soft in the current fiscal year. "Crude and commodity prices will remain subdued. Pulses sowing is nearly 40 per cent higher than last year. More clarity on food prices will emerge as the monsoon progresses. Our CPI estimate for 2015/16 stands at 5 per cent," he says.
In the survey, 52 per cent respondents are hopeful that GST will be passed in the monsoon session of Parliament and 61 per cent respondents say that the government is taking concrete measures to improve business environment. A series of initiatives taken by the government - relaxation of FDI norms, Start-up India campaign and push to the manufacturing sector - might take some in yielding the desired results. But the next set of reforms - GST and bankruptcy code - have lifted the industry mood for the time being.
