BT Business Confidence Index: Here's why muted global growth can be a concern

India reported higher-than-expected GDP growth of 7.2 per cent in FY23. The International Monetary Fund too has upgraded India’s GDP growth forecast for FY24 to 6.1 per cent from 5.9 per cent earlier. But if you thought that the economy could look forward to sunny weather, curb your enthusiasm. Economic growth may remain subdued this fiscal thanks to global storm clouds. The domestic economy, however, may still do better than anticipated if the capital expenditure of the centre and states remain on track and inflationary pressures ease to allow domestic demand to stay robust.

Easing retail inflation—despite the recent spurt in vegetable prices—at 4.81 per cent in June, has raised expectations of improved consumption demand as real wages rise. Besides, the Reserve Bank of India (RBI), too, may opt for a prolonged pause on rate hikes. Additionally, GST collections remained robust at over Rs 1.65 lakh crore in July, while industrial output as measured by the index of industrial production was at a three-month high of 5.2 per cent in May.

Businesses are turning a tad more optimistic because of this sustained momentum in economic activity, as reflected in the BT-C Fore Business Confidence Survey (of 500 CEOs and CFOs) for the April-June period. The Business Confidence Index (BCI) touched a five-quarter high of 52.7 in the June quarter. Though this was a marginal improvement from 50.9 in the March quarter, it is still the highest since the March 2022 quarter, when the BCI was at 55.2.

Economists believe that economic growth may remain muted due to the impact of weak global growth, but easing inflation and stable commodity prices could offer some reprieve. “The economy is showing signs of improvement. The major boost to confidence is coming from the decline in inflation, which is helping turn real wages positive. In turn, this is giving a demand push to the economy. If this trend continues, domestic demand will be able to take care of the slump in external demand to some extent,” says Devendra Kumar Pant, Chief Economist and Head (Public Finance), India Ratings. The agency has, however, maintained a conservative GDP growth estimate of 5.9 per cent for the fiscal.

Economic growth is expected to moderate to 6 per cent in FY24 due to factors including a not-so-favourable base effect, impact of monetary tightening, and an uncertain global environment that could hurt exports, notes Aditi Nayar, Chief Economist, Head of Research and Outreach at ICRA. “The impact of the uneven monsoon and El Niño conditions on agriculture also has to be monitored,” she cautions. But she says steady urban demand and softer commodity prices are positives.

The pace of capital expansion could also give GDP growth a push, with an estimated upside of about 50 basis points. By June-end, just about 27.8 per cent of the Rs 10 lakh crore of capex budgeted for this fiscal had been used, but heavier spending is expected after the southwest monsoon.

Businesses also remain cautiously optimistic about the economic prospects in the September quarter and have indicated a marginal improvement in sentiments at 5.6 on a 10-point scale, compared with 5.3 in the previous quarter.

In fact, 52 per cent of respondents are of the view that the better-than-expected GDP growth of FY23 is likely to be repeated this fiscal. However, 72 per cent felt that the upcoming state and Lok Sabha elections could impact government policymaking.

Companies are also more upbeat on hiring and profits in the September quarter, with the indices logging a score of 5 and 5.2, respectively, compared with scores of less than 5 in the previous quarter.

Nayar agrees, and says that ICRA expects corporate profitability to also improve this fiscal, benefitting from softer commodity prices.

But the skies haven’t cleared yet. Corporate profitability in the past has remained a challenge, and concerns persist. As many as 37 per cent of respondents termed muted global growth and its impact on exports as the top challenge to corporate profitability, while 32 per cent rated subdued consumer demand as the main concern.

Higher-than-expected inflation is the chief concern for 19 per cent of the respondents, but only 41 per cent believe that the RBI may hike the interest rate in the next policy review. Pant of India Ratings also expects the status quo on rates to be maintained but rules out a cut in the interest rate this fiscal.

The biggest takeaway from the survey, however, remains the low confidence of micro enterprises that still seem to be struggling. Providing employment to a large chunk of the informal sector, the business confidence of micro entrepreneurs has remained subdued and below 50 for three consecutive quarters. In the June quarter, it only improved marginally to 49.7 from 48.2 in the previous quarter.

K.E. Raghunathan, National Chairman of the Association of Indian Entrepreneurs, notes that micro industries have been struggling since demonetisation, then the hasty implementation of GST, and after that the Covid-19 pandemic and lockdown. “The outlook for micro industries has not improved even after a year of almost normal economic activity. They have not received sufficient or any support or attention from the government or banks, forcing many to close down or move on to gig work,” he points out.

Without an economic recovery across the board, business confidence may not rise significantly. The storm clouds may be clearing, but sunny skies are still some months away.

@surabhi_prasad