Business expectations in India are on the rise after four straight quarters of decline, according to the Dun & Bradstreet Composite Business Optimism Index (BOI), which has emerged as a leading indicator of turning points in the Indian economy. (Download the full report here.)
Results for Q1 2016 are up about 2.5% over the same quarter last year as four of its six subindices (sales volume, net profits, selling prices, new orders, employees, and inventories) registered increases. This quarterly report comes at a meaningful time in the Indian growth recovery process, especially as the country is battling with international slowdown and financial markets’ volatility.
The survey was conducted in December 2015, when the latest released GDP data indicated tentative signs of recovery in India’s economy. Also helping improve the optimism level were the decision of major Indian banks to reduce the lending rate and FDI (Foreign Direct Investment) reforms touching upon 15 major sectors of the economy to further ease, rationalize, and simplify the process of foreign investments in the country.
Although new investment is slowing down given low capacity-utilization rates in the manufacturing sector, stalled or shelved projects are at a 30-quarter low. One of the positive findings from the survey, which might support new investment in coming quarters, is the increased optimism level among respondents in the capital goods sector. In addition, government indication to continue public expenditures and postpone the fiscal deficit target would be a great support for private-sector investment, and implementation of the Seventh Pay Commission proposal (proposed hike of around 23% in government-employee pay) would support the consumption demand and thereby investment going forward.
The flip side of India’s growth recovery, however, remains fraught with uncertainties and challenges. Highly leveraged Indian corporates, deteriorating asset quality of banks, declining profitability, and lower debt-servicing capacity of companies have the potential to turn down the optimism level in India. Moreover, delays in the implementation of key reforms along with subdued rural demand may impact the optimism level going forward.
For business confidence to get a sharp boost, it is important for the Indian government to shift from the slow drip of reforms to targeted measures that are aimed at encouraging investment and correcting structural deficiencies in the economy. The measures announced in the 2016 budget, due in February, will also play a crucial role in shaping business sentiment going forward.
Dr. Arun Singh is Senior Economist with Dun & Bradstreet India. His area of work has spanned across quantitative & qualitative economic research, econometric modeling & industry research across a wide spectrum of sectors. He has received his Doctorate and Master degree in economics from Mumbai University, India.