Optimism in the Indian economy has soared, both internationally and domestically, thanks to strong fundamentals and healthy demand drivers. Domestic demand is expected to gather momentum on account of sustained buoyancy in services, revival in rural demand, the government’s thrust on capex, and healthy balance sheets of banks and corporates.
The Reserve Bank of India’s recent forward-looking surveys on consumer and industrial outlook also alluded to the sanguine economic prospects. Labour markets are also recovering well with a fall in unemployment and a rise in the labour force participation rate.
That said, there are some risks on the horizon mainly emanating from uncertainty prevailing in the global scenario due to flaring geopolitical tensions. However, the Indian economy remains well placed to tackle these challenges buttressed by its strong macroeconomic fundamentals.
Adding to the optimism are the findings of the recent Confederation of Indian Industry’s (CII) 124th Business Outlook Survey for the second quarter of the financial year, which strongly reflect the confidence of industry.
The CII Business Confidence Index has continued its upward trajectory as it rose to a three-quarter high of 67.1 in the second quarter as compared to 66.1 in the previous quarter, reiterating the on-ground experience of most industry players.
According to the survey, about 55 percent of respondents found that an improvement in the ease of doing business along with the government’s thrust on capital spending, especially in infrastructure-related sectors, were the biggest positives for domestic growth in the current fiscal. Indeed, the government’s focus on capital spending, which rose 48 percent on an annual basis in April-August, will help to stimulate growth in other sectors of the economy through its multiplier effect.
Respondents also expressed satisfaction on the growth front, with the first quarter real GDP print coming at 7.8 percent and a sustained positive momentum seen in most high-frequency indicators.
The ongoing festive season cheer is also expected to provide a fillip to domestic demand. Hence, the Indian economy is well placed to achieve the 6.5 percent growth forecast by the RBI. The results of the survey came in line with this prognosis, with 66 percent expecting the economy to grow at 6.0-7.0 percent this fiscal.
It is encouraging to see that the overall domestic demand has started getting support from the rural sector too. About half the survey respondents anticipated an improvement in rural demand in the first half of the fiscal. A strong rural economy is a prerequisite for faster growth as it fuels consumption. Rural consumption must be strong for the economy to consistently register a GDP growth of more than 8 percent over the medium term. Hence, it is encouraging to see that industry is expecting rural demand to turn around and some consumer companies are seeing green shoots of recovery with the onset of the festive season.
The improving domestic demand also finds a reflection in corporate indicators. Two-thirds of the respondents expect sales and new orders to increase at a faster clip in the second quarter than in the first. Mirroring this, half the respondents feel that capacity utilisation in their companies would range 75-100 percent in the second quarter, compared to 48 percent who experienced similar utilisation levels in the previous quarter. This bodes well for private investment outlook as high capacity utilisation fuels fresh investments. These findings are also attested by the on-ground experience of many companies engaged in sectors such as cement, steel and automobiles.
The 124th round of the CII Business Outlook Survey was conducted during September 2023 and saw the participation of around 200 firms of varying sizes and across all industry sectors and regions of the country. A majority of the respondent firms were from the manufacturing sector and, notably, 54 percent of all firms belonged to the large and medium size cohort. An index score above 50 indicates positive confidence while a score of less than 50 indicates the contrary.
The rise in retail inflation, which had emerged as a challenge in recent months, is now tempering with the September print decelerating sharply to 5.0 percent from 6.8 percent in the previous month. This is in tandem with a downward movement in food prices.
A slew of supply-side measures announced by the government in recent months also contributed towards taming the inflationary impulses in the economy. Notably, of the key measures imposed, one-third of the survey respondents stated that imposing export duties on commodities will be most beneficial to tame inflationary pressures, followed by open market operations (26 percent of the respondents).
With the inflation trajectory waning, the likelihood of interest rates remaining unchanged in the near term has brightened—an assessment affirmed by the survey findings which noted that more than half the respondents (58 percent) anticipated that the RBI would stick with a pause on the repo rate in the second half of the current fiscal. The status quo on interest rates will help let the lagged impact of the 250-basis-point hike in the repo rate to work through the system.
Chandrajit Banerjee, Director General, Confederation of Indian Industry
(cb@cii.in)