Rock Bottom

The economy is in the doldrums. GDP growth fall to a three-year low in the June quarter, record-low bank credit growth, weak private investment, underperforming exports, and impact of the goods and services tax, or GST, on the informal economy have jolted the confidence of business leaders.

The business sentiment hit a new low in the July-September quarter, breaching the previous low of 46.4 in the October-December 2016 quarter. The two major dips in business sentiment have been recorded in quarters of demonetisation and GST implementation, highlighting the nervousness of corporate leaders around these landmark changes.

The survey shows that, on a scale of 100, the confidence level went down to 45.1 in the second quarter of 2017/18 compared to 47.3 in the previous three months and 49.6 in the quarter prior to that. Market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey. This is the lowest level for the index in the last six quarters.

The historic low confidence level shows that the corporate sector is more worried than it has been in over six years since the survey started in January-March 2011. Nearly all parameters have registered a decline, including financial situation, profits, availability of finance, investment in business operations, hiring, cost of external finance, cost of raw material, and stock prices.

Take profits. Some 65 per cent respondents expect profit erosion in the October-December quarter. In the last survey, the corresponding figure was 42 per cent. Similarly, 44 per cent respondents expect financial situation to weaken in the current quarter as compared to 28 per cent in the previous survey.

EY India's Chief Economic Advisor D.K. Srivastava says the second quarter was expected to be bad for corporate India. "The pace at which GST issues are handled will determine sentiment. It will take at least six months for the refund process to be streamlined," he says.

Close to 74 per cent respondents think that GST is affecting the growth of their businesses. More than three months after its launch, the functioning of the new indirect tax regime has been far from smooth. There have been a series of issues such as flip-flop on tax rates, slow speed of the GST Network, several changes in return deadlines, and companies, especially exporters, complaining about significant working capital getting stuck with the government due to refund delays.

The survey highlights that 81 per cent respondents are not ready to invest in their business operations in the current quarter. The vicious circle of weak demand, sub-optimal capacity utilisation and low private investments has continued for several quarters now. "GST is a guaranteed slowdown tax regime. The policy design of the government is based on IMF [International Monetary Fund], which is oriented towards large industries. The current approach of bringing down interest rates and increasing public spending to boost private investments has major problems. The government's policies are not people-centric," says Vivek Moorthy, professor of economics at IIM-Bangalore.

"There's still excess capacity in the system. Until the capacity utilisation crosses 75 per cent, nobody would be interested in making investments," says an economist. The RBI's latest data show that capacity utilisation has slipped to 71.2 per cent in April-June in comparison to 72.7 per cent in the October-December 2016 quarter.

According to the survey, 42 per cent respondents expect that private consumption can be spurred by reducing GST rates while another 51 per cent think that lowering direct taxes will be better. However, most respondents - 76 per cent - think that a fiscal stimulus can boost the economy. The government is currently weighing the merits of a fiscal stimulus.

The newly-constituted Prime Minister's Economic Advisory Council has a different opinion on fiscal stimulus. The council has said that it shouldn't be financed by relaxing fiscal deficit limits.

"It's rather difficult to contain fiscal deficit below 3.2 per cent while introducing some kind of stimulus package at the same time. I suggest that public sector enterprises be taken out of the hands of the government," says EY's Srivastava.

Two major shifts have been recorded in areas such as cost of external finance and cost of raw material as compared to the previous survey. Twenty-seven per cent respondents are expecting the cost of external finance to go down in the current quarter, much lower than in the previous survey, when 72 per cent respondents hoped the same. Similarly, 28 per cent respondents believe that the cost of raw material will remain low in December ending quarter as compared to 50 per cent respondents expecting the same in the last survey.

As a supplement to the BCI survey, we carry out an assessment of other indicators of economic growth. These include macro-economic factors such as export-import data, IIP (index of industrial production), and consumer price inflation (CPI). These indicators give mixed signals. Retail inflation, measured by the CPI, stood at 3.28 per cent in September, similar to the previous month. The IIP moved up 4.3 per cent in August as compared to 1.2 per cent a month before. The rise is being attributed to festive season and re-stocking of manufactured items. In August, both exports and imports grew about 5 per cent.

From those surveyed, 63 per cent believe that export growth can be revived by providing some incentives while another 32 per cent think that the government should allow the rupee to depreciate. "The rise in imports and drop in exports over the past few quarters is a result of appreciating rupee. It's time for the RBI to intervene by purchasing dollar and letting the rupee depreciate further," says an economist.

The weak macro picture has hit sentiment. But there is also relief that the government has realised that something needs to be done to put the economy back on track. It is to be seen how it plans to fix it.

@manukaushik