Rise in Business Confidence Index after 5 quarters

31 May,2012

By A Correspondent


The Business Confidence Index in Indiais showing signs of improvement after five consecutive quarters in March 2012 according to the latest NCAER (National Council of Applied Economic Research) MasterCard Worldwide Index of Business Confidence. The 80th NCAER MasterCard Worldwide Index of Business Confidence is based on a survey which measures business confidence on four indicators.


They include overall economic conditions six months from now, financial position of firms six months from now, investment climate and level of current capacity utilization. All four indicators carry equal weight. The Index is released every quarter.


The Business Confidence Index (BCI) increased by 7.7 per cent over the previous quarter to 134.9 points from 125.2 points in January 2012. The rise in the Index indicates an increase in the investor confidence and expectation, irrespective of a global slump and high inflation rates. The Index also registered improvement in business environment for the first time since January 2011.


The study reflects stability in business sentiments and cautious outlook of the business sector. This change in business sentiments is backed by a number of changes that have taken place on both domestic and global front during the last quarter of FY 2011/12. While moderation in economic growth rates persisted, inflation rate also moderated and the food grain harvest in 2011-12 has been at a record level.


“NCAER MasterCard Worldwide Index of Business Confidence shows some significant changes in the economy during the quarter ending March 2012. After a dip in 2011, the index showed positive business sentiments during this time period. In light of the current challenging economic environment, the next quarter index will be worth watching. The study continues to provide great insights on the key factors that affect the business and political environment in India.” said TV Seshadri, Division President,South Asiaand Country President India, MasterCard Worldwide.


“It’s encouraging to see how the economy is recovering from the slump. The investors are regaining confidence and there is a positive outlook which has impacted this quarters result,” noted Dr. Shashanka Bhide, Senior Research Counselor, NCAER.


An analysis of the four indicators revealed an improvement in three out of four components of BCI over the previous quarter. Among the three, the largest improvement is in the case of present investment climate.


The survey focuses on trends within firm-specific business outlook indicators and also includes a Political Confidence Index (PCI) and a special section on Expectations and Evaluation of Union Budget 2012-13. The latest survey was conducted in March 2012 and received 528 responses. The data was collected through personal interviews and questionnaires sent to a diverse range of businesses across various regions inIndia. The Index and its accompanying report do not represent MasterCard financial performance.


Sector wise, analysis of BCI, revealed a marked improvement across all major sectors except consumer non-durables sector. Four of five major sectors of the economy reveal improvement in business sentiments. The consumer non-durables sector shows a decline where BCI slipped 4.8 per cent from 142.7 in January 2012 to 135.8 now.


An improvement in business sentiments is seen in the present round of survey, the highest optimism level being registered by firms in intermediate sector where BCI has jumped up by 14.5 per cent followed by services sector (134.5), capital goods sector (138.6) and consumer durables sector (135.8) with 7.2 per cent, 6 per cent and 4.2 per cent growth, respectively. Although business sentiments in consumer non-durables sector show decline, at the same time it exhibits the second most optimistic BCI among all sectors after capital goods sector.


According to the findings, business sentiments across all the regions reflect fair degree of uniformity in perceptions. Among four regions, three have registered improvement in business sentiments in the present survey. North has registered the highest improvement while South shows marginal fall over the previous quarter. Overall, the survey reflects improved business sentiments in all regions except South where although the present situation has improved, firms are still not sure about changes in the short run future.


On the whole, expectations with respect to overall economic conditions and to some extent financial position seem to remain the main issues of concern for the firms, especially in North and South.


The survey reveals a divergence in the perceptions between private sector and public sector firms on the one hand and smaller and larger firms on the other. There is a sharp increase in BCI for larger firms than smaller ones. Similarly, private sector firms show higher optimism while public sector firms show a decline.


The disaggregation of firms by ownership type reveals heterogeneity in the perceptions between public and private sector firms. The study reveals that while public sector firms show decline in the business sentiments, private sector firms showed an improvement. An improvement in overall BCI is mainly contributed by private sector firms as public sector firms reflect weak confidence.


Firms in the manufacturing sectors reflect expectations of greater improvement in domestic sales and production level as compared to firms in services sector along with improved profits over the next six months. The survey results also reveal expectations of higher input costs per unit of output such as for raw materials, labour, and electricity, in the short run. The ex-factory prices are also likely to increase. The survey also points towards improvement in employment conditions and higher wage rates for labour in the next six months. Given the expectations of higher sales and production by manufacturing firms, inventories are also expected to build up.


The latest survey has a special section on Expectations and Evaluation of Union Budget 201213. This study is aimed at capturing the expectations and impact of tax proposals made in budget 2012/13 on business sectors activities.


While majority of the respondents expected corporate tax to remain unchanged in the budget proposals, an equal proportion of respondents expected corporate tax rates to decrease or increase. More than 37 per cent anticipated excise duty would increase. In general, while there were apprehensions of increase in tax rates, there was also an expectation that the budget would reduce the tax burden. Post-budget it is found that significant proportion of firms report adverse effect of tax proposals. Only about 30 per cent of the respondents reported corporate tax rate proposal in the budget as satisfactory. The findings suggest that the business sector perhaps was expecting measures to boost investment and demand more directly and these may not have been realised.


Following two mild improvements in the previous quarters, the current round of BES in the latest survey results shows a decline in Political Confidence Index (PCI). The index has declined by 4.6 per cent from 86.9 in January 2012 to 82.9 in April 2012.


Nonetheless, the index still remains above its level recorded in July 2011. At regional level, two regions show fall in political confidence while the other two show improvement. Similarly, among sectors, two have registered a fall in PCI in April 2012 while the remaining three still hold up the optimism level.


The latest survey showed a drop in the ratings for seven of the eight components of PCI:


Factors Mar – 12 Jan – 12
Managing Overall Economic Growth 30.2 36.6
Managing Government Finance 37.2 39.4
Managing Inflation 18.8 22.3
Managing Unemployment 18.8 12.7
Managing Exchange Rate 28.3 28.5
Managing Conducive Political Climate 19.9 20.4
External Trade Negotiations (both bilateral /multilateral) 27.9 30.5
Pushing the Economic Reforms Forward 26.0 26.7
Political Confidence Index 82.9 86.9


The present survey shows that ratings of political management of the economic issues have declined compared to the previous quarter. Unlike the last round, where three out of eight PCI components showed decline, the current round shows decline in seven out of eight components. The highest fall is reported in the case of managing overall economic growth by 6.4 points followed by managing inflation (3.5 points) and external trade negotiation (2.6 points).


The survey results indicate that unlike BCI, which shows a decline in the consumer non-durables sector, the aggregate PCI in consumer nondurables, consumer durables and intermediates sectors witnessed an improvement of 5.5 points, 7.4 points and 5.1 points, respectively. The capital goods and services sectors witnessed decline by 19.1 points and 12.1 points respectively, indicating the aggregate PCI, which measures the overall confidence of business sector in the political management of economic policies, is not uniform across the manufacturing sectors.


Region-wise results suggest that PCI declined for two regions North & South and improved for the other two regions East & West over the previous round. In North, responses declined from 91 per cent in the previous round to 82.3 per cent in the current round. Southern region recorded a considerable decline of 11.6 points during same period. Across all the regions, eastern and western regions continued to maintain the trend of improvement with an increase of 9.2 points and 1.2 points respectively.


Out of the firms in five different sizes, two sizes witnessed improvement and the remaining showed a declining trend. The highest improvement is recorded in small firms indicating that small size firms are more optimistic in their assessment of political management of economic issues. Respondents in large size firms reported declining trend in PCI from 93.8 per cent to 85.4 per cent and from 109.9 per cent to 90.4 per cent, respectively from the previous round (January 2012) to the current round.

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