The Business Confidence Index has crashed to a five-year low of 125.8. The mood is strongly negative across sectors, companies and regions. With a full-fledged crisis playing out in the global arena, growth in domestic demand remains India Inc’s only hope
THE weakness in the global economy, rising inflation and India’s worsening fiscal deficit find a strong echo in the 65th round of the ETNCAER Business Expectations Survey (BES) conducted in July 2008. The survey reports an across-theboard sharp fall in the Business Confidence Index (BCI) to a five-year low and paints a rather sombre picture for the rest of 2008.
The July 2008 survey shows an increase in the number of respondents who have a negative outlook on all the four major parameters measuring BCI — overall economic conditions, financial position, investment climate and capacity utilisation level. There is a silver lining though — while the number of negative respondents has indeed risen, more than half of the total number of respondents continue to have a positive outlook. However, when it comes to perceptions about the investment climate, the number of positive respondents has fallen below 50%.
The BCI, which gives equal weightage to all the four criteria, has slipped by 23 points to 125.8 points from 148.7 recorded in the survey conducted in April 2008. The fall is pervasive — across parameters, sectors, regions and company size.
SECTOR VECTOR
While the BCI of the services industry has taken the biggest hit, the consumer durables sector — which had slumped the most in the April survey — has recorded the lowest fall across sectors in the current round. The BCI of the capital goods sector remains significantly higher than all the other sectors.
ZONAL CHECKPOST
The western region, which was languishing at the bottom in the previous survey, has taken the biggest hit vis-à-vis other regions in the current round. The region’s BCI fell to 99.3 — substantially below the average level, making it the most pessimistic of all the four regions in the country. Though the percentage of positive respondents in the eastern zone has fallen marginally in the current round, it still remains the most optimistic of all regions in the country.
SIZE MATTERS
The business confidence of the biggest corporates (with a turnover above Rs 500 crore) and the smallest companies (turnover below Rs 1 crore) recorded the sharpest fall. While a worsening of the overall economic conditions was the primary reason for the fall in BCI of large players, sub-optimal capacity utilisation levels hit the smaller players hard. Among companies, private sector firms witnessed a faster erosion of confidence vis-à-vis their public sector counterparts. In fact, public sector companies are now more confident about the overall economic conditions as well as their financial position in 2008, compared to the sentiment in the April BCI survey.
LABOUR PANGS
As a result of the worsening outlook, the labour market, too, is expected to remain subdued. A majority of the respondents predict no change in their workforce. The number of respondents expecting a wage hike in the next six months has increased markedly.
A RAW DEAL
With double-digit inflation and soaring commodity prices, the raw material costs of domestic manufacturers have also shot up. More than 55% of the respondents — substantially up from just 24.6% in the previous round — report an over 5% jump in raw material costs over the preceding quarter. Over 70% of the respondents feel that prices will continue to increase in the next six months. The intermediate goods sector is likely to be the worst hit by rising raw material costs.
RATE WOES
India Inc expects interest rates to keep pace with the high inflation rate. The number of respondents expecting interest rates to rise beyond 12% has grown substantially. However, high interest rates are not expected to strengthen the rupee.
HOPE FLOATS
Although the overall business confidence is down, expectations about sales and production growth have improved. While on the one side, the number of respondents expecting a fall in production and sales has increased, the proportion of respondents expecting more than a 10% growth has also gone up substantially. In fact, the percentage of respondents expecting a more than 10% growth in the consumer durables sector has gone up to 41.8% in the July survey against 11.7% in the previous survey. With the outlook for exports weakening, higher production and sales reflect confidence in the demand growth within the country.
However, this does not mean that India Inc is bullish on its profit growth. The services sector is the most pessimistic, as over 77% of the respondents see no growth in profits over the next six months. But, on the other hand, more than 50% of the respondents expect consumer durables and capital goods sectors to record higher profits. The sudden fall in the BCI, although not totally unexpected, is certainly worrisome. The survey reveals that India Inc is already grappling with slower production and sales growth, pressure on margins, weakness in the labour market, slowing exports and weakening rupee. The strength being shown by the consumer durables and capital goods sectors and a potential for healthy demand growth in the domestic market are the only silver linings on a darkening horizon.
THE weakness in the global economy, rising inflation and India’s worsening fiscal deficit find a strong echo in the 65th round of the ETNCAER Business Expectations Survey (BES) conducted in July 2008. The survey reports an across-theboard sharp fall in the Business Confidence Index (BCI) to a five-year low and paints a rather sombre picture for the rest of 2008.
The July 2008 survey shows an increase in the number of respondents who have a negative outlook on all the four major parameters measuring BCI — overall economic conditions, financial position, investment climate and capacity utilisation level. There is a silver lining though — while the number of negative respondents has indeed risen, more than half of the total number of respondents continue to have a positive outlook. However, when it comes to perceptions about the investment climate, the number of positive respondents has fallen below 50%.
The BCI, which gives equal weightage to all the four criteria, has slipped by 23 points to 125.8 points from 148.7 recorded in the survey conducted in April 2008. The fall is pervasive — across parameters, sectors, regions and company size.
SECTOR VECTOR
While the BCI of the services industry has taken the biggest hit, the consumer durables sector — which had slumped the most in the April survey — has recorded the lowest fall across sectors in the current round. The BCI of the capital goods sector remains significantly higher than all the other sectors.
ZONAL CHECKPOST
The western region, which was languishing at the bottom in the previous survey, has taken the biggest hit vis-à-vis other regions in the current round. The region’s BCI fell to 99.3 — substantially below the average level, making it the most pessimistic of all the four regions in the country. Though the percentage of positive respondents in the eastern zone has fallen marginally in the current round, it still remains the most optimistic of all regions in the country.
SIZE MATTERS
The business confidence of the biggest corporates (with a turnover above Rs 500 crore) and the smallest companies (turnover below Rs 1 crore) recorded the sharpest fall. While a worsening of the overall economic conditions was the primary reason for the fall in BCI of large players, sub-optimal capacity utilisation levels hit the smaller players hard. Among companies, private sector firms witnessed a faster erosion of confidence vis-à-vis their public sector counterparts. In fact, public sector companies are now more confident about the overall economic conditions as well as their financial position in 2008, compared to the sentiment in the April BCI survey.
LABOUR PANGS
As a result of the worsening outlook, the labour market, too, is expected to remain subdued. A majority of the respondents predict no change in their workforce. The number of respondents expecting a wage hike in the next six months has increased markedly.
A RAW DEAL
With double-digit inflation and soaring commodity prices, the raw material costs of domestic manufacturers have also shot up. More than 55% of the respondents — substantially up from just 24.6% in the previous round — report an over 5% jump in raw material costs over the preceding quarter. Over 70% of the respondents feel that prices will continue to increase in the next six months. The intermediate goods sector is likely to be the worst hit by rising raw material costs.
RATE WOES
India Inc expects interest rates to keep pace with the high inflation rate. The number of respondents expecting interest rates to rise beyond 12% has grown substantially. However, high interest rates are not expected to strengthen the rupee.
HOPE FLOATS
Although the overall business confidence is down, expectations about sales and production growth have improved. While on the one side, the number of respondents expecting a fall in production and sales has increased, the proportion of respondents expecting more than a 10% growth has also gone up substantially. In fact, the percentage of respondents expecting a more than 10% growth in the consumer durables sector has gone up to 41.8% in the July survey against 11.7% in the previous survey. With the outlook for exports weakening, higher production and sales reflect confidence in the demand growth within the country.
However, this does not mean that India Inc is bullish on its profit growth. The services sector is the most pessimistic, as over 77% of the respondents see no growth in profits over the next six months. But, on the other hand, more than 50% of the respondents expect consumer durables and capital goods sectors to record higher profits. The sudden fall in the BCI, although not totally unexpected, is certainly worrisome. The survey reveals that India Inc is already grappling with slower production and sales growth, pressure on margins, weakness in the labour market, slowing exports and weakening rupee. The strength being shown by the consumer durables and capital goods sectors and a potential for healthy demand growth in the domestic market are the only silver linings on a darkening horizon.
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