RBI forward looking surveys see green shoots of economic recovery

9 Aug 2022 , 10:37 AM

The gist of these surveys is to paint a picture of the health of the Indian economy from the consumer perspective and the producer perspective. The key takeaway has been that, the consumers and producers see some very distinct green shoots of economic recovery. That also explains why the RBI has maintained its real GDP growth target of 7.2% for FY23, with upward bias.

1.      Sustained recovery in Consumer Confidence

The consumer confidence survey for July 2022 compares the consumer confidence outcomes on a yoy basis. In terms of current situation survey, the consumers are positive on consumer spending and expect it to improve next year. While they are still negative on job creation, inflation and income levels in the current year, the respondents expect these parameters to improve in the next fiscal year. However, on the overall macro situation, the surveyed respondents remain pessimistic. That could be more due to negative global cues.

However, compared to the previous survey conducted in May 2022, there is an improvement in consumer confidence. The results are in line with a typical macro recovery. It is normally spending that is the lead indicator and that is where there is maximum optimism among consumers. It is said that hope springs eternal in the human heart. While the sentiments of consumers are mixed for the current context, most of the consumers are optimistic of the economic situation; one year done the line.

2.      Inflation expectations are trending lower

One of the approaches adopted by the RBI and the government in the last few months has been to address the issue of inflation expectations. An aggressive policy of hiking repo rates gives confidence to consumers about the intent of the government to contain price rise. That reduces inflation expectations. For July 2022, the inflation expectations have fallen by 80 basis points to 9.3%, compared to 10.1% during the May 2022 survey.

Even the outlook for inflation, one year down the line, is lower by 50-60 bps. In July 2022, the share of people who expect prices to increase; fell from 88.5% to 83.1% over May. While people are not too confident about a fall in prices, static inflation levels is the most common expectation. However, the survey only covers urban households, so conclusions are partial.

3.      Manufacturing Sector outlook for Q1FY23 shows demand optimism

At the outset, there has been demand optimism among businesses for the first and the second quarter of FY23. Most businesses have given a positive assessment of output, order books, capacity utilization, jobs and foreign trade. However, most manufacturers surveyed have also pegged a sharp rise in the cost of raw materials as well as arise in cost of funds in the first and the second quarters of FY23.

A large section of the manufacturers surveyed have also expressed confidence that they would be able to increase the selling price of products to compensate for the input cost spike. However, most of the manufacturers do anticipate the input cost pressures to ease during the third and fourth quarters of FY23.

The manufacturing outlook has to be read along with OBICUS survey for the previous quarter, which gives an assessment of actual data for order books, output and capacity utilization. The last OBICUS service for Q4FY22 brought out some inspiring numbers on the orders, output and inventory front.

Manufacturing capacity utilization overall touched 75.3% in Q4FY22, compared to 72.4% in Q3FY22. Now the capacity utilization is above the levels that India had pre-COVID. New orders in Q4FY22 were also substantially higher than the previous quarters. The table below captures this story best.

Quarter	Capacity Utilization	Finished goods inventory / Sales	Raw Material inventory / Sales
Q4 (2020-21)	69.4%	22.0%	27.2%
Q1 (2021-22)	60.0%	29.5%	36.9%
Q2 (2021-22)	68.3%	20.9%	29.4%
Q3 (2021-22)	72.4%	22.4%	28.0%
Q4 (2021-22)	75.3%	24.7%	30.5%

The steady rise in capacity utilization shows business confidence in demand conditions. On the other hand, the steady pick-up in the inventory ratios reflecting greater willingness and readiness to meet the demand for fresh orders.

4.      Macro indicators hint at growth optimism

Unlike other sections of the survey, which are addressed to consumers or to manufacturers, this is one part of the survey that is directed at professional experts and forecasters. There is a good deal of optimism visible in macro forecasts. For instance, the economists assign a high probability of 43% to the GDP growth in FY23 being in the range of 7.0% to 7.4%. For FY24, there is a 44% probability that growth could be between 6.5% and 7.5%.

There have been upgraded expectations too. Real private final consumption expenditure (PFCE) growth has been upgraded by 10 bps to 7.5% while the real gross fixed capital formation (GFCF) has also been upgraded by 10 bps to 8.8% for FY23. In terms of GVA (gross value added, the agricultural GVA has been downgraded by 20 bps to 3.0% for FY23 while the services GVA has been kept static at 8.3%. However, the good news is that the GVA of industrial output has been upped by 30 bps to 5.8% for FY23.

The expert view on inflation also corresponds with the consumer inflation expectations. They expect headline inflation in Q2FY23 to stay above 7% but gradually taper to 6% by Q4FY23, led lower by food inflation. However, fuel inflation is expected to remain static. The falling commodity prices will also reflect in WPI inflation, which is expected to taper from 13.5% in Q2FY23 to 10.0% in Q3FY23 and 7.4% in Q4FY23, as per the survey.

5.      Bank Lending and Services sector expected to show robust growth

These are two separate parts of the survey, but for simplicity, the two have been merged. For Q1FY23, the loan demand shows positive growth expectations across all the major sectors. However, the expectations have been toned down compared to previous quarters and that can be attributed to the spike in lending rates, which could impact loan demand. While loan demand in Q1FY23 will still be driven by infrastructure, services and personal lending; credit demand from manufacturing is expected to pick up sharply from Q2FY23.

Most of the service companies surveyed remained optimistic on top line growth and job creation. However, due to rising operating costs, there was general pessimism about profit margins. This trend is expected to continue in the third and fourth quarters also. On the infrastructure front, the overall revenues have crossed pre-COVID levels. However, cost pressures have made the respondents cautious about future margins.

To sum up the story of the RBI surveys, there is general optimism that the policy framework will support higher growth and gradual tapering of inflation. However, at a business level, there is still a lot of scepticism on the operating margins front.