Business optimism in India remains tepid in Q2 2018

  • Ranked 6th on the optimism index in Q2 2018
  • Ranked 4th on revenue expectations

India has recently been declared as the 6th largest economy by the World Bank, surpassing France. However, higher twin deficits resulting in a falling rupee and rising crude oil prices and inflation continue to be the reasons for the sluggish business optimism in the country. It continues to rank 6th on the optimism index with 75% businesses in India optimistic about the economic outlook in Q2 2018, finds Grant Thornton’s International Business Report (IBR), a quarterly global business survey. The confidence of Indian businesses has been low since Q3 2017 and is indeed a wakeup call for the government and policymakers. The survey reveals a similar trend globally as business optimism witnessed a drop from the record high net 61% reported in Q1 2018 to a net 54% in Q2 2018.

The report is based on the results of a quarterly global business survey of 2,500 businesses in 32 economies.

Vishesh C Chandiok, CEO, Grant Thornton India LLP, said:

“Rising oil prices and inflation and therefore expected interest rate revisions, in the middle of an election year, threaten the much talked about reversal in the investment cycle in India. Further, mid-sized businesses continue to complain of capital shortage due to our banking system still being over cautious because of mistakes of the past. The fundamentals behind high GDP growth remain intact though the mood on the street isn’t going to change to overall optimism any time before the next government is well in place.”

Globally, businesses are optimistic about an increase in revenue, with 70% of Indian businesses surveyed also expressing the same sentiment. With expectations of increased revenue, corporate India also showcased increased positivity to invest in R&D activities as its rank improved from 18th in the previous quarter to 13th. The optimism for profitability also improved compared to the last quarter, with 55% businesses voting for it (52% in Q1 2018). India Inc. also expects a rise in exports in the coming year and ranks 5th on this parameter as against 8th in the last quarter.

However, this buoyant sentiment is not reflected in selling price and employment expectations. Due to rise in inflation and GST, only 45% Indian businesses are expecting a rise in the selling prices, with India’s ranking slipping to the 9th position from 6th in Q1 2018 on this parameter. Although the revenue expectations have increased and availability of skilled workforce remains a key constraint for growth, the employment expectations are low. Half of the businesses surveyed are expecting a rise in employment, with India ranking 5th on the parameter.

While revenue is expected to be soaring in the coming quarters, Indian businesses are not planning to invest in longer-term structural growth. Only 11% businesses plan to invest in new buildings, slipping to the 18th position from the 8th position in the previous quarter. There is minimal improvement in optimism for investment in plant and machinery from the last quarter, from the 19th rank to the 16th.  

For the past four quarters, India had been topping the charts in considering red tape and ICT infrastructure as the main concern for growth; as per IBR’s latest figures, although India deviated from the trend in citing red tape as the main constraint to growth and ranked 3rd, it continued doing so for ICT infrastructure. The percentage of businesses citing availability of skilled workforce as the main concern for growth decreased from 63% in the previous quarter to 58%.

Commenting on the global outlook, Francesca Lagerberg, Global Leader Network Development at Grant Thornton, said:

“There is a sense that 2018 may be as good as it gets for the global economy. Optimism has clearly been dented after two years of it steadily climbing. However, businesses and policymakers need to look at how they are preparing for the next phase of the global economic cycle.”

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