Well, this does not come as a surprise. Global economy aside, the domestic environment itself is shaky right now. No wonder then India Inc.’s business confidence index has fell to a two year low at 51.6.
Inflation is one of the biggest monster the government authorities are trying to battle right now and first few initiatives to tame the rising inflation has come in the form of increasing interest rates. This has made the cost of capital high which is proving detrimental to businesses that depend on borrowed capital for their operations.
These are difficult times for businesses everywhere and India is no exception. Both global and domestic cues are negative and there seems to be no leading indicator of a major positive news in the next few months.
The uncertainty in demand both internationally and in domestic markets coupled with the monetary tightening has left businesses wary of high growth. This has resulted in a significant reduction in the overall business confidence index which has taken a beating during the very first quarter of this fiscal year.
The dip in the business confidence index in the very first quarter of this year has however been drastic as is visible in the chart below.
The survey conducted by FICCI also captures majority of reasons especially the ones arising from the domestic market responsible for this dip in the business confidence index,
At the domestic level, rising interest cost and weak domestic demand, both in part attributable to the contractionary monetary policy pursued by the RBI, are taking toll
To add to this, the international woes what with US reaching its debt ceiling and the Eurozone crisis in Europedo not leave too much scope for optimism for a positive growth of India Inc. Export driven orders comprise a major portion of the order book of a lot of companies across various in India and uncertain conditions have seemed to bought down the demand forecast. To add to that, RBI has been tightening the monetary policies.
What is worrying about the business confidence index falling to 51.6 levels is that even during the recession in late 2008, India’s business confidence index stood at 60 for Q4 (2008-2009). Relaxed monetary policies could have contributed in part but business were still pretty much hopeful. The business confidence index then kept going upwards for majority of 2010-2011 and then hovered around the 60-62 range till the last quarter of 2010-11.
The respondents also presented some of the initiatives that they would like implemented to ensure turning the tide for the industry,
- Address issues related to land acquisition expeditiously.
- Bring down the cost of credit particularly for small and medium enterprises
- Ensure introduction of the Goods and Services Tax and Direct Tax Code from April 2012.
- Further foreign direct investment reforms in areas like insurance and multi-brand retail.
- Increase spending on the infrastructure sector as this would have a multiplier effect across sectors.
- Improve the governance framework to ensure quick policy implementation and fast-track project clearances.
Of these, infrastructure is something that had been a key agenda from last year’s budget though I am not sure if the government has managed to meet its objectives.
The response from the industry folks suggests a lot more needs to be done still. FDI in retail has been another burning topic in the recent past and there might be some positive development like with the entry of Starbucks in India.
All in all, if there was any doubt that the current economic climate is rough the dip in business confidence index has provided the validation for same. In times like these when the businesses itself are wary of maintaining growth and momentum, one wonders if 9% growth seems reachable?
What are your thoughts on this major dip in the business confidence index in India? Do you think businesses are over reacting or they are reading the market right?