Uptick in Business Confidence Lifts India’s Economic Outlook

With Indian economic activity gathering pace this year, India’s business confidence has improved underpinning the hope that the reform initiatives of the government would unravel a host of investment opportunities for firms going forward.

According to the Grant Thornton International Business Report (IBR) survey, India’s ranking has surged from 4th to 2nd position on the optimism index in the second quarter of 2017.

The uptick in business outlook has been attributed to the continued reforms coupled with expectations of higher economic growth. The implementation of Goods and Service Tax (GST) has further contributed to optimism. GST is expected to contribute to productivity gains and a higher GDP growth by improving the ease of doing business, unifying the national market and boosting India’s attractiveness as a foreign investment destination.

According to the report, 94 per cent Indian businesses have faith in India's economic growth story. India also topped the chart on the ranking for revenue expectations with 78 per cent of the businesses in the country expecting an increase.

Meanwhile, on profitability index, 69 per cent of the respondents expect higher profitability, thus, bringing India on the 2nd rank on the chart from 6th position in the last quarter.

Strong reform measures and political stability has led to improved business sentiment towards India. The trend is further expected to continue in the longer-term, filtering through to corporate earnings.

India continues to stand out as the one economy which has huge potential to continue to grow and this is reflected in the survey where Indian businesses are most optimistic and high on expectations of increasing revenue, employment, profitability.

While India continues to rise on the optimism index, China is still lagging with only 48 per cent businesses displaying confidence in its economic growth for the second consecutive quarter.

Globally, companies are positive on business prospects with an all-time quarterly high of 51 per cent in Q2, making it the fifth consecutive quarter of optimism. Companies in the US, European Union and China are more confident with 81 per cent, 50 per cent and 48 per cent, respectively, businesses optimistic on future prospects.

Latin Manharlal Group

Cooling Inflation Bolsters Rate Cut Hopes

India’s consumer price inflation has eased to its slowest pace in more than five years, raising demands for the interest rate cut by the Reserve Bank of India (RBI) at its policy meet scheduled in August, in order to stimulate growth in Asia’s third biggest economy.

According to Central Statistics Office (CSO) data released, consumer inflation eased to a record low of 1.53 per cent in June from 2.18 per cent in May. It was 5.77 per cent during the corresponding period last year.

With inflation number below the RBI’s mid-term target of 4 per cent for the past eight months, industry participants and the government are batting for a cut in interest rates to support economic expansion. The central bank now expects retail inflation to come in a 2.0-3.5 per cent range for the first half of FY 18 and 3.5-4.5 per cent in the second half, down from 4.5 per cent and 5.0 per cent, respectively.

Deflation in vegetables and pulses continues to bring down the headline numbers as food and beverage price index, which accounts for 45 per cent of the consumer price index basket, contracted 1.17 per cent in June. Vegetables prices slipped 16.53 per cent during the reporting month from last year, while price of pulses declined nearly 22 per cent. Analysts expect these prices to remain subdued for few more months aided by an excess supply, good monsoons and low prices globally.

On the other hand, industrial output rose 1.7 per cent in May after rising 3.1 per cent in April owing to weaker performances in manufacturing, mining and power generation. The tepid factory output data could further strengthen the case for RBI rate cut in August to support India's economy, which grew 6.1 per cent in the January-March quarter, its weakest pace in more than two years.

While the recent data may put pressure on RBI to consider a token 25 basis point rate-cut, it is not a given. Monsoons, HRA increase under the Seventh Pay Commission, temporary impact of GST, base effect trickling in, and fiscal risks coming from farm loan waivers by States can still exert upside pressure on inflation in the second half of this fiscal.

Latin Manharlal Group