The absence of political consensus over key economic bills coupled with supply bottlenecks and a likely fall in rural incomes and demand is seen dampening business sentiment across sectors, data from a recent survey of select companies show. Extending this year’s downward spiral, the Dun & Bradstreet Composite Business Optimism Index for the October-December quarter projects a 4.1 per cent decline compared with the July-September period.
The survey, however, does not capture the impact of the Reserve Bank of India’s (RBI) latest interest rate reduction as the announcement was made post the survey period.
Based on the responses received, Dun & Bradstreet observed that only three out of the six optimism indices -- volume of sales, net profits and new orders -- registered an increase as compared to the preceding quarter. “For business confidence to get a sharp boost, it is pertinent for the Government to shift up several gears from the slow drip-feed of reforms to targeted measures that are aimed at encouraging investment and correcting structural deficiencies in the economy,” Arun Singh, Senior Economist, Dun & Bradstreet India, wrote in the survey report.
The report says monsoon deficiency, weak new investment demand and rising global financial market volatility also operated as binding constraints on business sentiment. This is in line with the earlier signals given by the fall in manufacturing and services Purchasing Managers’ Index (PMI) numbers.
“Going forward”, said Dr. Singh, the effectiveness of supply management measures to contain the impact of deficient monsoon would also play a crucial role in shaping business sentiment.
Other reports also indicate negative sentiment in the economy. SBI Corporate Pricing Power Index is at (–) 1.09 per cent compared to (–) 0.91 per cent in August 2015. “This indicates domestic demand is still weak, specifically, urban demand,” Dr. Soumya Kanti Ghosh, Chief Economic Adviser, State Bank of India, wrote in ‘Écowrap’, a report on the Indian economy.
The RBI, however, expects a pick up in economic momentum with domestic demand improving after it front-loaded a 50 basis points interest rate cut. Starting in January, the central bank has reduced the policy interest rate by 125 basis points in anticipation of a revival in credit offtake.
Interestingly, a positive jump in tractor sales in September, which at 58 per cent month-on-month growth compared with a drop of 25 per cent in the previous month, corroborates the outlook for a moderate pick up in rural activity, according to Dr. Ghosh.
Meanwhile, data released by the RBI recently on the performance of non-financial private corporate sector during the first quarter (April-June) of 2015-16 showed that almost all business indicators had contracted. Airing a contrarian view, Prof. Rudra Sensarma, Associate Professor of Economics, Indian Institute of Management, Kozhikode, noted that the available economic data paint a mixed picture of the business environment.
While the central bank’s action (front loading a 50 basis points cut) is a major positive, the worst monsoon in six years has dampened prospects for the rural economy.
Agriculture crisis “An agriculture sector crisis is in the making,” emphasised Prof. Sensarma.
According to him, the government has to efficiently use National Rural Employment Guarantee Act (NREGA) funds and also come up with other innovative rural sector policies to avert a disaster.
There are also signs of a demand revival in the urban sector as seen by a surge in car sales. August Index of Industrial Production (IIP) growth hit a three-year high at 6.4 per cent. Said Prof. Sensarma, “As we enter the festival season, demand conditions should improve.”
Retail inflation or consumer price index (CPI) inflation inched up to 4.4 per cent in September but is very much in the RBI’s comfort zone. According to him, inflation might remain under control with smart food management policies. Indirect tax collection has been strong so far in the year but not direct taxes.
Prof. Sensarma’s assessment is that while we may be going through choppy waters in the short run, the medium term prospects are still very positive for the Indian economy. “Business sentiments are certain to improve over the next few months.”
A key data point to watch out for would be whether we are able to climb up in the World Bank’s Ease of Doing Business rankings, which is due to be released in a few weeks.
