Spring in the Air

The second term of the United Progressive Alliance (UPA) government was widely perceived to have been marred by corruption and policy paralysis. The Narendra Modi-led National Democratic Alliance (NDA) government came into power promising sweeping changes in social and economic structures of the country.

For the first four years, the government went into an overdrive and launched over 110 schemes and initiatives, including repackaging some of the old schemes of the UPA government. With general elections nearing, there's a belief that the government might slow down on its reforms agenda. Given that development and good governance were the focal points of the last general elections, can the government afford to sit quietly? It tried to hedge bets in the last budget by introducing the world's largest government-funded healthcare scheme - Modicare.

Despite possible policy inaction, business confidence registered a minor uptick in the latest survey. The business confidence index (BCI) in the January-March quarter, on a scale of 100, increased to 50.6 against 47.3 in the quarter ended December 2017 and 45.1 in the quarter before that. Market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey.

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This is the second consecutive rise in sentiment after the index fell to its lowest point in the July-September 2017 quarter since the survey began in the January-March 2011 quarter. Economists say the results are consistent with the overall economic scenario. In the quarter ended December 2017, GDP growth climbed to 7.2 per cent. "The manufacturing sector, particularly the auto sector, has performed well. The top line growth of corporates is likely to be in double digits in 2018/19 after a gap of five-six years. In the run-up to the 2019 elections, the consumption demand is expected to gather pace," says D.K. Joshi, Chief Economist at CRISIL.

"If one takes into account the past survey results, the business sentiments seem to be moving sideways. It's not moving in any particular direction decisively," says an economist. In the survey, 59 per cent respondents expect economic reforms to slow down ahead of the elections whereas 27 per cent don't think so. The experts seem to agree that economic reforms are likely to take a back seat in the coming months. "There will not be any big-bang reforms. If at all, we are expecting reforms on the administrative side, and some fine-tuning of existing schemes," says Siddhartha Sanyal, Chief Economist (India) at Barclays.

A last year report by Barclays titled "Modi's priorities - The three "C"s" says that "notwithstanding his bold and aggressive reforms since 2014, we believe (Prime Minister Narendra) Modi will be selective in picking his battles and deploying his political capital ahead of the elections. In this context, a likely absence of near-term benefits will remain a constraining factor against the introduction of new reforms in the coming months. Closer to the 2019 elections, we think Modi might consider deploying his political capital more to boost the BJP's 'nationalist' credentials rather than its 'reformist' image."

The survey highlights that corporate leaders expect improvement in areas like requirement of working capital, profit, selling price and exports in the April-June period. For instance, in the last survey, 29 per cent respondents expected profits to deteriorate in the January-March quarter. In the latest survey, that number has gone down to 17 per cent. More respondents (18 per cent) expect selling price to improve in the April-June quarter as compared to 10 per cent in the previous survey. The survey points out that a significant number of respondents - 77 per cent - don't plan to make fresh investments over the next one year, which is in line with the last survey, when 69 per cent respondents said they are not making fresh investments in 2018.

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"We don't expect private investment to improve for several quarters. Public sector investment will be supporting the investment scenario. Private investment is weak due to unutilised capacity and uncertainty around the pace of economic recovery," says Barclays' Sanyal. Investment as a percentage of GDP is likely to remain stable with a mild upward bias, says CRISIL's Joshi. "The central government's ability to put money from its own pocket is limited. The delta will come from public sector enterprises," he adds.

Breaking the low private investment cycle is beyond the control of the government. The option to reduce the cost of finance might be in their hands but low capacity utilisation - 74.1 per cent in quarter ended December 2017 - and changing the perception in corporate India of a weak economic scenario are beyond their control. Some parameters in the survey have shown a deterioration in the latest round, including overall business situation, cost of external finance, production level, cost of raw material and sales. For instance, some 30 per cent respondents were expecting the overall business situation to improve in the January-March quarter.

In the latest survey, that number stands at 22 per cent. As a supplement to the BCI survey, we carry out an assessment of other economic indicators. These include macroeconomic conditions such as export-import, IIP (index of industrial production) and consumer price inflation (CPI). IIP growth remains strong at 7.1 per cent in February 2018; CPI stays low at 4.28 per cent in March 2018. The growth in IIP was primarily driven by manufacturing, capital goods and consumer durables whereas the softening of inflation (from 4.4 per cent in February 2018) was led by a drop in food inflation. Despite declining retail inflation, the Reserve Bank of India (RBI) kept benchmark interest rates unchanged in its last monetary policy early April.

Recently, the Asian Development Bank (ADB) predicted that the RBI will keep policy rates unchanged in 2018. Exports improved by 3.29 per cent, and imports dropped by 6.99 per cent in February 2018. Several estimates by the government and outside agencies peg GDP to grow at a higher rate than the previous financial year. Most macroeconomic indicators highlight that the economy has improved over the past four years but weak employment situation, over-dependence on monsoon and an ailing banking system are some of the chinks in India's armour.