Business Today

Keeping the faith

Business sentiment improved for the fifth quarter running despite little evidence of better times in the offing, reveals the Business Today-C fore Business Confidence Survey.
twitter-logo Manu Kaushik        Print Edition: February 1, 2015
Keeping the faith
(Illustration: Raj Verma)

The year 2013 was tough for the Indian economy. Policy paralysis, slowing GDP growth, high interest rates, rising inflation, plunging rupee and mounting current account deficit - the macroeconomic outlook was grim. In 2014, there wasn't a drastic change in ground realities, but the formation of a stable central government buoyed business sentiment. And the hopes of an economic revival from the seven-month-old Narendra Modi government is showing no signs of waning.

The Business Today-C fore Business Confidence Survey for the third quarter of 2014/15 found that business sentiment among corporate leaders has continued to improve. On a scale of 100, the business confidence index (BCI) was at 62.2 in the October-to-December period, up from 60.5 in the previous quarter. It is the fifth consecutive improvement in BCI and its third-highest value since the launch of the survey in the January-to-March quarter of 2011. Market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey.

The survey reveals a dichotomy in the opinion of business leaders when it comes to macro and micro indicators. Even though the BCI has moved up, some of the key parameters that make up the index have hardly shown improvement - in cases they have deteriorated. For example, consider the respondents' response to the "overall economic situationw. In the October-to-December survey, only 24 per cent respondents expect the economic situation to improve in the next quarter (January-to-March). The comparable figure for the July-to-September period was 48 per cent.


"Investments have not picked up yet because there's a time lag between a stable government and policies getting implemented to jump-start the economy"


CFO, Maruti Suzuki India

Similarly, there is decline in the percentage of respondents who are optimistic about the overall business situation, availability of finance, production levels, sales pickup and order books. Sales pickup, for instance, has witnessed a sharp drop - just 19 per cent expect sales to rev up in the latest survey compared with 68 per cent respondents in July-to-September quarter. D.K. Joshi, Chief Economist at ratings agency CRISIL, says that the difference between macro and micro indicators is a result of the way businesses perceive the overall environment.

"The broad index number reflects the sentiments beyond just one quarter, whereas the micro picture will still take time to improve. It will require decisive actions from the government for several quarters," he says. The corporates are yet to see some action on the ground," says Ajay Seth, CFO, Maruti Suzuki India. "The investments have not picked up yet because there's a time lag between a stable government and policies getting implemented to jump-start the economy," he says.

The government has certainly moved the needle on several fronts. For example, bringing ordinances in critical areas such as coal, mining, insurance and land acquisition not only boosts the confidence levels of the industry but also shows the government's commitment to reforms. Also, steps have been taken to remove bureaucratic hurdles related to environment and labour.

Interestingly, the survey shows that 67 per cent of the respondents expect fresh investments by the private sector to gain traction in 2015. It is in sharp contrast to the last survey results when two-thirds said that they plan to keep investments on hold in the next quarter.

Clearly, both infrastructure and manufacturing require fresh investments without which an economic revival may remain a pipe dream. But there are issues plaguing both the sectors. Manufacturing is facing low capacity utilisation for the past few quarters. In the quarter ending September - according to the Reserve Bank of India (RBI) survey of 1,288 companies - the capacity utilisation stood at 71 per cent, a marginal increase from 69.4 per cent in the fiscal first quarter. Infrastructure, on the other hand, has been hit by a double whammy of stalled projects, estimated to be worth Rs 18 trillion, and companies burdened with huge debt. "New investment in manufacturing sector will take time due to unutilised capacity. In infrastructure, the first step will be to de-bottleneck projects which are stuck-up. It seems that the [GDP] growth has bottomed out which is driving the sentiments up," says Sonal Varma, India economist, Nomura Financial Advisory and Securities.

Last month, the mid-year economic review highlighted the need to increase public spending in order to boost economic growth in the medium term as there are no signs of private investment picking up. Various industry bodies have also approached Finance Minister Arun Jaitley and asked him to step up public spending, especially in infrastructure. Public spending is a double-edged sword. It spurs the economy but has a cost. The current fiscal position of the government looks extremely tight. Between April to November, fiscal deficit - difference between government revenues and expenditure - reached 99 per cent of the full-year target of Rs 5.31 trillion, leaving not enough room for spending. Despite the odds, over 40 per cent of the respondents believe that the government will meet its deficit targets while 32 per cent are sceptical.

Holding steady
A majority felt the October-to-December period was more or less the same as the previous quarter.
Anticipating a shortfall in revenues, the government has chalked out elaborate disinvestment plans in several public sector entities - CIL, ONGC, NHPC, and most recently, in PFC and REC. So far, the government has been able to mop up some Rs 1,715 crore from SAIL disinvestment. It has set a disinvestment target of Rs 58,425 crore for 2014/15. The 2G spectrum sale is on the cards as well. The government expects to mop up over Rs 64,000 crore from it.

In the survey, 43 per cent of the respondents expect cost of external finance to rise in the current quarter. In the previous survey, the figure was 20 per cent. The RBI's tough monetary stance over the past several months have kept interest rates high. However, with inflation softening, the clamour for rate cuts have grown manifold. Maruti's Seth says the cost of finance varies from one company to another due to a bunch of reasons, including health of balance sheet and credit ratings. "Companies with low ratings or highly leveraged balance sheets will find it difficult to tap low-cost funds," he says.

Meanwhile, one-fifth (19 per cent) of the respondents expects cost of raw materials to drop. Kishore Biyani, Group CEO, Future Group, says that the continuous fall in (raw material) prices creates uncertainty for manufacturers. "At one level, businesses are feeling positive but things are not shaping up the way they should. Commodity prices are falling but manufacturers don't know what to do. They are not able to buy raw material because prices are going down almost every day. We need a stable environment," he says.

The survey highlights that nearly one-third (32 per cent) respondents expects their requirement of working capital to go up in the current quarter. Working capital requirement typically rises when order book gets a boost or payments get delayed. Anil Bhardwaj, secretary general of Federation of Indian Micro and Small & Medium Enterprises, says that the second scenario looks more likely. "Look at gems and jewellery, the slowdown in international demand is affecting the sector adversely. The slump in auto and realty sectors has led to inventory pile-up and payment delays," he says.

Meanwhile, next month holds the key for businesses as two major policy events - Jaitley's first full Budget and RBI's monetary policy - are expected to set the economic agenda for the country over the next year.

Good prospects
Respondents are more hopeful about macro indicators than micro ones in January-March.


Market research agency C fore conducted the survey. The field work was conducted between December 23 and 31, 2014. A structured questionnaire was administered to CEOs or CFOs of companies. In all 500 CEOs or CFOs representing various industries in terms of sector and size were interviewed. The survey was carried in 12 cities -Delhi, Mumbai, Chennai, Hyderabad, Bangalore, Kolkata, Chandigarh, Lucknow, Nagpur, Kochi, Vizag and Bhubaneswar. The companies were segmented based on their turnover and also the products offered by them. Those with turnover of over Rs 500 crore have been termed as big, those between Rs 100 crore to Rs 500 crore as medium, those with a turnover less than Rs 100 crore as small and those less than Rs 5 crore as Micro businesses.

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