When Will The Tide Turn?

The Business Confidence Index has fallen to a five-year low of 119.9 as pessimism spreads in India Inc. However, governments across the world are taking extra efforts to combat the slowdown. It remains to be seen how these measures play out in the coming quarters

INDIA INC’s business confidence has ebbed further. This is reflected in the 66th round of the ET-NCAER Business Expectations Survey (BES) for the quarter ended September ’08. The Business Confidence Index (BCI) has dipped to a five-year low of 119.9, as companies’ expectations have worsened on all the four parameters, viz overall economic conditions, financial position, investment climate and capacity utilisation levels. The index stood at 154 in January ’08, but has consistently deteriorated since then.

Although all these four criteria — which carry equal weightage in the BCI — suffered, unlike in the previous round of the survey, the dip in confidence in the current round has not been uniform across regions, sectors or size of companies. With the passage of three months since the previous round of the survey, many respondents seem to have given in to the barrage of negative news. In fact, several groups, which had remained bullish earlier, have now turned bearish. At the same time, those respondents who had posted the largest fall in confidence in the previous round have mostly remained unchanged.

ALL’S NOT LOST
The services industry has seen a healthy revival in sentiment to emerge as the sector which is most hopeful about the overall economic conditions. In the previous round, this sector was the most pessimistic about overall economic conditions. The intermediates sector is the least affected, as it remains the most optimistic about the current investment climate. Nevertheless, the sector has witnessed a fall in respondents who expect a growth in production and sales over the next six months. However, the capital goods industry, which had seen the maximum decline in confidence level in the previous round, has turned out to be the biggest loser in the September ’08 quarter as well.
There has been a marked increase in the number of respondents expecting a growth in sales over the next two quarters. Despite this fact, the services industry remains the most pessimistic about the investment climate and financial position over the next six months. With the increased optimism about higher production and sales, the expectations on the profits front over the next six months have also increased. However, there has been a fall in the number of respondents expecting profit growth in excess of 10%. WEST, SOUTH KEEP THE FAITH
In terms of regional comparison, the West and South have witnessed a surprising improvement in business confidence across all criteria. The southern region has emerged as the most optimistic, but the western region, which was the most pessimistic in the previous round, continues to languish at the bottom, despite its improvement in confidence. The North has witnessed weakness on all counts, with a particularly steep fall in outlook on the current investment climate.

SIZE MATTERS
Surprisingly, the smallest of companies in the group have joined the largest ones to register an improvement in confidence.
Companies with turnover of less than Rs 1 crore, as well as those with turnover exceeding Rs 500 crore, are more optimistic about the economic conditions, investment climate and capacity utilisation, but they don’t feel that their financial positions will improve.

PUBLIC VS PRIVATE
Public sector enterprises, which were buoyant in the previous round of the survey, also seem to have succumbed to the pessimism. This is reflected in a fall in their business confidence. The BCI for public sector companies has fallen to 120.7 in the September ’08 quarter from 149 in the June ’08 quarter, and the sector is now most pessimistic about the current investment climate and financial expectations.
The listed companies in the private sector, which figured at the bottom in terms of business confidence in the previous round, continue to maintain their position, with little change.

PRICE WATCH
Given the current economic downturn, there has been a decline in the number of respondents reporting a rise in raw material costs. The percentage of respondents which witnessed a hike in raw material prices during the preceding three months fell to 67.5% in the September ’08 quarter from 75% in the June ’08 quarter. Similarly, only 62% of the respondents now expect a price increase over the next six months compared with 70.4% earlier.
As a result of the worsening outlook, the labour market is also expected to remain subdued. Respondents reporting a wage hike or an increase in number of workers have come down sharply.
Still, there has been an increase in the percentage of respondents expecting a wage increase over the next six months.

KEEPING FINGERS CROSSED
As the recession has spread to major global economies, India Inc seems to be uncertain about its immediate economic future.
This is mainly due to a decline in those sections which had not fallen steeply earlier. However, several sectors of the industry hope to post healthy growth over the next six months. Governments across the world are taking extra efforts to combat the slowdown and have introduced several measures to this effect.
The results of these efforts will become visible gradually over the next 6-9 months. Till then, India Inc needs to wait and watch how these measures will affect its confidence in the coming quarters.

SHATTERED

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.