Business Today

Brimming with Hope

Corporate leaders expect the India growth story to make a strong comeback under the new BJP-led government, finds the latest Business Today-C fore Business Confidence Survey.
twitter-logoManu Kaushik | Print Edition: June 22, 2014
RIL Chairman Mukesh Ambani (left) with Adani Group Chairman Gautam Adani at the swearing-in ceremony of the BJP-led government
RIL Chairman Mukesh Ambani (left) with Adani Group Chairman Gautam Adani at the swearing-in ceremony of the BJP-led government. Photo: PTI

A sudden change in the buying habits of people shopping at Big Bazaar stores might be a tell-tale sign of the country's improving economic situation. In the past one week, according to Future Group CEO Kishore Biyani, more people are picking up high-value items such as furniture, kitchen goods and electronics. What does it mean? "Consumers are more confident about the future than before. The consumer sentiment has improved after a long period of slump," says Biyani.

India's current account deficit in 2013/14, down from 4.7% in 2012/13

Not just the retail sector, optimism is evident across corporate India, indicates the Business Today-C fore Business Confidence Survey. Taking a break from the quarterly cycle, Business Today decided to gauge the mood of corporate leaders soon after the Bharatiya Janata Party-led National Democratic Alliance got a thumping majority in the just-concluded elections for the Lok Sabha. The survey results suggest a high level of optimism among business leaders. Market research agency C fore quizzed 185 CEOs and chief financial officers across 12 cities for the survey.

A majority of respondents - 85 per cent - expect economic prospects facing their businesses to improve in the July-to-September quarter compared with the three months through June. Not even a single respondent expects economic prospects to worsen. But Sunil Duggal, CEO of the Rs 7,094-crore consumer goods maker Dabur India, says all sectors would not see revival happening at the same time. "Sectors such as auto and consumer durables will see growth returning much before than infrastructure," he says.

P. Ramakrishnan, Deputy Managing Director at Bangalore-based Sobha Developers, says three months is a short time frame for conditions to change. "I think the next budget, slated to be introduced in July, holds the key. It should present a road map in terms of what policies the government wants to push through. Because of its clear mandate, there's no reason for the government to disappoint the industry now," he says.

The survey shows that 94 per cent respondents foresee corporate earnings to get better in the next one year. (See Towards A Better Future). Also, two-thirds of those polled expect gross domestic product (GDP) growth to return to seven per cent within 15 months, a sharp jump from the Central Statistical Office's estimate of 4.9 per cent for 2013/14.

Siddhartha Sanyal, Barclays' Chief India Economist, says while that kind of growth rate looks ambitious, it cannot be completely ruled out. "GDP growth is comparing last year's economic activity with that of current year. At the moment, the base is so low that when conditions start to turn around, GDP growth would pick up much faster."

Contrary to the survey results, ratings firm ICRA says in its May report that economic growth is unlikely to recover sharply in 2014/15. "While GDP growth has bottomed out in the first half of 2014, the agency expects only a mild improvement in growth, from 4.6 per cent in 2013/14 to 5.0-5.5 per cent in 2014/15," the report says.

The BT-C Fore survey showed 88 per cent respondents are willing to make fresh investments in two to three quarters

India's economic environment worsened last fiscal year due to slowing growth, a wide current account deficit, a weak rupee, and high inflation. The situation has improved over the past few months, with the current account gap narrowing, inflation easing and the rupee strengthening, making the next government's task much easier. In April, for instance, inflation based on wholesale prices fell to 5.2 per cent, a half-point drop from the previous month. Similarly, the current account deficit shrank to 1.7 per cent of GDP in 2013/14 from 4.7 per cent in 2012/13.

However, risks to current account deficit and inflation remain. The Reserve Bank of India's recent decision to ease restrictions on gold imports could again exert pressure on the current account deficit. Also, expectations of deficient monsoon rainfall due to the likely impact of El Niño - a weather phenomenon that could cause drought - could jack up already-high food prices.

Some experts think otherwise. "The impact of El Nino will be muted," says Vinay Khattar, research head at Edelweiss Securities. Ratings firm CRISIL says in a recent report that only two of seven El Nino years in India since 1991 experienced drought. "[It] suggests a nearly 30 per cent chance of an El Nino condition morphing into a monsoon failure."

Another factor working in India's favour is the economic revival of its two biggest export markets - the United States and Europe. In addition, India is likely to get a higher proportion of foreign funds as compared to other emerging economies. "Most competing economies - China, Thailand and Russia - are going through some sort of political or economic turmoil," says U.R. Bhat, Managing Director at financial services firm Dalton Capital Advisors.

Critics argue that ground realities have not changed much and the upbeat mood is driven mainly by hype. Dabur's Duggal, however, disagrees. "The hope is backed by strong credentials of the new prime minister [Narendra Modi], which wasn't the case in 1977 when the Janata Party came to power. Its hype was not supported by a performance track record," he says.

According to the BT-C fore survey, 88 per cent respondents are willing to make fresh investments in the next two to three quarters, and 97 per cent expect consumption to pick up in three months. To some extent, fresh investment is dependent on inflation, and therefore, the movement of interest rates. As long as interest rates remain high, new projects will not materialise quickly.

Bhat says the government needs to take all tough decisions in the first year. "Before the state elections begin, the new government can look into several key areas on an urgent basis," he says, and suggested removing supply-side bottlenecks to tackle inflation. "Since new projects from the private sector will take at least six to eight quarters, the government can expand the fiscal deficit to stimulate the economy by launching new projects on its own," he adds.

Clearly, the new government has its task cut out. A wobbly economy needs more than just band-aid fixes, especially when the expectations are sky high. The BJP made many promises before the elections. Now is the time to deliver on those promises.

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