Union Budget 2017-18 Expectations : Macro-Perspective
Is it the calm before the storm or the poise before the fall? While the answer will depend on what one believes in; but one thing is for certain – India is undergoing a transition and like every transitory phase, comfortability takes a back seat. After 10 months of demonetization and 3 months of implementation of Goods and Services tax, the learnings have been immense but it created some short term disruptions in the economic activity and the way companies do their businesses.
One cannot ignore the long-term benefits of these bold reforms but the short-term disruption was inevitable. Indian economy once growing at 7%+ growth rate; is now undergoing a rough patch. While the capital markets continue to soar in anticipation of the recovery; it is the cycle of job creation and investments that have come to a crawling pace. When we look at investment data in the GDP calculation, the share of investment to the incremental GDP fell to just 2% during three quarters since demonetisation as against approximately 32% during previous 10 quarters.
At Dun & Bradstreet, we have been keeping a tab on the optimism among the C-Suite executives of corporate India. The Composite CFO Optimism Index for Q3 2017 was unveiled recently and the index for Q3 2017 stands at one-and-a-half-year low. The findings of this quarter has lend visibility to the uncomfortable feeling prevailing among the Indian corporates. Optimism amongst CFOs deteriorated more for the financial performance of their companies, as compared to the macroeconomic situation; and in addition, the optimism level of the CFOs in the services sector fell more strongly than the CFOs in the industrial sector.
The optimism though present in the corporate level, has lost its traction for majority of respondents. Besides, only 41% of CFOs expect liquidly position of their companies to improve as compared to 56% in the year ago period and 50% in Q2 2017. The almost frozen capital cycles have taken a toll on the risk appetite too – with only 27% of the CFOs expect to increase in risk appetite – a five quarter low. Further, the percentage of CFOs expect declining cost of raising funds fell to 11 quarter low.
However, all is not lost – at all. As we all know that the nation undergoing transformation, these blips are bound to happen. The bigger question - are we learning from the past? In the bull run of 2005-10 most of the corporates created unsustainably large capacities – while led to oversupply and overleveraging in the books. The banks are still grappling with deteriorating asset quality and increasing Non-Performing Assets (NPAs) ratio. Post demonetization, the Indian economy has still not fully recovered from the disruption. Adding the teething problems of GST – and its safe to assume that the disruption is likely to continue at least in 2017. However, on ground, investments by the public sector, government and possible resurgence of consumer spends due to good agriculture crop and implementation of 7th Pay commission – all have the potential to change the narrative and optimism in the country in mid-term. It will be exciting what the next survey will have in store.