Weaker domestic demand and growing disinflationary pressures is weighing on the business confidence of Indian corporates, the final reading for 2015 suggests.
MNI India Business Sentiment, a monthly poll of Indian business executives at BSE (formerly the Bombay Stock Exchange)-listed companies, dipped to 60.7 this month from 60.9 in November. MNI Indicators is part of Germany’s Deutsche Börse Group
An indicator reading above 50 shows expansion and below 50 indicates contraction, so Indian business sentiment remains well into positive territory. However, the business sentiment indicator (BSI) average of 61.3 for the three months to December was the weakest quarter in 2015 and the lowest reading since Q4 2013.
Weak domestic demand meant that production and new orders were down 9.7% and 8.6% year-on-year (YoY) respectively in December, with the latter now 12.5% below last year’s average. More positively, there was an increase in foreign demand for India’s goods and services for the second consecutive month as the export orders indicator rose 6.1% in December.
MNI Indicators said that Indian companies faced lower costs for raw materials and other inputs owing to the fall in crude oil and other commodity prices. Some passed on these cost savings to their customers, while several reported that they had cut their prices even more sharply owing to high competition and low demand.
This could explain the fall in the financial position indicator to the lowest since October 2013. High debt and low sales have also hurt Indian firms’ balance sheets this year as evidenced by the decline in the indicator to 64.1 in Q4, the lowest level since Q2 2013.
“The decline in business sentiment throughout 2015 casts some doubt over the sustainability of growth in India,” said the chief economist of MNI Indicators, Philip Uglow .
“Notably orders, a key measure of activity, have been in trend decline for more than a year. The stabilisation in export orders and production provides some optimism that things might be on the turn, but we need to see more data to see if this does indeed prove to be the case.
“The decline in input prices and stronger disinflationary pressure on prices received should help to limit demand pressure on inflation. Efforts to tackle price pressures from the supply side need to be stepped up to enable the Reserve Bank of India [RBI] to use monetary policy effectively to support the economy.”
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