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Confidence in Indian economy high, impact of demonetization eases
Posted:May 7, 2017
 
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The impact of the Indian government’s decision to demonetize high-value currency notes late last year seems to have eased much faster than earlier anticipated. Replacement of the currency that was removed, or re-monetization, is now at an advanced stage and a business confidence survey indicates that things seem to be turning normal, even improving, particularly for the corporate sector.
 
In the latest survey, confidence levels in the Indian economy have rebounded, touching a two-year high, particularly compared to the previous survey, which saw a huge drop in confidence because of a demand squeeze, caused by demonetization. 
 
The Business Confidence Survey brought out by the Federation of Indian Chambers of Commerce and Industry (FICCI), is a quarterly survey conducted amongst industry members from across sectors of the economy, from all across the country. The latest survey, conducted during March and April 2017, saw participation of 185 companies.
 
Participating companies reported improvement in current conditions and performance levels and expressed hope of a better showing in the coming six months. This could be a harbinger for better economic growth in the current year. Some indicators are available already and the government is becoming increasingly confident. 
 
Survey results show nearly 54% of participating companies feel that current economic conditions are "moderately to substantially better" compared to the previous six months.
 
After the government invalidated high-value currency notes on 8 November, several analysts and economists predicted a sharp fall in India’s GDP growth rate in the fiscal third quarter. However, gross domestic product (GDP) data showed sustained growth at 7% for the last quarter, surprising analysts, prompting Finance Minister Arun Jaitley to hit back at critics of the government’s demonetisation move. The data belies the exaggerated claims made by many that the rural and farm sectors were in distress, Jaitley said.
 
The economy is expected to do even better in the coming six months, according to 79% of the participating companies. Similar trends are clear from figures pertaining to current performance and expected performance at the industry level and individual firm level.
 
A theme closely related to demonetization is the greater use of digital modes for transactions. Results from FICCI’s Business Confidence Survey show that this is an area which companies have adopted in a big way.
 
Almost 7 out of 10 companies which participated in the survey have confirmed that they have laid out plans to deploy digital modes of payments, including payments made to all vendors and reimbursements for employees. This shows corporate India’s commitment to the government’s objective of ‘going digital’.
 
A look at the operational parameters shows that, during the period April 2017 to September 2017, nearly 65% of companies expect better sales performance, 42% expect profits to increase, 40% expect to invest more than their current investments levels, 31% expect export demand to be better than what it is now and 27% plan to hire more people and make additions to their workforce.
 
Compared to the results of the previous survey, things look better on most parameters other than exports, where some caution is now being reflected after an improvement in expected performance reported by a much larger group in the previous survey.
 
While the global economy is improving gradually, with most parts of the world showing better growth and performance, the rising tide of protectionism and advent of inward looking policies to promote growth and jobs ‘at home’ could impact export performance.
 
Even as the demand situation is improving in the economy, companies are still far from being at a point from where they can enjoy some pricing power. While raw material costs are on the rise - nearly 6 out 10 respondents to the present survey cited increasing raw material costs as a hurdle to business performance - the general view is that it could take another 9-12 months for pricing power to stabilize.
 
While the impact of demonetization on demand has eased considerably, the natural build up after an improving economic performance is still happening at a slow pace.
 
In the previous survey, nearly 80% of the respondents had mentioned weak demand as a clear dampener – resulting from the demonetization move - this number has come down in the current survey, but is still high at around 60%.
 
Both the government and the central bank have taken a slew of measures over the past couple of years to moderate lending rates in the economy. The Reserve Bank of India has cut the repo rate by 175 bps between January 2015 and October 2016; interest rates on small saving scheme have been reset and marginal cost of funds based lending rate was introduced last year. Earlier this year, following the rapid build-up of deposits, some major banks brought down their lending rates.
 
The survey participants were asked to indicate if they have benefited from the recent lowering in lending rates by banks.  Almost 67% of participants said they were not getting the benefit from of credit flow at lower rates, and that remained a critical concern for their growth prospects.
 
It was an issue the government needed to address, to ease the bottlenecks in credit availability, now that the negative effects of demonetization have eased.
 
 
 
 
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