Confidence Returns

The effects of demonetisation seem to have dissipated. Soon after Prime Minister Narendra Modi's decision to ban high-value currency notes, India Inc.'s confidence had taken a severe beating. Barring the initial hiccup, the government has thus far tackled the currency shortage effectively. This has improved the overall business environment in the country.

The confidence level, on a scale of 100, soared to 49.6 in the January-March quarter. It's a significant jump from the last quarter, when it had slipped to 46.4, the lowest since the survey was started six years ago. The latest level, though, is still low compared with the previous year. For instance, it was 53.1 in the July-September quarter and 51.5 in the quarter before that.

The revival in sentiment highlights the restoration of confidence among business leaders, who were unnerved by the impact of demonetisation. Market research agency C fore quizzed 500 chief executive officers and chief financial officers across 12 cities for the survey. The Business Confidence Index (BCI), was launched in the January-March quarter of 2011.

The survey points out that corporate leaders expect improvement on a bunch of parameters as compared to the previous survey. These include overall economic situation, overall business situation, production level, demand scenario, utilisation of production capacity, cost of external finance, sales, selling price, and profits.

Just 24 per cent respondents expect the economic situation to worsen in the April-June period; in the previous survey, the number was 33 per cent. "In December, economic activity had come to a halt due to lack of clarity after demonetisation. From January onwards, the pace of remonetisation picked up. The third quarter results were not as bad as expected. Export growth was good last month. All these factors have contributed in lifting the mood of the corporate sector," says Upasna Bhardwaj, economist at Kotak Mahindra Bank.

The survey shows that 57 per cent of respondents expect public investment to have a visible effect on the economy in the next six months. In Budget 2017/18, Finance Minister Arun Jaitley has given a booster shot to the infrastructure sector with record budgetary allocation of `3.96 lakh crore. An increase in public investment is typically followed by rise in private investment. The massive infrastructure spending is expected to benefit sectors such as roads, affordable housing, steel and cement. The survey found that 52 per cent respondents expect private investment in projects to pick up over the next two quarters. "Last year, infrastructure spending earmarked in the Budget started around July. This time, the Budget was announced earlier, in February. It's expected that government spending on infrastructure has already begun. This will significantly revive the domestic investment cycle," says D.K. Srivastava, Chief Policy Advisor at consultancy EY.

The survey shows that a majority of respondents - 52 per cent - rate the three years of the Narendra Modi government as average; another 27 per cent rate it bad.

The survey captures the mood of businesses of all sizes - big, medium, small and micro. The sentiment has improved across these businesses, especially for big and micro enterprises. Similarly, confidence levels have jumped for heavy engineering, light industry and services sectors.

As per the survey, the respondents are confident on several parameters. One such is cost of external finance. Some 73 per cent corporate leaders think that the cost is likely to remain low over the next three months. In the previous survey, the corresponding figure was 59 per cent.

In the first bi-monthly monetary policy for 2017/18, the Reserve Bank of India kept the repo rate unchanged. A status quo on interest rates indicates that the central bank is willing to increase money supply in the economy by keeping interest rates low.

"Corporate balance sheets are in good shape. The cost of finance has come down, which should give more buffer to private players. I think we are at the bottom of rate-cut cycle. But while the cost of finance has come down, credit growth is weak and will stay subdued unless private investment picks up," says Kotak's Bhardwaj.

The survey shows more respondents are hopeful that the utilisation of production capacity will improve over the next three months. For instance, in the last survey, 34 per cent respondents had said that they don't expect utilisation to get better. In the current survey, that number has shrunk to 23 per cent. "I don't see a major increase in private investment despite low interest rates. That's due to under-utilisation of current capacity. The current capacity utilisation is around 75 per cent," says EY's Srivastava.

Hiring is another area where people are more upbeat than in the past. Nearly 26 per cent respondents expect hiring to pick up in the April-June quarter as compared to just 10 per cent respondents expecting the same in the previous survey.

In the previous survey, 74 per cent respondents had said that they expected raw material prices to either go down or stay at current levels. In the current survey, 71 per cent people are expecting the same. "Comm- odity prices, primarily that of base metals such as aluminium, zinc, nickel, lead and iron ore, had moved up sharply in 2016, but are stable now. I don't see higher input costs being passed on to consumers because companies don't have pricing power at the moment," says Bhardwaj.

There are some areas where respondents have shown pessimism. This includes financial situation and investment in business operations. For example, 23 per cent respondents hope that their financial situation will improve in the next three months. The corresponding number in the last survey was 32 per cent. Fourth quarter results will undoubtedly reflect a better picture of the health of the corporate sector; the rebound in sentiment is an indicator that fears over demonetisation are over.

@manukaushik