India business sentiment falls back to pre-Modi level

In a major blow to the Narendra Modi government, which has completed its first year in office, an indicator of sentiment towards current and future business environment declined to the level seen during the reign of the former government.

The MNI India Business Sentiment Indicator, a gauge of current sentiment among BSE listed companies, fell by 2.5% to 62.3 in May from 63.9 in April. The current reading is the lowest since April 2014.

The indicator is compiled based on responses from more than 400 companies from manufacturing, service, construction and agricultural sectors. A reading above 50 indicates expansion.

The fall in sentiment comes in line with declines in output and orders, while pointing to a significant deterioration in business activity. New orders fell sharply to 57.1, the lowest since May 2013, while export orders declined to 53.6, the weakest since June 2013, despite the recent weakening of the rupee.

The indicator, which measures the effect of the rupee exchange rate, fell to a four-month low of 45.2 in May, with companies concerned about the increased cost of imports.

In addition, input prices increased to 58.6 in May from 55.9 in April, the highest since October 2014. Production declined to a near two-year low in May, as Modi's ambitious 'Make in India' project is failing to get off the ground.

"The May report confirms that the trend in business activity is down with overall sentiment, output and orders all continuing to fall from the Q4 peak," said Philip Uglow, chief economist of MNI Indicators.

"Along with the continued soft official data on production and exports, and the low level of inflation, we expect the RBI to decrease rates further at the June 2 monetary meeting."

The overall sentiment has improved following the two cuts to benchmark interest rates in 2015 from the Reserve Bank of India. Nevertheless, the impact was temporary.

The Modi government has received widespread criticism locally and internationally over its inability to make effective economic changes in the country, despite having enough power.