MNI India Business Report July 2014

MNI India Business Report July 2014

Insight and data for better decisions

MNI India Business Report - July 20142

About MNI Indicators Insight and data for better decisions

MNI Indicators offers unique macro-economic data and insight to businesses and the investment community. We produce data and intelligence that is unbiased, pertinent and responsive. Our data moves markets.

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Written and researched byPhilip Uglow, Chief EconomistShaily Mittal, Economist

Release TimeEmbargoed until 9:45 a.m. Mumbai timeJuly 22, 2014

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MNI India Business Report - July 2014 3

MNI India Business Report - July 2014Contents

4 Editorial

6 Executive Summary

10 Economic Landscape

14 Indicators

15 MNI India Business Indicator

16 Production

17 New Orders

18 Export Orders

19 Productive Capacity

21 Order Backlogs

22 Employment

23 Inventories

24 Input Prices

25 Prices Received

26 Financial Position

27 Interest Rates Paid

29 Effect of Rupee Exchange Rate

30 Supplier Delivery Times

31 Availability of Credit

32 What the Panel Said

34 Data Tables

38 Methodology

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The government’s maiden budget tried to appease all, offering something for everyone. But it lacked spice – it was rather like making a dal without the tarka!

Dal without Tarka


The finance minister, Arun Jaitley, in his maiden budget speech tried to appease all, offering something for everyone. But it lacked spice – it was rather like making a dal without the tarka.

What the budget did do was clearly signal the pro-right policies of Prime Minister Narendra Modi and the Bharatiya Janata Party. But while it had the feel good factor, it lacked detail and failed to provide a clear roadmap for tough reforms. We expected to see more concrete proposals from Modi’s government which has, after all, secured the strongest mandate in 30 years.

The government expects economic growth, which has been below 5% for two consecutive years, the worst performance in a quarter of a century, to bounce back to 5.4-5.9% in the current fiscal year and an annual 7-8% in the next three years. To achieve this, it has pledged to sharply cut government debt, bring down inflation, heavily invest in infrastructure and create more jobs. And infrastructure is the key priority with a clear goal to increase investment in areas such as roads, railways, power and airports. India, though, is not like China and we need to see just how well Modi’s plans hold up against a wave of red tape which has in the past stymied infrastructure improvement.

And to maintain the comparison with China, India does not have an excess of money to splurge. The government’s hands are tied by a sizeable fiscal deficit, and so there is reliance on public-private partnership projects and a need to attract foreign investment. The latter will be helped on the relaxation of rules on foreign ownership with the budget announcing that it will allow 49% ownership in local defense ventures and insurance companies. Since 2001, when the defense sector was first opened, it has attracted a meagre $4.1 million in foreign investment, much lower than other industries such as telecoms, software services etc.

Certain policies have been drafted to encourage savings and provide relief to the middle class who have been burdened by persistently high inflation in the country over the past two years. An increase in income tax deduction limits helps, and so to do the concessions for automobile and consumer durable sectors that have already been extended by six months. Increased investment in agricultural storage may help deal with food supply issues, the main contributor to stubborn food inflation.

In other areas the budget drafted plans to introduce the long overdue goods and services tax by the end of the year, which is expected to simplify India’s cumbersome tax system by replacing a series of existing taxes such as value added tax, excise duty and service tax to raise revenues. There was, though, little information on implementing it. It won’t be easy as it’s opposed by many states.

Finally the budget failed to address in detail key areas such as subsidies which the Modi government must try to get to grips with. All in all it was a budget focused on encouraging investment, personal savings and fiscal management and has in general avoided the usual freebies previous finance ministers have given in to, a rare move in a poverty stricken nation. But with little detail it failed to stimulate our taste buds.

Shaily MittalEconomistMNI Indicators

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While overall business conditions increased to a record high, probably in a wave of Modi optimism, other key indicators in the report declined in July.

Executive Summary


Business confidence rose to the highest since the survey began in November 2012 in a wave of optimism that India’s new Prime Minister, Narendra Modi, will be able to revive the economy and stimulate the business environment.

The MNI India Business Indicator increased for the third month in a row to 70.0 in July from 69.2 in June. The rise was mainly led by construction and services companies, while the majority of manufacturing companies also remained highly optimistic. Infrastructure is a key focus area in the new government’s plan for turning the economy around and construction companies in our panel are already increasingly optimistic, with sentiment here rising at the fastest pace in nine months.

While overall business conditions increased, probably in a wave of Modi optimism, other key indicators in the report declined in July. Production, New Orders, Export Orders and Employment all fell between June and July, although they remained in expansion.

The Production Indicator edged down to 61.8 in July from 63.2 in June, the lowest since May but well above the level seen in the same month a year earlier.

After falling to a record low level at the start of the year, Order Backlogs have subsequently trended upwards, showing signs of a revival in demand. However, in July, fewer companies reported higher backlogs, although they still expected to see growth over the coming three months.

Having suffered with high input costs over the past year, companies saw some relief in July as the Input Prices Indicator hit a series low, although remained in expansion.

Even though current prices eased, companies were apprehensive about prices over the next three months as a poor monsoon and violence in Iraq are expected to impact food and fuel prices. Expectations for Input Prices in three months’ time rose for the first time in

five months in July to 59.8 compared with 56.2 in the previous month.

The prices companies charge have remained elevated over the past year, however they have eased somewhat since the start of the year, with the three month trend gradually easing.

Companies’ financial health improved for the fourth month in a row to the highest level since September 2013.

Businesses expected credit availability to improve in the next three months as the Future Expectations Indicator rose to 65.8 from 63.7 in the previous month, the highest since April.

More companies reported that the interest rates paid by them were lower compared with the previous month, pushing the indicator to the lowest since February 2013, the beginning of the data series.

After slipping below the 50 expansion/contraction level in the previous month, the Effect of the Rupee Exchange Rate Indicator rose to 51.1 in July, as fewer companies reported that the exchange rate was hurting their operations.


Overview

May-14 Jun-14 Jul-14Highest

SinceLowest

Since3-Month Average

Monthly Change

Monthly % Change

MNI India Business Indicator

Current Conditions 67.0 69.2 70.0 series high - 68.7 0.8 1.2%

Future Expectations 80.3 78.5 78.6 May-14 - 79.1 0.1 0.1%

Production

Current Conditions 59.0 63.2 61.8 - May-14 61.3 -1.4 -2.2%


New Orders


Future Expectations 77.0 78.6 75.7 - Mar-14 77.1 -2.9 -3.7%

Export Orders

Current Conditions 63.5 65.0 61.7 - Feb-14 63.4 -3.3 -5.1%

Future Expectations 69.4 72.0 73.6 Sep-13 - 71.7 1.6 2.2%

Productive Capacity

Current Conditions 61.5 60.9 59.9 - Mar-14 60.8 -1.0 -1.6%

Future Expectations 69.6 68.9 68.9 Jun-14 - 69.1 0.0 0.0%

Order Backlogs

Current Conditions 49.0 53.9 47.4 - Feb-14 50.1 -6.5 -12.1%


Employment

Current Conditions 52.1 51.1 50.5 - Dec-13 51.2 -0.6 -1.2%

Future Expectations 51.5 53.8 52.4 - May-14 52.6 -1.4 -2.6%

Inventories

Current Conditions 50.9 54.5 55.9 Apr-14 - 53.8 1.4 2.6%

Future Expectations 49.0 52.5 54.8 Mar-14 - 52.1 2.3 4.4%

Input Prices

Current Conditions 62.2 62.6 60.4 - series low 61.7 -2.2 -3.5%

Future Expectations 57.8 56.2 59.8 Mar-14 - 57.9 3.6 6.4%

Prices Received

Current Conditions 55.6 55.6 54.9 - Mar-14 55.4 -0.7 -1.3%

Future Expectations 57.4 57.2 55.5 - Jun-13 56.7 -1.7 -3.0%

Financial Position

Current Conditions 69.1 69.3 70.3 Sep-13 - 69.6 1.0 1.4%


Interest Rates Paid

Current Conditions 52.3 52.7 51.8 - series low 52.3 -0.9 -1.7%

Future Expectations 46.1 50.0 46.4 - May-14 47.5 -3.6 -7.2%

Effect of Rupee Exchange Rate

Current Conditions 50.8 49.4 51.1 Jun-13 - 50.4 1.7 3.4%

Future Expectations 56.4 57.5 55.1 - Apr-14 56.3 -2.4 -4.2%

Supplier Delivery Times


Future Expectations 54.9 56.8 53.3 - Jan-14 55.0 -3.5 -6.2%

Availability of Credit

Current Conditions 60.4 61.1 61.7 Apr-14 - 61.1 0.6 1.0%

Future Expectations 63.0 63.7 65.8 Apr-14 - 64.2 2.1 3.3%

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Business confidence in July rose to the highest since the survey began in No-vember 2012.

Business sentiment among construction companies rose by the highest pace in nine months.

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In its first budget, the government vowed to lift economic growth to 7-8% in the next three years by promoting manufacturing growth, investment in infrastructure and reducing the fiscal deficit to as low as 3% by 2016.

Economic Landscape


In its first budget, the government vowed to lift economic growth to 7-8% in the next three years by promoting manufacturing growth, investment in infrastructure and reducing the fiscal deficit to as low as 3% by 2016. The budget focused on attracting foreign capital by opening sectors, encouraging personal savings and creating incentives for businesses to invest. Disappointingly the budget fell short of being strict on overhauling subsidies and lacked detail in the implementation of the goods and services tax that is expected to boost revenue and make it easier to do business.

Latest economic data from India has been encouraging and showed some signs of revival. Consumer price inflation eased to the lowest on record in June, while wholesale price inflation fell to a four month low. However, with fears that a below normal monsoon will put upward pressure on food prices, and that turmoil in Iraq will negatively impact India’s fuel import bill, it will be challenging for the Reserve Bank of India to cut interest rates. Industrial production expanded for the second consecutive month in May, of which output of consumer durables grew for the first time in eighteenth months, a tentative sign of a revival in consumer demand.

Economic growth remains subduedThe economy grew by 4.7% in 2013-14, slightly above the 4.5% growth witnessed a year ago. This was the first time in 26 years that growth has been below 5% for two successive years.

GDP in India slowed to 4.6% on the year in the three months to March, down from 4.7% in the previous quarter. It was, though, marginally above the 4.4% rate seen in the same period a year ago.

Data on an output basis showed that growth in the three months to March was boosted by agriculture which grew 6.3% on the year, compared with 3.7% in the previous quarter and 1.6% in the same quarter a year earlier. Manufacturing data was disappointing and remained in contraction, declining by 1.4% compared with a fall of 1.5% in the previous quarter, and substantially below the growth of 3% in the same quarter a year earlier. Service sector output, grew by 12.4%, down from 14.1% in the previous quarter but up from the 11.2% increase seen in the January-March quarter a year ago.

The government expects the economy to grow by 5.4-5.9% in the current fiscal year, although a poor monsoon, relatively weak external environment and weak investment means growth closer to the lower end of the forecast range seems more likely. May industrial output expandsIndustrial production accelerated in May by 4.7% on the year from 3.4% in April, the second consecutive rise on the month.

Manufacturing, which contributes about 75% to industrial output, grew by 4.8% on the year, the highest since October 2012 and up from 2.5% in the previous month. Sixteen out of the 22 industry groups within the manufacturing sector expanded in May, led by a huge 60% rise in ‘Furniture manufacturing’, followed by 37.1% growth in ‘Tobacco products’ sector and a 33.7% increase in the output of ‘Electrical machinery and apparatus’. The industry group ‘Radio, TV and communication equipment & apparatus’

Economic Growth

0%

2%

4%

6%

8%

10%

12%

Q1

2009

Q4

2009

Q3

2010

Q2

2011

Q1

2012

Q4

2012

Q3

2013

GDP Y/Y % , fiscal year

Source: Central Statistical Organisation, India


Wholesale price inflation, which the RBI used to focus on, eased to the lowest in four months, to 5.4% in June from 6% in May. The prospect of weak monsoon rains, a rise in minimum support prices (floor price offered by the government to farmers) and turmoil in Iraq has increased the risk of rising food and fuel prices. The government plans to bring down inflation by tackling supply constraints and creating cold storages and warehouses to prevent food spoilage.

Repo rate at 8% The RBI left the key policy rate unchanged at 8% at its monetary policy meeting on June 3, the first interest rate decision since the BJP formed a new government.

Governor Rajan said further policy tightening would not be warranted if the economy continues on a disinflationary path. At the same time, the RBI took steps to raise the availability of credit, reducing the mandatory amount of bonds lenders must keep with the central bank - called the statutory liquidity ratio - by 50 basis points to 22.5% of deposits.

Fighting inflation is expected to remain the central bank’s priority and it is firmly focused on keeping the

showed the highest negative growth of 40.3%, followed by a 28.6% decline in ‘Office, accounting & computing machinery’ and a 7.4% contraction in ‘Motor vehicles, trailers & semi-trailers’.

Mining output grew for the seventh month in a row by 2.7% in May compared with 2.6% in April. Output of consumer durables, a measure of consumer demand, grew for the first time in eighteenth months, rising by 3.2% in May compared with a 7.8% decline in the previous month. Capital goods output, a proxy for investment, rose for the second month in a row by 4.5% on the year, following four months of contraction.

Inflation eases in JuneConsumer prices, which the Reserve Bank of India now targets, rose by the slowest pace since creation of the CPI index in January 2011 by 7.31% in June compared with 8.28% in May. Food price inflation, which makes up almost half of the basket, fell to 7.9% from 9.2% in the previous month. There are, though, concerns that a deficient monsoon could push food inflation higher. Core CPI inflation, which excludes food and energy, eased slightly to 7.73% from 7.74% in the previous month.

Inflation

0%

2%

4%

6%

8%

10%

12%

Apr-1

2

Jun-

12

Aug-

12

Oct-1

2

Dec-

12

Feb-

13

Apr-1

3

Jun-

13

Aug-

13

Oct-1

3

Dec-

13

Feb-

14

Apr-1

4

Jun-

14

Wholesale Price Inflation*

Consumer Price Inflation**

Source: *Office of the Economic Advisor, India, **MOSPI

Industrial Production

-10%

-5%

0%

5%

10%

15%

20%

25%

50

100

150

200

250

2007

2008

2009

2010

2011

2012

2013

2014

Industrial Production y/y % (RHS)


Source: Central Statistical Organisation, India


economy on a disinflationary glide path that is intended to hit 8% inflation by January 2015 and 6% by January 2016.

Lower fiscal budget deficit The government budget deficit stood at Rs. 5.08 trillion in 2013-14, or 4.5% of GDP, mainly on account of curbs on government expenditure. Net tax receipts totalled Rs. 10.15 trillion, below the target of Rs. 10.29 trillion, while total expenditure was Rs. 15.63 trillion, below the target of Rs. 15.9 trillion in the interim budget.

Finance Minister, Arun Jaitley announced that he planned to shrink the budget deficit to 4.1% of GDP this fiscal year and subsequently to 3.6% and 3% of GDP in the following years, however he did not detail exactly how the government planned to do this. The government expects Rs 9.77 trillion from taxes and expenditure of Rs. 17.92 trillion in the current fiscal year. The cap on foreign investment was raised to 49% in the defense and insurance sectors and more public private partnerships are to be encouraged for road building. The budget was disappointing in the sense that the government did not manage to cut food and fuel subsidies which cost the government $40 billion a year.

Trade deficit widens to 11-month high in June India’s trade deficit widened to $11.8 billion in June from $11.2 billion in May, and was also 4.3% above the $11.3 billion shortfall recorded in June a year earlier.

Exports increased by double digits for the second consecutive month by 10.2% on the year to $26.5 billion, although slightly below May’s exports worth $28 billion. Imports rose for the first time in 13 months, increasing by 8.3% on the year in June compared with a contraction of 11.4% in the previous month, but were 2.5% below the $39.2 billion recorded in May. Oil imports rose almost 11% to $13.3 billion in June. Gold imports inched up to $3.1 billion from $2.2 billion in May and were also 65% up on the year reflecting the easing of some gold import

restrictions in May with premier trading houses being added to the list of entities allowed to import gold. To trim the current account deficit last year, the government increased import duties on gold and imposed a rule that required a fifth of all bullion imports to be re-exported. Those measures had crimped supply and led to a rise in smuggling. Finance Minister left the import tax on gold unchanged at 10% in the annual budget against market expectations that the tax would be cut to boost supply ahead of the festival season.

Car sales rise in June Car sales rose to the highest in 10 months, increasing by 14.8% in June, following growth of 3.1% in May. Sales in the three months to June gained 2.3% to 444,242 cars, over the same period a year earlier. Heavy discounting by car manufacturers has aided volume growth as companies have gone the extra mile to attract price sensitive buyers.

The new government has given positive impetus to consumer sentiment by extending tax breaks on automobiles by six months to the end of December. The excise tax has been reduced on small cars, motorcycles, trucks and buses from 12% to 8% and on SUVs to 24% from 30%. The industry is cautious about the demand for two-wheelers and small cars, as the predicted below average monsoons could result in lower incomes for many of the rural households who rely on these rains.

Foreign reserves increase India’s foreign exchange reserves rose by $614.6 million to $316.39 billion in the week to July 4. According to the RBI’s weekly statistical supplement, foreign currency assets, the biggest component of the forex reserves, rose by $760.6 million to $286.57 billion.

India’s foreign exchange reserves have risen substantially since September, leaving the country less vulnerable to another run on the currency. The value of India’s gold reserves declined by $155.5 million to $20.6 billion in the week ending July 4.

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Indicators




The MNI India Business Indicator increased for the third month in a row to 70.0 in July from 69.2 in June. The rise was mainly led by construction and services companies, while the majority of manufacturing companies also remained highly optimistic. Infrastructure is a key focus in the new government’s plan for turning the economy around and construction companies in our panel are already increasingly optimistic, with sentiment rising at the fastest pace in nine months.

The government’s maiden budget took place within our survey period and planned to revive the economy by attracting investment and creating more jobs. The government outlined an economic reform agenda that foresees introducing a general sales tax, encouraging foreign investment and speeding up approvals for major business projects. With the Modi government in power, many companies in our panel expect a quick upturn in the business environment.

Future Expectations for business conditions remained broadly stable at 78.6 in July compared with 78.5 in June. All three sectors were highly confident about future business conditions, with manufacturing firms leading the pack.

70.0

MNI India Business IndicatorBusiness Sentiment at Record High


Jul-13 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14

Current Conditions 51.8 58.2 65.5 61.9 67.0 69.2 70.0

Future Expectations 67.6 69.5 70.1 79.1 80.3 78.5 78.6

40

45

50

55

60

65

70

75

80

85

Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14


Current Conditions

Future Expectations

“Business conditions are slowly but gradually improving.” Industrial machinery manufacturing company

“Due to political stability, we have lot of expectations from the government.” Real Estate Holding and Development company

In July, only five out of the 15 current conditions indicators included in the survey increased, although all but Order Backlogs were above the 50 expansion/contraction mark. For business expectations in the next three months, eight indicators rose on the month.


The Production Indicator edged down to 61.8 in July from 63.2 in June, the lowest since May but well above the level seen in the same month a year earlier.

Production bottomed out in the spring a year ago and has subsequently been on an upward trend, averaging 62.2 over the past 12 months. More construction and services companies reported higher production levels, while the proportion of manufacturing companies that reported a rise in Production fell compared with the previous month.

Latest official data showed that industrial production expanded by 4.7% on the year in May, having grown by 3.4% in April, the highest since October 2012. Manufacturing, which constitutes three quarters of industrial production, rose 4.8% following a gain of 2.6% in April.

In July, more than 50% of companies expected their Production to increase over the next three months in anticipation that there will be higher demand in the festival season. The Future Expectations Indicator rose to 72.9 in July from 72.1 in the previous month. Manufacturing was the most optimistic sector while construction and services companies reported a slight downward adjustment in their production plans.

Production Lowest Since May

Production




61.8

30

35

40

45

50

55

60

65

70

75

80


Production

Current Conditions

Future Expectations


-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

40

45

50

55

60

65

70

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Industrial Production y/y % (RHS)*

MNI Production

*Source: Central Statistical Organisation, India


Having risen sharply in June, companies’ order books shortened slightly to the lowest since May led mainly by manufacturing and construction sector companies.

The New Orders Indicator fell almost 5% to 63.4 in July from 66.7 in June, in spite of overall business sentiment hitting a record high. However, the approaching festival season will likely give a seasonal boost to orders.

Expectations for New Orders in three months have been increasing since the start of the year and after rising to a series high of 78.6 in June, they eased slightly to 75.7 in July, led by both manufacturing and construction companies.

New Orders Lowest in Two Months

New Orders




63.4

30

40

50

60

70

80

90


New Orders

Current Conditions

Future Expectations

“We expect lower new orders because of the monsoon season.” Speciality chemicals manufacturing company

“Orders are low as the off season has begun.” Hotels group


In line with overall business confidence, companies’ Export Orders have trended upwards since April last year, but they faced lower foreign demand for their goods and services in July.

The Export Orders Indicator dropped 3.3 points to 61.7 in July from 65.0 in June, the lowest in five months. In spite of this month’s fall, the indicator was almost 7% above the same period a year earlier, pointing to a continued recovery in India’s exports and in-line with official data which has shown an improvement in exports.

Improved economic performance, especially in the US and UK, coupled with the depreciation in the rupee over the past year, has resulted in greater demand for Indian exports. Latest data showed that Indian exports rose by 10.2% on the year in June, the second consecutive double digit gain.

The rupee has recovered partially since the start of the year, due to the RBI’s proactive role. Over the past year, the currency is down 1.2%, although rising import costs have offset much of this gain for many companies. However, concerns over violence in Iraq in recent weeks have increased crude oil prices, with a subsequent negative impact on the rupee.

Companies’ future expectations about Export Orders rose to the highest since September, with the Expectations Indicator increasing to 73.6 in July from 72.0 in June. There was a sharp rise in the proportion of construction companies who were more optimistic about their future Export Orders.

Export Orders Lowest Since February

61.7

30

35

40

45

50

55

60

65

70

75

80

Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14

Export Orders

Current Conditions

Future Expectations

Export Orders




Export Orders Movement

30

40

50

60

70

20

22

24

26

28

30

32

Feb-

13

Apr-

13

Jun-

13

Aug-

13

Oct

-13

Dec

-13

Feb-

14

Apr-

14

Jun-

14

MNI Export Orders (RHS)

Exports,FOB, USD B*

*Source: Indian Ministry of Commerce and Industry


The Productive Capacity Indicator declined for the second month in a row to 59.9 in July from 60.9 in June.

The decline was led by manufacturing companies as the proportion of them that reported increased productive capacity fell significantly. In contrast, construction companies showed an improvement in their capacity. In general, companies’ Productive Capacity has trended upwards since the survey started in November 2012, although its pace of ascent has slowed in 2014.

Companies’ expectations about Productive Capacity in the next three months was strong and remained at 68.9 in July.

Productive Capacity Lowest Since March

59.9

30

35

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45

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55

60

65

70

75


Productive Capacity

Current Conditions

Future Expectations

Productive Capacity




“It is a slack season for sugar industries.” Food Products manufacturing company

“The production capacity is on lower side in summer.” Agricultural company

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w

Optimism for hiring fell to the lowest since December 2013.

The Employment Indicator declined for the second month in a row to 50.5 in July from 51.1 in June.


After falling to a record low level at the start of the year, Order Backlogs have subsequently trended upwards, showing signs of a revival in demand. However, in July, fewer companies reported higher backlogs, although they still expected to see growth over the coming three months.

The Order Backlogs Indicator fell 12.1% to 47.4 in July from 53.9 in June, surprisingly lower than the same period a year earlier. The decline was led mainly by manufacturing companies as the proportion of those whose order backlogs rose in July more than halved as compared with the previous month.

Companies expected Order Backlogs to remain broadly the same over the next three months. The Future Expectations Indicator rose very slightly to 52.0 in June from 51.7 in the previous month, although was significantly above the outturn of 43.6 seen in July a year ago.

Order Backlogs Contract Significantly

47.4

25

30

35

40

45

50

55

60

65

Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

Order Backlogs

Current Conditions

Future Expectations

Order Backlogs




“We received fewer orders and hence even fewer backlogs.” Software services company

“Due to higher orders, our backlogs will be up.” Industrial machinery manufacturing company


The Employment Indicator measures whether companies have an adequate number of employees, and even though the majority of companies continued to say that the size of their workforce was “just right”, optimism fell to the lowest since December 2013.

The Employment Indicator declined to 50.5 in July from 51.1 in June, mainly led by services and manufacturing companies. The latter decreased to the 50 level that separates whether companies have too many or too few employees. In contrast, construction companies boosted their hiring for the first time in three months in line with a pick-up in their production.

Fewer companies were confident about hiring in the next three months in spite an expectation of improved demand in the upcoming festive season. The Expectations Indicator fell to 52.4 in July compared with 53.8 in the previous month. The indicator rose only for construction companies with manufacturing and services less optimistic than a month earlier.

Employment Lowest Since December

50.5

40

42

44

46

48

50

52

54

56

58

60


Employment

Current Conditions

Future Expectations

Employment




“Due to the rainy season, business is down so we are planning to cut employment in the next three months.” Surface Transportation company


The Indicator for the Inventory level of Finished Goods rose for the second month in a row to 55.9 in July from 54.5 in June. The trend of falling and rising stocks during the early part of the financial year was partly seasonal, as many companies initially draw down their existing stock levels and then rebuild them in anticipation of higher demand during the festival season later in the year.

Companies expected inventories to expand in the next three months to the highest since March. The Expectations Indicator rose 4.4% to 54.8 in July from 52.5 in June, led mainly by manufacturing companies to meet higher anticipated demand.

Between June and July, the proportion of construction companies who expected inventories to rise more than halved, in line with their weaker demand expectations over the coming months.

Inventories Highest Since April

55.9

25

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70


Inventories

Current Conditions

Future Expectations

Inventories




“There are higher inventories due to the rainy season, slowing down sale of goods.” Construction company

“Both finished goods and raw material inventories have gone up because of the rains.” Furnishings company


Having suffered with high input costs over the past year, companies saw some relief in July as the Input Prices Indicator hit a series low, although remained in expansion.

The Input Prices Indicator fell to 60.4 in July from 62.6 in June and was considerably below the outturn of 79.6 recorded in the same period a year earlier. Apart from construction companies, both manufacturing and services companies reported an easing in input price pressures compared with the previous month, although those reporting higher input costs still outnumbered panellists reporting lower prices.

Even though current prices eased, companies were apprehensive about prices over the next three months as poor monsoon and violence in Iraq are expected to impact food and fuel prices. Expectations for Input Prices in three months’ time rose for the first time in five months in July to 59.8 compared with 56.2 in the previous month. The month’s rise pushed the indicator to the highest in four months, although was 19.2% below the level recorded in July 2013.

Input Prices Series Low

60.4

45

50

55

60

65

70

75

80

85


Input Prices

Current Conditions

Future Expectations

Input Prices




“Raw material prices have come down.” Speciality Chemicals manufacturing company


The Prices Received Indicator declined to 54.9 in July from 55.6 in June, and was significantly below the outturn of 67.1 seen in the same month a year earlier.

The prices companies charge have remained elevated over the past year, however they have eased somewhat since the start of the year, with the three month trend gradually easing.

The increase in the Prices Received Indicator over the past year has been closely matched by the official inflation data. Latest data showed that wholesale price inflation eased to 5.4% in June from 6% in May, led by a decline in food and fuel price inflation.

Expectations for Prices Received in three months’ time declined to the lowest since June 2013 to 55.5 in July compared with 57.2 in the previous month. For the first time in 13 months, construction companies expected prices charged to contract. The indicator was above the 50 level for manufacturing and services companies, although latter were less optimistic as compared with the previous month.

Prices ReceivedLowest Since March

54.9

30

35

40

45

50

55

60

65

70

75

80


Prices Received

Current Conditions

Future Expectations

Prices Received




3%

4%

5%

6%

7%

8%

9%

30

40

50

60

70

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Prices Received and Wholesale Price Inflation

MNI Prices Received

Wholesale Price Inflation y/y % (RHS)*

*Source: Office of the Economic Advisor, India

“Because of competition, we have reduced our prices.” Heavy Construction company

“Due to lower occupancy, we have reduced prices of our services.” Hotels Group


Companies’ financial health improved for the fourth month in a row to the highest since September 2013.

The Financial Position Indicator increased slightly to 70.3 in July from 69.3 in the previous month as the majority of companies said that their financial position was better or the same compared with the previous month. The indicator has trended upwards since the start of the survey and in the quarter ending June, it hit a series high at 69.1, 1.3% above the reading of 68.2 in the previous quarter. The BSE benchmark Sensex which has been on a record breaking spree over the last three months, pulled back slightly after a lacklustre budget speech by the new government. The government unveiled its plans to boost economic growth and open sectors to attract investments but a lack of detail spooked investors with the Sensex closing at 25,377.99 on July 16. More recently Asian markets have tumbled owing to tensions in Iraq and investors are also cautious of the Federal Reserve’s move to phase out quantitative easing and the risk of an earlier hike in rates. Companies’ expectations about their future Financial Position have also trended higher since last year. In July, companies’ expectations were broadly stable at 76.9 compared with 76.5 in June.

Financial Position Highest Since September

70.3

45

50

55

60

65

70

75

80

85

90


Financial Position

Current Conditions

Future Expectations

Financial Position




“Due to economic revival and more demand for our products, financial position is better.” Containers and Packaging manufacturing company

“Margins have improved.” Apparel retailer


More companies reported that the interest rates paid by them were lower compared with the previous month, pushing the indicator to the lowest since February 2013, the beginning of the data series.

The Interest Rates Paid Indicator fell 1.7% to 51.8 in July from 52.7 in June. The indicator rose for both manufacturing and construction sector companies and was above the 50 expansion/contraction level, while it reduced significantly for the fifth consecutive month among service companies to a level below 50 for the first time in over a year.

While in June, 10.7% of companies surveyed reported higher credit costs, in July this rose to 12.4%. In contrast, the percentage of companies who reported they faced the same interest rates decreased to 78.8% in July from 83.9% in June.

The Reserve Bank of India kept the key policy rate unchanged at 8% at its monetary policy meeting on June 4, the first interest rate decision by the central bank since the Bharatiya Janata Party won the general election. The Modi government is seeking to strike the right balance between reducing the budget deficit and reining in high inflation, while at the same time stimulating economic growth, which has fallen below 5% in the past two fiscal years. The RBI has committed itself to limit consumer price inflation to 8% by January 2015 but has said that it is open to easing policy should inflation fall faster than currently anticipated.

Interest Rates Paid Hits a Series Low

51.8

45

50

55

60

65

70

75

Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14

Interest Rates Paid

Current Conditions

Future Expectations

Interest Rates Paid




Expectations for Interest Rates Paid remained elevated throughout most of last year with the indicator hitting a record high in June 2013, although it has trended down since November. This month, a smaller proportion of companies expected to see higher or the same credit costs in the next three months. The Expectations Indicator fell by 7.2%, very close to the series low, to 46.4 in July from 50.0 in June.

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Companies felt the exchange rate was benefiting them in July.

The Effect of Rupee Exchange Rate Indicator rose by 3.4% to a level above 50.


After slipping below the 50 expansion/contraction level in the previous month, the Effect of the Rupee Exchange Rate Indicator rose to 51.1 in July, as fewer companies reported that the exchange rate was hurting their operations.

Businesses are asked whether the exchange rate is helping or hurting their company and a value above 50 shows more firms reported that it was helping, while a reading below 50 shows the exchange rate was hurting.

The indicator has moved sharply over the past year in line with the movement in the exchange rate. It fell into contraction a year ago in line with massive capital outflows due to concerns the US Federal Reserve would start tapering Quantitative Easing earlier than expected. It has since recovered along with the rupee’s appreciation, helped by a lower current account deficit and large foreign capital inflows, not least due to the RBI’s proactive role. In July, the indicator was 13.3% above the same period a year ago.

The appreciation in the currency over the past few months has helped the majority of Indian companies due to their heavy dependence on imports of fuel and other raw materials. The rupee is 1.2% above the same period a year ago.

Companies expected the rupee to help their businesses in the coming three months, although concerns over oil prices due to increased violence in Iraq fuelled worries among some companies. The Expectations Indicator declined for the first time since December 2012 to 55.1 in July compared with 57.5 in the previous month, the lowest since April.

Effect of Rupee Exchange Rate Helps Businesses

51.1

20

30

40

50

60

70

80

90



Current Conditions

Future Expectations





0.010

0.016

0.022

10

20

30

40

50

60

70

80

90

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Exchange Rate

MNI Effect of Rupee Exchange Rate

US Dollar versus Indian Rupee (RHS)*

*Source: Reuters


The indicator measuring supplier delivery times declined by 1.8% to 53.5 in July from 54.5 previously as fewer companies reported lengthening of their supplier delivery times.

Construction companies reported unchanged delivery times with the indicator remaining at the neutral 50 level. Manufacturers continued to report an expansion in delivery times. Companies expected their Supplier Delivery Times to lengthen to 53.3 in July over the next three months, albeit slower from the previous month’s record of 56.8. Both manufacturing and construction companies expected supplier delivery times to expand, although slower than the previous month.

Supplier Delivery Times Lowest Since May

53.5

30

35

40

45

50

55

60

65



Current Conditions

Future Expectations






The indicator measuring the Availability of Credit increased in July to 61.7 from 61.1 in June, the highest since April, when the series hit a record high level.

The Availability of Credit Indicator has trended upwards since the summer of 2013 and the rise on the month puts the indicator well above the level in the same period a year ago. For the quarter ending June, optimism about credit availability hit the highest level on record.

The RBI cut the statutory liquidity ratio – the mandatory amount of bonds lenders must keep with the central bank by 50 basis points to 22.5% of deposits in June, in order to raise the availability of credit. There was a rise in the proportion of service companies who registered an increase in credit availability while a higher proportion of construction companies reported the same credit availability compared with the previous month. In contrast, fewer manufacturing companies reported an improvement in their credit availability.

Businesses expected credit availability to improve in the next three months as the Future Expectations Indicator rose to 65.8 from 63.7 in the previous month, the highest since April. Manufacturing and service companies expected credit conditions to improve in the coming three months while construction firms were less optimistic.

Availability of Credit Second Monthly Rise

61.7

30

35

40

45

50

55

60

65

70



Current Conditions

Future Expectations





“Due to our better performance, we have good chances of getting credit.” Pharmaceuticals manufacturing company

“Banks are ready to give credit.” Construction company

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A selection of comments from the panel of businesses surveyed over the past month.

What the Panel Said

“There are higher inventories due to the rainy season, slowing down sale of goods.” Construction company

“We are trying to increase the headcount.” Clothing and accessories manufacturing

“Due to our better performance, we have good chances of getting credit.” Pharmaceuticals manufacturing company

“Production was low because of unavailability of raw material.” Food products manufacturing company

“Both finished goods and raw material inventories have gone up because of the rains.” Furnishings company

“We received fewer orders and hence even lesser backlogs.” Software services company

“Global demand is weak, hence our export orders suffer.” Diversified Industrials manufacturing company

“Banks are ready to give credit.” Construction company

“It is a slack season for sugar industries.” Food Products manufacturing company

“The production capacity is on lower side in summer.” Agricultural company

“Production will be higher as festival season is approaching in the coming 3-4 months.” Real Estate Holding and Development company

“Last month many people left our organisation.” Chemicals manufacturing company

“We are opening more branches so we need more employees.” Insurance company

“Higher production will be in the coming months as it’s the peak season for tea business.” Agricultural company

“We expect lower new orders because of the monsoon season.” Speciality chemicals manufacturing company

“We got some orders in advance so the production will be on a higher side in the coming three months.” Industrial machinery manufacturing company

“Production was weaker due to lack of manpower.” Heavy construction company

“Export Orders are low due to weaker demand from China.” Iron and steel manufacturing company

“We expect higher foreign demand due to our stronger marketing network.” Industrial machinery manufacturing company

“Due to lower occupancy, we have reduced prices of our services.” Hotels group

“Our production levels were low due to breakdown of machinery.” Utilities company

“We expect rupee to be stronger as compared with US dollar, hence beneficial for us.” Electrical components manufacturing company

“We expect a cut in rate of interest by the RBI.” Real Estate Holding and Development company

“Business conditions are slowly but gradually improving.” Industrial machinery manufacturing company

“Due to the rainy season, the business is down so we are planning to cut down employment in the next three months.” Surface Transportation company

“Due to political stability, we have lot of expectations from the government.” Real Estate Holding and Development company

“Raw material prices have come down.” Speciality Chemicals manufacturing company

“Because of competition, we have reduced our prices charged.” Heavy Construction company


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35 Historical Summary

36 Historical Records

37 Historical Records - Quarterly

Data Tables


Historical Summary

2013 2014

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul


Current Conditions 51.8 64.0 59.4 59.8 64.6 57.8 63.4 58.2 65.5 61.9 67.0 69.2 70.0

Future Expectations 67.6 75.5 77.1 68.8 69.5 71.1 72.0 69.5 70.1 79.1 80.3 78.5 78.6

Production



New Orders



Export Orders



Productive Capacity



Order Backlogs



Employment



Inventories



Input Prices



Prices Received



Financial Position



Interest Rates Paid






Supplier Delivery Time







Historical Records

2012 - Current

Minimum Maximum Mean Median


Current Conditions 47.5 70.0 60.1 60.6

Future Expectations 49.7 80.3 68.3 69.8

Production



New Orders



Export Orders



Productive Capacity



Order Backlogs



Employment



Inventories



Input Prices



Prices Received



Financial Position



Interest Rates Paid













Historical Records - Quarterly

Q4 13 Q1 14 Q2 14 Quarterly Change Quarterly % Change


Current Conditions 60.7 62.4 66.0 3.6 5.8%

Future Expectations 69.8 70.5 79.3 8.8 12.5%

Production

Current Conditions 60.8 63.7 61.4 -2.3 -3.6%


New Orders



Export Orders



Productive Capacity



Order Backlogs



Employment


Future Expectations 50.9 54.7 52.4 -2.3 -4.2%

Inventories



Input Prices



Prices Received



Financial Position



Interest Rates Paid













Methodology

MNI India Business Sentiment is a monthly poll of Indian business executives at companies listed on BSE (formerly known as the Bombay Stock Exchange). Companies are a mix of manufacturing, service, construction and agricultural firms.

Respondents are asked their opinion on whether a particular business activity has increased, decreased or remained the same compared with the previous month as well as their expectations for three months ahead, e.g. Is Production Higher/Same/Lower compared with a month ago?

A diffusion indicator is then calculated by adding the percentage share of positive responses to half the percentage of those respondents reporting no change. An indicator reading above 50 shows expansion, below 50 indicates contraction and a result of 50 means no change.

Data is collected via telephone interviews. More than 200 companies are surveyed each month.

Insight and data for better decisions

Discovering trends in Emerging MarketsMNI’s Emerging Markets Indicators explore attitudes, perspectives and confidence in Russia, India and China. Our data and monthly reports present an advance picture of the economic landscape as perceived by businesses and consumers.

Our indicators allow investors, economists, analysts, and companies to identify economic trends and make informed investment and business decisions. Our data moves markets.

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MNI India Business Report July 2014

Economy & Finance

Transcript of MNI India Business Report July 2014