Statement by Mr Ajay S Shriram, President, CII on Sixth Bimonthly Monetary Policy Review

Commenting on the sixth bimonthly monetary policy review, Mr Ajay S Shriram, President, CII stated that the decision of the RBI to maintain a status quo in policy rates reflects a cautious approach of the RBI while tackling the growth-inflation conundrum.

According to CII, a modest 25 bps cut would have further lifted sentiments and assured the markets that the monetary easing cycle is on course which would be followed by further cuts in rates during the course of the year. 

CII however welcomes the lowering of the statutory liquidity ratio by 50 bps which, by easing liquidity in the system, would ensure that funds would be available to the banking sector for onward lending. This in turn would provide a fillip investment and growth Mr Shriram stated that with the recent change in inflation dynamics, particularly the steep slide of global oil and commodity prices and current account deficit under control, there is enough space to maneuver policy in favor of growth. CII is hopeful that the RBI would resume its accomodative monetary policy stance in the next policy review and work in tandem with the government to bring the investment momentum back to the economy. CII is looking to see a 100 bps reduction in headline rates in the course of the year.

Conditions Suitable for Substantial Rate Cut: CII President

Commenting on the WPI data that was released today, Mr Ajay S Shriram, President, CII said that “CII welcomes the steep fall in headline inflation, which has dropped to zero per cent in November as against 1.77 per cent growth evidenced in October owing to a broad-based decline in all sub-indices, which is significantly better than market expectations. What is also noteworthy is that both food and fuel prices have entered the negative terrain during the month. This data comes close on the heels of a drop in retail inflation to a low of 4.38% in November, thereby reaffirming the moderation of the inflation print which in turn would have a beneficial impact on inflationary expectations.”

CII has said that going forward, the continuing slowdown in global commodity prices as well as the government’s resolve to rein in the fiscal deficit would prevent prices from moving upwards. According to Mr Shriram, “this should induce the RBI to rethink its cautious monetary stance and urgently move towards a growth propelling monetary policy. The RBI should not wait till the next monetary policy announcement and reduce interest rate substantially, as industrial production is in the red and investment and consumption demand are yet to show visible signs of a pick-up.”

CII Business Confidence Index Shoots Up Second Time in a Row

Indicating a sharp improvement for the second consecutive quarter, the CII Business Confidence Index (CII-BCI) for July-Sept quarter FY15 has shot up to 57.4, up from 53.7 in April-June quarter and 49.9 in Jan-March quarter this year. During the same quarter last fiscal, the index had touched the all-time low value of 45.7. The number 50 is the dividing line on the index between positive and weak business confidence.

Commenting on the upward march in the value of index, Mr. Chandrajit Banerjee, Director General, CII, said that “the determination shown by the new government at the Center to provide an impetus to growth along with reviving the ‘feel good’ factor has sent the business confidence index soaring for the second quarter in a row. In order to capitalize on the early signs of improving business sentiments, we must ensure that this momentum is maintained going forward.”

The 88th Business Outlook Survey is based on responses from over 150 industry members. Majority of the respondents (44 per cent) belong to large-scale sector, while medium scale companies comprise another 12 per cent. Around 38 per cent and 6 per cent respectively are from the small-scale and micro firms. Further, 60 per cent of the respondents are from manufacturing and 36 per cent are from the services sector.

The highest percentage (41 per cent) of respondents expected GDP in the current fiscal to expand by 5.0-5.5 per cent, up from sub-5 per cent growth witnessed in the last two years. In fact, 30 per cent respondents expected GDP to grow in a range of 5.5-6.0 per cent in FY15, which indicates that 6 per cent growth is within reach this year. We have already started this financial year on an impressive note with the first quarter GDP recording a growth of 5.7 per cent, up from 4.6 per cent in the previous quarter.

WPI Inflation is expected to average 5.5-6.5 per cent in FY15, which is slightly on a higher side considering the likelihood of a sub-normal monsoon this year. “The management of inflationary expectations through supply-side measures would hold the key for ensuring continued momentum of economic revival”, suggested Mr. Banerjee.

The expectation of higher economic growth in the current fiscal is rooted in optimism about the overall demand situation. A significant 77 per cent of the respondents expected their sales to increase in the July-Sep quarter, much higher than 50 per cent respondents in the previous quarter. Similarly, 49 per cent of the respondents expected their export orders to increase in July-Sep quarter compared to 39 per cent respondents in the previous quarter.

The revival in domestic and global demand has resulted in a majority (46 per cent) of the surveyed businesses contemplating new investment in the July-Sep quarter, whereas only 10 per cent expected contraction. This indicates that economic recovery is sustainable, provided we maintain the demand momentum, where the monetary stance by the Central Bank will play a crucial role.

The businesses, besides undertaking new investments, have started experiencing a rise in capacity utilization. Nearly half (49.5 per cent) of the respondent firms expected their capacity utilization to exceed 75 per cent in July-Sep quarter of FY15, up from 34 per cent respondents in the previous quarter, which augurs well for the turnaround of the economy.

CII survey has observed a sharp decline in the percentage of respondents reporting increase in inputs costs related to raw materials, energy and employees in the Jul-Sep quarter as compared to the previous quarter, which is in line with the official data specifying the current moderation in inflation rate.

Expectation of recovery in sales, coupled with sharp decline in input costs, has led to a rise in percentage of respondents expecting an increase in profits after tax (PAT) in the July-Sept quarter to 40 per cent as against 36 per cent in the previous quarter. On the other hand, the percentage of respondents reporting a decline in PAT between the two periods declined from 30 per cent to 20 per cent.

A slow pick up in global demand, high inflation and rising borrowing costs are cited to be the top three concerns of the respondents. “While we can do little about addressing the global slowdown concern, all policy options must be explored to tackle the problem of inflation and high borrowing cost. At a time when economic recovery needs to be strengthened, the ideal policy instrument would be to manage inflation through supply-side measures, and make a direct intervention to reduce borrowing costs”, added Mr. Banerjee.

Economic outlook 2014: New Indian government will have to hit the ground running

The Indian economy stands at a critical juncture today. 2013 has been one of its most disappointing years, with GDP growth plummeting to sub-5% levels even as inflation has remained stubbornly high. It has successfully tackled some macroeconomic problems such as the widening of twin deficits and currency depreciation. But equally challenging problems in the form of a growth slowdown and rising food inflation persist. It is therefore natural that industry is hoping for better times in 2014. The new government will have to hit the ground running on economic policy in order to provide confidence to investors. Enlightened action by a new government is required to put the economy back on track. 

In an article in the Times of India, Mr Chandrajit Banerjee, Director General, CII highlights key economic issues for 2014. 

http://timesofindia.indiatimes.com/home/opinion/edit-page/Economic-outlook-2014-New-government-will-have-to-hit-the-ground-running/articleshow/28298595.cms?