Just as corporate India is recuperating from the effects of demonetisation, the roll-out of the goods and services tax (GST) has caused jitters. Corporate sentiment has dipped to its second-lowest level in the April-June period. The confidence level, on a scale of 100, slipped to 47.3 in the first quarter of 2017/18. In comparison, confidence level stood at 49.6 during January-March 2017 and 46.4 in October-December 2016, the lowest ever. The business confidence index (BCI) in the same quarter last year stood at 51.5.
After a sharp fall at the end of last year, business confidence jumped in the first quarter of the calendar year 2017, giving an impression that businesses have shrugged off demonetisation fears. The current slump indicates that corporate leaders have turned pessimistic due to the uncertainty around GST execution and slowdown in investments.
The BCI was initiated by Business Today in the January-March quarter of 2011. Just like in every quarter, market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey.
"The 6.1 per cent GDP growth in the January-March period was a confirmation of the slowdown. The dip in sentiment is largely attributed to that. The sentiment should go up with GST," says D.K. Joshi, chief economist at ratings agency CRISIL.
The survey indicates that business leaders are worried about a host of issues such as production level, utilisation of capacity, investments, sales, exports and hiring activities. For instance, 40 per cent expect sales to drop in the July-September period. In the previous survey, 21 per cent respondents were expecting the same.
The survey highlights that respondents believe utilisation of capacity will remain low going forward. Around 39 per cent respondents anticipate that capacity utilisation will be subdued in the July-September 2017 quarter as against 23 per cent anticipating the same in the last survey.
RBI data shows that capacity utilisation stood at 72.7 per cent in the October-December 2016 quarter, slightly higher than the corresponding figure in the same quarter of the previous year.
Analysts say that improvement in the investment cycle is some distance away. "There's still excess capacity in the system, and hence no urgency to make fresh investments. Private investments will likely remain weak for a while. I see an uptick in the same when manufacturing capacity utilisation crosses 85 per cent," says Siddhartha Sanyal, Director and Chief India Economist, Barclays Bank Plc.
With investment growth in the corporate sector slowing down to record lows in 2016/17, 86 per cent respondents do not plan to make fresh investments over the next six months.
The survey shows that 36 per cent of respondents expect the production level to worsen in the July-September period. In the previous survey, only 20 per cent respondents felt so. The Index of Industrial Production (IIP), a leading economic indicator, has dipped to 1.7 per cent in May from 8 per cent a year ago, owing to poor performance of the manufacturing and mining sectors.
"The cycle of weak production level, lower capacity utilisation and lack of investment appetite has not broken," says Joshi.
The survey captures the mood of businesses of all sizes - big, medium, small and micro. The sentiment has deteriorated across businesses, especially for medium and small-size enterprises. Confidence levels have plummeted for heavy engineering, light industries and services sectors in the latest survey.
As per the survey, hiring has shown the maximum deterioration among all parameters. For instance, 74 per cent respondents - as against 26 per cent in the previous survey - foresee hiring activities to weaken in the current quarter.
From those surveyed, 67 per cent think that GST will negatively impact consumption. The common fear among businesses is that most items are falling under the 18 per cent tax bracket which could jack up the prices of goods and services. However, some hold a different view. "I don't expect any notable negative impact of GST on overall consumption on a sustained basis. There could be some pressure on prices of certain high-end segments of consumer durables and automobiles," says Barclays' Sanyal.
Respondents are expecting improvement in the cost of external borrowing and cost of raw material. Some 72 per cent respondents hope that cost of external finance will remain low in the next three months, much like in the previous survey.
In the last credit policy in June, the apex bank kept the repo rates unchanged at 6.25 per cent for the fourth consecutive time, taking a cautionary stance on inflation. But with inflation, both WPI and CPI, softeFning, there's a strong case for interest rate cut in the next policy. "The bank deposit rates have come down sharply that can lead to lower lending rates. Interest rates will remain low with bias towards downward revision," says Joshi.
Fifty per cent respondents believe that cost of raw materials will go down in the July-September period - in the last survey only 34 per cent thought so. "This is not completely inconsistent. The crude oil prices have come down again. The commodities haven't picked up as they were expected to," says an analyst.
As a supplement to the BCI survey, we carry out an assessment of other indicators of economic growth. These include macro-economic conditions such as exports-imports data, IIP, and consumer price inflation (CPI). All these indicators have registered a decline in recent months. The CPI index, which is closely watched by the RBI, pummelled to 1.54 per cent in June from 2.18 per cent in May due to lower food prices. The drop in imports - 4.11 per cent - in June was more pronounced than the drop in exports - 1.84 per cent - in the same month.
The fourth quarter earnings remained subdued for corporate India; the sentiment over the next few quarters will largely be determined by the implementation of GST.