Sentiment towards the current business environment and expectations for the future are now both back to pre-Modi levels in a blow to the government as it completes its first year in office, said data and intelligence services provider, MNI.
The MNI India Business Sentiment Indicator, a gauge of current sentiment among BSE listed companies, fell by 2.5% to 62.3 in May from 63.9 in April. "The fall in business sentiment left it at the lowest level since April 2014 and in hand with declines in output and orders points to a significant deterioration in business activity. Overall sentiment has reacted positively to the two cuts to benchmark interest rates this year from the Reserve Bank of India, although their impact has proved temporary," MNI said.
Companies reported a significant weakening in both domestic and export orders. New Orders fell sharply to 57.1, the lowest since May 2013, while export orders declined to 53.6, the weakest since June 2013, said MNI. "The recent weakening of the rupee has yet to have any impact on overseas demand. In contrast, firms saw the weakness of the currency as a negative with adverse implications for business in May. The indicator which measures the Effect of the Rupee Exchange Rate fell to a four-month low of 45.2 in May, with companies concerned about the increased cost of imports."
MNI said inflationary pressures continued to pick-up in May as a growing number of companies paid higher prices for their inputs following the depreciation in the rupee. The Input Prices Indicator rose to 58.6 in May from 55.9 in April. "Even though input prices were 5.8% down on the year, they have risen rather quickly since their downfall over the past year. However, intense competition and subdued consumer sentiment have prevented many companies from raising the prices of their goods and services for a considerable time."
There was a sharp fall in the number of firms reporting an expansion in output in May, dashing hopes of the manufacturing revival envisioned by the government. The Production Indicator fell by 8.1% to 57.5 in May from 62.6 in April, putting the indicator 4.6% below the series average.
Companies continued to run down their existing stock in May, while the time taken for their suppliers to deliver key inputs fell to the shortest level in the survey's history. MNI's panel reported that delivery times had shortened to a series low of 48.6 from 48.9 in April.
Further MNI said the Interest Rates Paid Indicator has fallen dramatically since the start of the year as the RBI initiated a monetary easing cycle, although availability of credit has been more or less stable as commercial banks show reluctance to fully pass on the benefits of lower key repo rate. The Interest Rates Paid Indicator remained below the 50 mark at 44.2 in May. "Companies were optimistic in their outlook for credit availability over the coming three months but less so in May as the Expectations Indicator fell for the fourth consecutive month to 58.2 from 59.7 in April, substantially below the outturn of 63.0 seen in May 2014," it concluded.