If economic growth is a yardstick, the current government is ending its term on a stronger wicket than its predecessor. Estimates released by the Central Statistics Office (CSO) in January pegged 2018/19 gross domestic product (GDP) growth at 7.2 per cent, higher than the 6.9 per cent rise in the last year (2013/14) of the previous government.
Yet, the micro indicators seem weak. Industrial growth has plunged to low single digits, the unemployment rate is reportedly at a 45-year high and slowing of the economy has forced the Reserve Bank of India (RBI) to cut the repo rate twice in recent months.
However, despite lower GDP growth, business confidence was higher prior to the general elections in 2014. The index number was 51.4 then as compared to 49.7 now. The sentiment was more upbeat across sectors - services, heavy engineering and light industries - in the January-March 2014 survey as compared to the latest results. The development agenda of the current government moved up the sentiment for about a year, taking BCI to the third-highest peak of 62.2 in the second quarter of 2014/15 since the survey started in 2011, before it started going down from the first quarter of 2015/16. Since then, the BCI has been moving sideways for nearly four years.
So, while latest headline GDP numbers look robust, they have not helped the government build a favourable perception in corporate India. In the latest Business Confidence Index (BCI) survey conducted for the January-March quarter, 52 per cent respondents rated the economic performance of the current government as bad. Just 36 per cent called it good while 12 per cent couldn't form an opinion. It can be argued that the 500 CEOs and CFOs surveyed don't represent the entire electorate, but these corporate leaders run organisations that employ thousands and opinions of powers-that-be trickle down to the rank and file. That should worry Prime Minister Narendra Modi-led NDA government.
The BCI for the March quarter took a hit as business leaders held back on investment and hiring plans. The BCI - on a scale of 100 - slipped to 49.7, compared to 50.5 in the previous quarter and 48.7 in the quarter before that. Market research agency C fore quizzed 500 CEOs and CFOs in 12 cities for the survey.
"We don't expect GDP growth in the March quarter to be dramatically different from the December number. Elections and focus on political outcome will remain dominant themes. This period is never conducive for thinking about new projects. It's not surprising that people are taking a cautious stance," says Siddhartha Sanyal, Chief India Economist, Barclays Bank.
"Corporate sentiments have dipped due to depressed domestic and global growth outlook. GDP growth has come down in recent quarters. Constraints on fiscal deficit have limited the scope for an expansionary fiscal policy. World GDP growth is predicted to slow down. Plus, US-China tariff wars have not been resolved yet," says D.K. Srivastava, Chief Economic Advisor at audit and consultancy firm EY India.
The current survey shows that sentiment has fallen on several parameters such as overall economic situation, overall business situation, financial situation, availability of finance, order book, production level, raw material costs, utilisation of capacity, sales and profits. For instance, 31 per cent respondents expect the overall economic situation to worsen in the April-June period as compared to 21 per cent in the previous survey.
The survey points out that 41 per cent respondents don't plan to make fresh investments in 2019/20. Experts say there are a number of sectors with unutilised capacity. Also, investment plans have been postponed as investors wait for the election outcome. As per the RBI data, capacity utilisation stood at 75.9 per cent in the third quarter of 2018/19, higher than the 74.1 per cent in the same quarter last year. "I can imagine that at this moment, there's no clear plan, and it's fair for them to think about any investment after the political uncertainly is behind them," says Barclays Bank's Sanyal.
The survey shows that 52 per cent respondents don't plan to hire more in the current quarter. The hiring outlook is unlikely to improve unless the growth picks up. Growth indicators are expected to improve only gradually, and in the absence of long-term investments from corporates, the job market will remain sluggish.
Respondents are hoping for an improvement in some areas, including cost of external finance and imports. For example, 49 per cent believe that the cost of external finance will rise in the current quarter as compared with 64 per cent expecting so in the previous survey and 58 per cent in the survey before that.
The rate cuts, along with liquidity injection by the apex bank, are aimed at giving confidence to industry, which is facing headwinds on account of slowdown in global economic activity. "In terms of monetary policy, we are sensing more support [from the RBI] on the growth front as compared to 2018. Our forecast is that they will probably cut once more later this quarter. We don't rule out the possibility of more cuts in the subsequent quarters. They have stepped up liquidity infusion as well," says Sanyal.
As a supplement to the BCI survey, we carry out an assessment of other indicators of economic growth. These include macroeconomic conditions such as exports/imports, IIP (Index of Industrial Production) and Consumer Price Index (CPI). The CPI inflation climbed up marginally to 2.6 per cent in February after touching a 19-month low in January 2019. The retail inflation, still within the RBI's comfort zone, has plummeted 571 basis points under the current government. The IIP is weak due to slowdown in the manufacturing sector.
As per the survey, respondents believe that economic growth (51 per cent) should be the top priority for the next government followed by job creation (23 per cent), infrastructure (14 per cent) and tackling rural distress (12 per cent). Economists say GDP growth, which averaged around 7 per cent in the past five years, could have been better, and the country wasn't able to benefit from benign global crude oil prices. The task for the next government is not going to be easy as lingering effects of demonetisation and GST continue to affect businesses even if the GDP numbers appear to be healthy.