The National Council for Applied Economic Research conducted the 92nd round of Business Expectations Survey (BES) in the month of March 2015 which reveals that business sentiment has fallen sharply. The Business Confidence Index (BCI) decreased by 6.9% over the previous quarter from October 2014 to December 2014. All components of BCI declined between January and April 2015.
If the BCI increases for a particular round, it is due to the larger proportion of positive responses in that round. The positive responses may increase for a specific question. An increase in the level of BCI reflects optimism in the business sector on the performance of the economy.
What were the Firms’ views about macro factors? –
According to the data collected from the firms, overall economic conditions are expected to be better in next six months’ and the present investment climate has deteriorated the most compared to January 2015.
How is the Business Confidence in various sectors of the Economy?
All sectors of the economy, other than the Consumer durables sector registered a fall in BCI over the last quarter, with the Services sector showing the largest fall of 13.6% followed by the Capital goods sector at 13.1%. The consumer durables sector registered a marginal increase in BCI of 0.8% over the previous quarter. The regional distribution of responses reflects mixed perceptions. All regions, other than the South, show a decline in BCI, with the East falling the most. The BCI of the East fell by as much as 18.9 % followed by the West, 9.5 %. The BCI of the South increased by 0.8 %. The disaggregation of responses by firm size also exhibits pervasive gloomy sentiments. The BCI of the Rs.1 billion to Rs.5 billion firms declined the maximum, 9.2 %. This was followed by the less than Rs.10 million firms whose BCI declined 8.6 %. The only group that showed a marginal increase in BCI is the Rs.100 million to Rs.1 billion firms, whose BCI increased 0.4 %.The distribution of firms by ownership type reveals deterioration in all categories, with Partnership/ individual-owned firms falling the most.
Sentiments regarding production, domestic sales, exports, imports of raw materials and pre-tax profits are mixed. Sentiment regarding sales and exports was subdued, with larger firms not expecting an increase in either, sentiments regarding production were discouraging.
How is the Political Confidence Index (PCI) trending?
The trend of a continuous rise in the Political Confidence Index (PCI) reversed in April 2015 when PCI fell 8.9 % over the last quarter. Components of PCI show mixed results, with only two improving and six deteriorating. Across industries, PCI fell for all groups, with the Consumer non-durables’ group falling the most. With regard to regions, only the East showed a marginal rise in PCI while others fell sharply. Firm size wise, the Rs.1 billion to Rs.5 billion companies are the only ones to show an increase in PCI.
The firms are reporting lower than expected growth in sales and profits for the quarter ended March 2015. Some of the companies are even reporting a decline on a year on year basis and sequential quarter on quarter basis. Read Our Monthly Market Analysis – Growth not in line with Valuations for many Sectors, Be Careful – Market Movement Analysis May 2015. The trend has been seen starting from the second half of FY 2014-15. The sentiments are expected to revive in the next six months according to the Business Confidence survey.
Will the sentiments Revive?
The question now remains is what factors could dampen the sentiment further or which ones could revive it. Due to global linkages for most of the economies any event or changes can lead to further deterioration or improvement in overall business conditions. The factors to watch out globally include the much awaited interest rate hike for the US economy along with uncertainty in Greece about debt repayment. Any positive outcome on the above front can revive sentiments and help in a quicker sentiment boost for business conditions.
Interest rates in India has already been cut by 50 basis points in the year 2015 and it is expected that there can be additional rate cuts based on inflation trends in the remaining part of the year. Inflation expectations do not indicate a sharp rise in the coming months with the RBI targeting inflation under 6% for the month of January 2016. Normal monsoons will keep down inflation expectations however given high foodgrain production in the last three years, below normal monsoons are not likely to have a major impact on food prices.
Even if the RBI cuts interest rates in the policy meeting on 2nd June 2015, it would take time for the effect to percolate to industry level. The quarterly revenue and profitability growth is thus expected to be muted in the first two quarters of FY 2015-16.
Rise in the service tax to 14% is another dampener to the business community but the increase is justified as there is a strain on the Government finances with a lot of pressure on the new government to contain the fiscal deficit that was 4% of the GDP at the end of March 2015. The service tax is currently levied at the rate 12.36% including education cess. The new rate of 14% announced by Finance Minister Arun Jaitley in his Budget for 2015-16 would come into effect from June 1 2015.
