Graphic by Rohit Goyal/Mint
Graphic by Rohit Goyal/Mint

How can business sentiment be down if consumer confidence is up?

Two surveys indicate opposing trends in consumer confidence andbusiness sentiment. What are the reasons?

November’s MNI India Business Confidence Index, from the Deutsche Börse Group, finds that business sentiment fell to the lowest level since February 2014, with companies seeing little chance of a revival over the coming months.

This comes a day after another survey—ANZ-Roy Morgan India Consumer Confidence Index—saw consumer confidence rising sharply in November. Brokerages have been pointing to robust automobile sales this Diwali.

What explains these contrary indicators?

(1) We could conclude that surveys are less than perfect and it’s best to rely on hard data on production, sales, profits rather than woolly answers provided to leading questions.

(2) We could say that consumer expectations turn around first and business expectations follow.

(3) There may be a divergence between consumer and business expectations because business also includes exports, and it’s possible that business sentiment has been dampened by falling exports.

This month’s MNI business confidence survey points out what they call “The Make in India paradox". They say, “While Prime Minister Narendra Modi has been pitching India as a global manufacturing destination with the Make in India initiative, demand for goods made in India has been falling". Shaily Mittal, economist(India, Russia) at MNI Indicators, writes: “Our own business survey shows that the decline in business confidence among large Indian firms has been driven by lacklustre demand especially from abroad."

But the MNI survey also says that domestic demand has been sluggish and that auto sales have been driven by discounts. The report says, “Companies across all sectors received fewer orders in the three months to November compared with the same period a year earlier." In fact, the index for foreign orders moved up in November. Note that the MNI India Consumer Sentiment Survey for October showed confidence falling to a record low level among households.

That brings us to what could be the fourth reason for low business sentiment.

(4) Deflation in certain sectors and intense competition, especially from imports.

The MNI report says, “Sector data indicates that the rate of growth of production eased in the construction and manufacturing sector while it maintained its course among service sector companies." Services are mostly non-tradable, which gives them protection.

Whatever may be the reason for these varying trends, if what most economists are saying is right and the implementation of Seventh Pay Commission boosts consumption demand, then the dichotomy between domestic consumption and export demand is likely to get sharper in future.

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