Business Today

Knocked Out

Pessimism rules as corporate leaders expect a dull Budget and below 5 per cent growth in 2019/20, finds the latest Business Today-C fore Business Confidence Survey
twitter-logoManu Kaushik | Print Edition: January 26, 2020
Knocked Out
Illustration by Raj Verma

The fear of further decline in GDP growth and low expectations from the upcoming Budget dragged down confidence of corporate leaders in the October-December quarter. The Business Confidence Index (BCI), which has been moving within a three percentage point bracket for the last nine quarters, fell further in October-December. The BCI - on a scale of 100 - was at 48.6 compared with 49.1 in the previous quarter and 48.5 in the quarter before that. Market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey.

The survey shows that majority of respondents are despondent about the economy and issues facing their businesses. The previous survey had shown a similar trend. Most expect the situation to worsen in the January-March quarter. They show negative outlook in areas such as economic situation, business situation, financial situation, production level, order book, cost of raw material, use of production capacity, investment in operations, sales, exports and hiring. Take economic situation, where 31 per cent expect things to worsen in the current quarter. In the last survey, 14 per cent had expected this for the October-December quarter. Similarly, 28 per cent think production will fall in January-March as against 17 per cent in the previous survey.

A total of 51 per cent respondents believe that GDP growth in 2019/20 will be below 5 per cent. Just 28 per cent hope it will be above 5 per cent and 21 per cent think it will be 5 per cent. GDP growth tanked to a multi-year low of 4.8 per cent in the first half of 2019/20, a sharp drop from 7.5 per cent a year ago. "Some high-frequency data show that the speed of slowdown has reduced, but GDP is still decelerating. I expect a mild upturn in the second half driven by better rabi crop prospects and low base of last year. Moreover, expectations of business leaders are shaped by what they observe. The third quarter numbers present a hazy picture so far," says D.K. Joshi, Chief Economist, CRISIL. The ratings agency's full-year GDP growth forecast is 5.1 per cent.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Securities, says GDP may still be able to rise above 5 per cent. "The biggest problem with the economy is the huge funding crunch post the NBFC [non-banking financial companies] crisis. Credit growth continues to fall. Yet, there are some good signs. I don't see overall growth below 5 per cent for the full year," he says, adding that the first pre-condition for turnaround is restart of lending by public sector banks. "The second issue is government maintaining a significant payment backlog because of fiscal constraints, which is increasing receivables of companies. The companies, in turn, are not being able to clear payments to suppliers. This has become a vicious cycle which needs to be broken. While the RBI has cut lending rates sharply, this hasn't translated into the weighted average lending rate coming down significantly," says Hajra.

In the survey, 49 per cent respondents do not hope that Budget 2020 will revive the economy. Most economists Business Today spoke to say the government has limited fiscal space due to lower revenue collections. Since GDP growth has fallen, the top line of the economy hasn't grown, which has resulted in lower tax revenues. "It is certain that GST [goods and services tax] collections will be short of the budgeted figure. If revenue collections remain weak, the government's ability to spend will go down. Unless the government decides to raise the fiscal deficit target, its ability to spend will remain quite constrained," says a research analyst. "Direct budgetary support will be difficult but the government can provide indirect inducements to industries. The sharp cut in the corporate tax rate, which is 15 per cent for new companies, is a big boost," says Hajra of Anand Rathi Securities.

The survey highlights that 46 per cent corporate leaders don't intend to make fresh investments over the next two quarters, a trend the BCI has been capturing for the last few quarters. Initially, the poor private investment cycle was primarily led by lower capacity utilisation, but in recent quarters, the slump in consumption has contributed to low private investments.

It's believed that companies may hold back on investments and use the surplus from the corporate tax cut to retire debt or increase savings, though a handful of sectors are likely to see some investments. "Some indicators suggest a slight pick-up in investments. It's not across the board but sectors such as chemicals, food products and fuel are seeing traction," says an economist. The respondents expect things to improve in just a few areas such as selling prices, imports, profits and stock prices. For example, 18 per cent corporate leaders expect profits to improve in the current quarter as against 14 per cent in the previous survey.

As a supplement to the survey, we do an assessment of other economic indicators. These include export-import, index of industrial production (IIP) and consumer price inflation (CPI). The numbers are bleak. While IIP shrunk 3.8 per cent in October, its third consecutive monthly fall, CPI rose 5.5 per cent in November, much above the RBI's comfort level of 4 per cent. The situation on the export/import front is not healthy either.

BCI has captured the ground realities of the India Inc over the past nine years - the first survey was conducted in January-March 2011 - for the country's decision-makers. It will not be out of place to hope that the latest results, which are far from satisfactory, will act as a wake-up call.


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