India’s business confidence dips to one-year low on demonetization drive

Business confidence in India has slipped to a one-year low due to the demonetization drive introduced by Prime Minister Narendra Modi in November, according to a survey conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI).

The survey, conducted between December 2016 and January 2017, showed the country's Overall Business Confidence Index (OBCI) slipped to 58.2, compared to a figure of 67.3 for the same period last year. The survey drew responses from 207 companies and aimed to capture the assessment of the current situation, as well as gauge expectations regarding performance for the first half of this year.

"The sharp dip in current condition index can be attributed to the sudden spur of uncertainty created by the government's move to demonetize high value currency notes," the survey said. "Cash dependent sectors especially in the informal economy have been affected. The government has been working to minimize the impact of demonetization and the economy is on the path of normalization."

A man counts Indian rupee banknotes for a photograph near the Bombay Stock Exchange (BSE) building in Mumbai, India.
Dhiraj Singh | Bloomberg | Getty Images

While a number of respondents said they feel demonetization is a positive step towards reducing so-called "black money" and corruption from the economy, they saw an impact on sales. Some respondents indicated a time frame of three months for things to normalize, a few others said the process could take about a year.

In November last year, the government decided to introduce a new 500 rupee note and also introduce a higher denomination banknote of 2,000 rupees. However, ever since the announcement on November 8, thousands of people have faced long lines outside banks to exchange old currency notes for new ones. While analysts and celebrities across the country applauded this move, the crowds got more and more restless due to dependence on cash in their daily lives.

The move has however created constraints for corporates but the survey indicates that businesses foresee a pickup in demand (both domestic and external) over the period January 2017 to June 2017.

Around 58 percent of the participating companies foresee an increase in domestic demand over the near term; while 69 percent of the respondents expected external demand to increase over the next six months, according to the survey.

Compared to last year, the latest survey saw participants reporting a deterioration in the current conditions at all three levels – the economy, industry and at the corporate level. Only about 25 percent of respondents reported the current economic conditions as "moderately to substantially better" compared to the previous six months.

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