Business boom

Business confidence is definitely in positive territory, as they would say in the stock market. The state of mind of the Indian corporate world can often be a better indicator of what lies ahead than corporate accounts for the last quarter. The National Council for Applied Economic Research’s earlier report on business opinion showed that happy days are here again for the first time since 1995. And the mood appears to improve with every passing week. According to the Federation of Chambers of Commerce and Industry’s latest survey of companies, business confidence is not only holding up, it has risen since the last survey. One of the clearest signs of optimism comes not from expectations of how the economy as a whole will perform in the current year but how industry will do. Here the expectation is of a healthy growth rate of between eight and ten per cent. Pitched neither too high nor too low, this sounds quite realistic.

The niggling question remains, how much of the positive mood increasing being reported is part of the irrational exuberance induced by the stock market? The Ficci survey had evidently been completed before the stock market index fell to lows not seen since ten months ago. On the other hand, the respondents from 400-plus companies could not have been influenced by Thursday’s pre-monsoon deluge in Mumbai, a sure sign the rains had arrived on time. What has contributed to the positive mood is that the government has been business-friendly. Corporates think the government has been functioning well and particularly by cutting fertiliser subsidies and changing the taxation rules on employees’ stock options. These two examples show that the government has judged well where firmness or flexibility are called for and acted correctly. The efforts to reduce interest rates and the cost of borrowing have been appreciated too. But whether there will actually be a further fall in interest rates must remain in doubt at thisstage given the huge size of the government’s own borrowing programme and inflationary pressures beginning to be felt. In fact, business appears to have grown more sceptical about the finance minister’s ability to rein in the fiscal deficit, the Ficci study shows.

Expectations are that capacity utilisation will improve in many sectors. Other data shows sales and profitability are improving. Exports are rising. Although the future looks rosier, dark clouds are discernible at the edge of the picture. Whether they will be dispelled or grow larger in the course of the year depends on a number of factors. The drought which has taken its toll of the rural economies of several states will reduce demand for consumer and other goods. It must be hoped the rains will be abundant and well dispersed. The government seems to be moving purposefully ahead with disinvestment. Even though the bottom appears to be falling out of the stock market a substantial sell-off could still be possible this year. If, however, the process is not well managed and runs into the controversies and snarl-ups that have dogged it in the past, there will be renewed pressure on interest rates and inflation which will throw corporate calculations askew.