Shifting into High Gear
The gloom in the corporate sector is making way for an upbeat mood. The passage of the GST (goods and services tax) Bill in Parliament and implementation of the Seventh Pay Commission recommendations coupled with the overall festive season buoyancy have contributed to a rise in confidence levels. Indeed, business sentiment - as measured by the Business Confidence Index (BCI) - has improved for the second consecutive quarter.
The confidence level, on a scale of 100, has jumped to 53.1 in the July to September period. In the past two surveys, the confidence level stood at 51.5 (in April-June) and 49.6 (in January-March). The BCI in the same quarter last year stood at 55.4.
Business confidence had fallen for five consecutive quarters before starting to climb from the first quarter of 2016/17. The BCI was launched in January to March quarter of 2011. Market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey.
The survey shows that corporate leaders believe the overall economic situation, financial situation, production level and sales would improve in the October to December period. For instance, some 37 per cent respondents expect overall economic situation to get better in the current quarter as compared with 29 per cent respondents expecting the same in the previous survey. Some 44 per cent respondents say that sales are likely to improve in the October-December period. The corresponding figure in the previous survey was 34 per cent.
One of the biggest contributors to the rise in BCI is the nod to GST by Parliament in August. The GST bill is the biggest reform in India's indirect tax structure. "The confidence level going up has to do with the government's ability to pass the GST. They have also shown their commitment towards reforms. With pay commission implementation and a good monsoon, demand is picking up," says Neha Saraf, India economist at Nomura.
The GST can boost economic growth by as much as 2 percentage points, as per some estimates. But there are reports that the government is working on four tax slabs under the GST. Union Minister of State for Finance Arjun Ram Meghwal has recently said that the slabs will exist during the (initial) transition period, and the country will move to a single tax rate eventually. The survey shows a vast majority of respondents - 74 per cent - believe that different slabs for GST could defeat its purpose. "Multiple slabs would create confusion, and is unlikely to change the situation from what it is today," says a Mumbai-based economist.
The survey captures the mood of business leaders across heavy engineering, light industries and services sectors. While confidence level in services and heavy engineering has moved up, the sentiments in light industry have dipped marginally. The confidence levels have jumped across businesses of all sizes - big, medium, small and micro.
Besides, the survey points out that 68 per cent of corporate leaders are expecting consumption - both rural and urban - to pick up in the next couple of quarters. The near-normal monsoon will improve rural consumption. The monsoon, which lasts four months to September, is expected to have a major effect on agricultural production this year. The government has set a record grains production target of 270.10 million tonnes in 2016/17, up from 252.23 million tonnes in 2015/16 and 252.02 million tonnes in 2014/15. Pulses production is likely to increase this year as pulses acreage has soared. Economists say that the implementation of pay commission will have positive effect on urban consumption.
Certain survey parameters that are directly linked to consumption - demand, order book and utilisation of production capacity - have registered improvement in the current survey. Take the case of demand. In the previous survey, 35 per cent respondents were expecting demand and order book to improve. In the current survey, 42 per cent respondents expect an uptick in demand. "With the rise in consumption, we will see volumes growth, which is going to drive up toplines. The profits may also increase but the profit margins are likely to remain stable," says Nomura's Saraf.
The survey highlights some areas of concern, which include cost of external finance, cost of raw material and exports. A dip in sentiment across these parameters is visible in the latest survey. For instance, 31 per cent of respondents believe that the cost of external finance is going to come down in the current quarter, down from 55 per cent in the previous survey.
As a supplement to the BCI survey, we have carried out an assessment of other indicators of economic growth: exports-imports data, index of industrial production (IIP), and consumer price inflation (CPI). Both exports and IIP have weakened in August. Exports have fallen for the third consecutive month reaching $21.52 billion in August. The CPI touched a five-month low in August. But, clearly, despite the mixed macroeconomic signals, India Inc. appears positive about the immediate future.
