India resilient in the face of adversities

This year’s Deloitte survey suggests that CFOs might have already been rolling up their sleeves to take investment risks as their optimism about India’s economic prospects reaches new heights.

CFOs are already on the road to recovery from the recent economic and regulatory disruptions (willing to take investment risks), according to Deloitte’s annual CFO Survey for 2017. Given the macro-economic trends that point to a possible global growth revival, there will be opportunities to increase exports and investment, which have been a concern for the past few quarters.
 
Much of the optimism is because of economic resilience in the past few quarters despite weak global growth, increasing global uncertainties due to Brexit and US elections, and, more importantly, the government’s demonetisation move in November 2016. The liquidity squeeze in the economy, following the note ban, disrupted economic activity (as suggested by the data on industrial production and auto sales), but the economy quickly bounced back.
 
GDP grew 7.1 per cent year-over-year in FY 2016-17 and the Reserve Bank of India (RBI) expects economic activity to retain this momentum in the current fiscal year as well; GDP is projected to clock 7.5 per cent growth in FY 2017-18. In addition, other economic fundamentals continue to remain strong. Inflation, so far, has been low and might undershoot the RBI’s inflation forecast. Despite a strengthening rupee and modest rise in oil prices, the current account deficit has remained range-bound and is expected to be within 1-1.5 per cent in FY 2017-18.
 
Moving Beyond Demonetisation
 
As the dust slowly settles, it is now widely believed that concerns related to demonetisation were transient. Simultaneously, a tangible long-term benefit of the process appears to be emerging: a gradual move towards a digital economy. Post demonetisation, there has been a sharp increase in usage of digital channels such as point of service (PoS) machines, m-wallets, and mobile banking.
 
This could have positive implications on tax revenue generation as more transactions get digitally recorded. Currently, India’s tax revenue generation is 16.6 per cent of GDP and is much lower than the average of 21 per cent among emerging economies. This may enable the government to step up capital expenditure, while consolidating fiscally.
 
What to watch out for
 
The transition to GST system may disrupt the working cycle for many companies for sometime as they have to modify their supply chain based on the assessment of tax savings and inventory management costs. In addition, the average burden of service tax has risen to 18 per cent from the current 15 per cent levels, which may fuel inflation in the economy. However, Deloitte believes that the better flow of input credit will negate the impact of higher rates on services.
 
Compliance with the changing regulatory environment transpires as the topmost priority for the CFOs, with 69% considering it a near-term priority and 61% CFOs stating that internal control and streamlining is their near-term priority.
 
In comparison to last year’s CFO Survey results, the CFOs’ near-term, medium-term and long-term priorities are almost same in terms of profitable growth. Business partnering and compliance with changing regulatory environment has witnessed a growth of 5 percentage points and 7 percentage points, respectively, for the CFOs’ near-term priority versus last year.
 
With the Indian economy adopting GST, companies have shifted their focus to supply chain modification and inventory cost management which might disrupt their working cycles. This change could fuel inflation in the economy as the tax burden has risen. However, it is believed that better flow of input credit will negate the impact of higher rates on services.
 
Macro Economy
 
In comparison to last year’s survey, a positive expectancy has been observed among business leaders with respect to India’s medium to long-term economic outlook—30 per cent and 56 per cent of CFOs are now ‘very optimistic’ about economic prospects over the next 2-3 years and 4-5 years, respectively. Thus, a substantial increase in business confidence and the willingness to take risks bode well for capital investment growth. 
 
Industry Expectations
 
Companies are undergoing critical transformation with upcoming technology and regulatory changes. These changes pose challenges for CFOs every day to stay ahead in the race of disruptive technologies and unforeseen competitive threats. The survey reveals CFOs’ top challenges in the changing technology and regulatory environment. 
 
From an enterprise perspective, technology integration/upgradation (23 per cent) and analytics solutions (17 per cent) continue to dominate CFOs’ key focus areas. This is due to the increasing importance of technology and analytics for decision making and strategy of the organisation. As the business environment shifts towards a more data centric future, it has become inevitable for CFOs to implement various technologies for different aspects of finance including analytics, fraud monitoring, risk management, etc.
 
Business Focus and Risks
 
The key focus area for 44 per cent of the CFOs is current geographies in lieu of entering new markets, of which more than 50 per cent CFOs are from energy, manufacturing, technology, media and telecommunication sectors.
 
In terms of external risks, 19 per cent of the CFOs believe regulatory impediments and 14 per cent of the CFOs believe uncertainty in tax environment are the two major external risks faced by companies currently as a result of changing regulations and policies.
 
On the other hand, 15 per cent CFOs shared their concern for execution against the plan/ strategy, whereas 15 per cent CFOs are concerned about cost and productivity improvements with respect to internal risks.
 
Current Finance Priorities
 
Compliance with the changing regulatory environment transpires as the topmost priority for the CFOs, with 69 per cent considering it a near-term priority and 61 per cent CFOs stating that internal control and streamlining is their near-term priority.
 
The survey highlights the stance of CFOs in India on various facets of the Indian economy, investment climate, industry expectations and CFOs’ role and readiness. 

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