Weak Demand Weighs on Sentiment and Company Financials
Indian business sentiment eased for the second consecutive month in December as orders weakened and disinflationary pressures intensified.The MNI India Business Sentiment Indicator, a gauge of current sentiment among BSE-listed companies, fell slightly to 60.7 in December from 60.9 in November. The fall in sentiment was observed across both manufacturing and service companies, while sentiment among construction sector companies rose, offsetting the previous month's sharp fall.
Confidence has gradually declined throughout this year, with the Business Sentiment Indicator averaging 61.3 in the three months to December, the weakest quarter in 2015 and the lowest outturn since Q4 2013.
Weak domestic demand continues to bear down on business confidence. Production and New Orders were down 9.7% and 8.6% on the year 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 with the Export Orders Indicator rising 6.1% in December.
Companies faced lower costs for raw materials and other inputs owing to the fall in crude oil and other commodity prices. Some companies reported that they had 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 may well explain the fall in the Financial Position Indicator to the lowest since October 2013. High debt and low sales have also hurt firms' balance sheets this year as evidenced by the decline in the indicator to 64.1 in Q4, the lowest level since Q2 2013.
Commenting on the latest survey, Chief Economist of MNI Indicators Philip Uglow said, "The decline in business sentiment throughout 2015 casts some doubt over the sustainability of growth in India. 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."
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"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 RBI to use monetary policy effectively to support the economy."
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