Time changes fast in the corporate world. In June, business confidence was at its lowest in two years, but about three months later, the sentiment has moved up to its highest level in 10 quarters. What has changed in just a quarter to justify this swing? Leading economists say a lot of factors have contributed to the sharp rise in Business Today’s latest BCI (Business Confidence Index). On a scale of 100, for instance, BCI jumped to 49.6 in the September quarter, compared to 43.2 in the June quarter. Given that the latest BCI is at a 10-quarter high, it is a strong indicator of buoyancy in the confidence levels of business leaders. Market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey.
“Covid-19-related uncertainties have receded materially during the quarter ending September. That has been the key source of optimism for businesses, especially as against a particularly harsh situation in the previous quarter. On the ground, a number of high frequency indicators, including PMI [Purchasing Managers’ Index], tax compliance, consumer sentiment and spending have improved ahead of the festival season. Better credit availability and buoyant financial markets might have fed into the positive sentiment as well,” says Siddhartha Sanyal, Chief Economist and Head-Research, Bandhan Bank.
Ratings show major improvement across all five parameters—overall economic conditions, financial situation, demand conditions, profit margins and hiring conditions—that form the survey. For instance, corporate leaders have given a rating of 4.9 (on a scale of 10) to financial situation, compared to 4.1 in the previous one. Though the ratings across parameters are below the half-way mark, they are above 4. “The second Covid-19 wave was damaging from the health perspective but not for economic activities. Larger firms are doing well. They have better access to capital, higher capacity utilisation levels, and are beginning to invest. Smaller firms are struggling... This optimism might be true for large firms but not for smaller ones,” says D.K. Joshi, Chief Economist, CRISIL.
The survey says that 45 per cent of respondents expect a boost in economic activity and employment from the government’s asset monetisation plan. In August, the government launched a massive Rs 6-lakh crore asset monetisation pipeline that aims to monetise coal mining projects, airports and railways over the next four years. Sceptics say the government’s track record with disinvestment does not give them confidence that the targets will be met. For instance, between FY12 and FY20, disinvestment targets were achieved just twice.
“The asset monetisation programme is to generate revenues for the government which it will use for investment, and that can, in turn, generate jobs, etc... Implementation is the key challenge. But if implemented well, it can unlock resources for public investment,” says an economist who spoke off the record as he isn’t authorised to speak to the media.
Some 80 per cent respondents said they are financially prepared to deal with a possible third wave of Covid-19. CRISIL’s Joshi says businesses have learnt to live with the virus. “There’s a level of confidence that each coming wave will be less damaging to the economy and, therefore, they are prepared to deal with that,” he says.
Business leaders are sanguine about the December quarter as well. Apart from hiring conditions, ratings for all other parameters—economic prospects of the business, overall economic situation, demand conditions and profits—are above 5.
The Reserve Bank of India has lowered its forecast for retail inflation in FY22 to 5.3 per cent. While it is lower than the RBI’s target of below 6 per cent, some experts argue that interest rates could harden if inflation goes up. But 63 per cent of the survey’s respondents don’t expect higher cost of funds or higher interest outgo over the next 6-12 months. “The central bank is not in a hurry to raise interest rates,” says Joshi.
As a short-term relief for businesses, the government and the RBI have provided guarantees, moratorium, and two-year loan restructuring during the pandemic. Over two-thirds of the respondents were of the view that corporates will face financial stress when those measures are rolled back over the next few months. “That’s one factor we need to watch in the coming months. However, policymakers have been preparing market participants for the same for a while. It’s expected that a sizeable number of borrowers and financial institutions are prepared,” says Bandhan Bank’s Sanyal.
As a supplement to the survey, we assess other economic indicators like export-import, index of industrial production (IIP) and consumer price inflation (CPI). In July, IIP grew 11.45 per cent on an annual basis, and CPI cooled off a bit to 5.3 per cent in August. Exports jumped 21.3 per cent in September year-on-year, while the spike in imports was 84.6 per cent.
Even as the survey paints a rosy picture, economists say they are getting mixed signals. While economic activity is normalising, there are fresh concerns.
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