Slip, Trip And Fall
Mumbai-based Rajni Thakur is an economist working for RBL Bank. She spends 40 per cent of her work time interacting with clients hailing from automotive, start-up, software, textiles and other sectors, and every week helps 150-odd clients take calls on interest rates and transactions in foreign exchange. Thakur says her clients' confidence level has dipped sharply over the past six months. "Before elections, there was a sense that things would get better after polls were over. But during this earnings season, most of the management-speak has been around how consumption is going to slow down. Nothing fundamentally has changed in the economy, but we see negative sentiments," she says.
The weak sentiment of her clients seems to echo in the latest Business Confidence Index (BCI) survey conducted for the April-June quarter. The BCI for the quarter went down for the second consecutive time as corporate India gave the thumbs down to the Union Budget and remains sceptical of consumption pick-up and future investments. The BCI - on a scale of 100 - declined to 48.5 compared to 49.7 in the previous quarter and 50.5 in the quarter before that. Market research agency C fore quizzed 500 CEOs and CFOs across 12 cities for the survey.
"Some headwinds are pulling the sentiment down and high-frequency data is showing weakness. The first quarter of the current fiscal is not likely to be good and that is getting reflected in sentiment," says D.K. Joshi, Chief Economist at CRISIL.
The survey shows that a large number of respondents believes there will be status quo in overall business situation, financial situation, sales, production level, order book, supply side, raw material inventory and hiring in the current quarter. Some respondents are expecting the situation to worsen in areas such as overall economic situation, availability of finance, working capital requirement and profits.
For instance, 55 per cent of respondents are expecting no change in the overall business situation in the July-September quarter compared to 42 per cent who expected the same in the previous survey. Similarly, 58 per cent of respondents foresee sales at the same level as in the previous quarter. In the last survey, the corresponding number was 34 per cent. The survey points out that 65 per cent of the respondents think that the Union Budget has not done enough to boost economic growth while 57 per cent of the respondents are not sure about making fresh investments over the next two quarters.
"The Budget was growth neutral. Some of the things that the government is doing such as bank recapitalisation and supporting non-banking financial companies through partial guarantees are not going to give a big boost. There was some improvement in capacity utilisation. But with the economy slowing down, investment decisions get postponed. So, a meaningful revival of private investment is unlikely this year," says Joshi of CRISIL.
Although the Reserve Bank of India (RBI) has reduced the repo rate by 75 basis points (bps) in three instalments during the calendar year, the survey shows that a bigger number of respondents is pessimistic about the availability and cost of finance. For instance, 55 per cent of the respondents believe that the cost of finance will be a major issue in the quarter ending in September.
"On the fiscal side, the government does not have too much space. We have seen the focus moving purely to the monetary side to stimulate the cycle. If there is risk aversion, rate cuts would not entirely help. Even if there is a 100 bps rate cut at this point, I do not see many investors and consumers taking the plunge," says Thakur of RBL Bank.
However, credit squeeze has been a serious concern for businesses with short-term working capital requirements. It is estimated that 30-40 per cent of the current slowdown is due to the credit squeeze and a rate cut will help in these cases.
As per the survey, 44 per cent of the respondents do not expect private consumption to bounce back in the next six months. Demand for passenger vehicles, FMCG, consumer goods and air travel have registered decline over the past few months. According to a recent Nielsen India report, consumption growth in rural India, which was historically three-five percentage points higher than urban consumption, is slowing down at double the rate of urban demand in recent quarters.
Market experts say that everybody is sitting on the sidelines and waiting for things to turn around as they are not sure about the short-term landscape. The uncertainty has triggered risk aversion on both consumption and investment, and it is perhaps the beginning of a vicious cycle. "The risk aversion is spreading out from investors to lenders to end consumers," says an economist who does not want to be named.
Besides, there is a debt overhang on all balance sheets, be it government, corporate houses and households, which makes each of them cautious of the next step. Economists fear that the uncertainty has not hit the headline numbers (like GDP) yet, but given that the negative sentiment has continued for over six months, it may soon start doing so.
Respondents are hoping for improvements in just one area - cost of raw material. For instance, only 30 per cent expect it to worsen in the July-September quarter. In the last survey, the corresponding number was much higher at 50 per cent.
As a supplement to the BCI survey, we have assessed other indicators of economic growth. These include macroeconomic conditions such as export-import data, index of industrial production (IIP) and consumer price inflation (CPI). The CPI rate at 3.1 per cent in June remains well below the RBI's target of 4 per cent. Besides, there are some worrying signs on export and IIP fronts. Export growth toppled to a 41-month low in June due to poor performance of petroleum, gems and jewellery, and engineering goods. Imports, too, fell sharply to touch a 34-month low. Meanwhile, the drop in IIP numbers in May has raised hopes of further rate cuts by the RBI in its August policy.
The economy may not be in the best shape right now, but the macro numbers are still holding up, except for IIP and GDP growth, which was subdued in the last two quarters of FY2018/19. More than the policy intervention, a plethora of sentiment-boosting and confidence-building measures need to be implemented to turn around the mood of corporate India.
