After a minor jump in the previous quarter, business confidence stays on a downward slope as the second wave of the pandemic hits businesses, finds the latest Business Today's Business Confidence Index

Illustration by Raj Verma & Graphics by Tanmoy Chakraborty Illustration by Raj Verma & Graphics by Tanmoy Chakraborty

Covid-19 has hit the country’s economy hard. According to provisional data released by the National Statistical Office, India’s gross domestic product (GDP) contracted 7.3 per cent in FY21, the biggest dip since 1947. The second wave of the pandemic has affected all segments of the economy. As a result, corporate sentiment took a beating in the June quarter. On a scale of 100, Business Today’s Business Confidence Index (BCI) fell to 43.2 in the June quarter, against 45.5 in the previous quarter and 43.8 in the quarter before that. Market research agency C fore quizzed 500 CEOs and chief financial officers across 12 cities for the survey.

Economists say the dip is on expected lines. “This (survey) pertains to the quarter in which the second Covid wave impacted two months significantly. Many sectors of the economy are almost at standstill as far as demand is concerned. The confidence will remain low. It will show tangible recovery from the third quarter,” says D.K. Srivastava, Chief Policy Advisor, EY.

The latest survey shows deterioration on all five parameters — overall economic conditions, financial situation, demand conditions, profit margins and hiring conditions. Take financial situation. The respondents have given a rating of 4.1 (on a scale of 1 to 10), compared with 5.1 in the previous survey. Demand conditions have been rated 4, against 5.2 in the previous survey.

Around the time the survey was commissioned, which was in the second last week of June, it seemed the government was aware of the dire situation of India Inc. On June 28, Finance Minister Nirmala Sitharaman announced a package worth Rs 6.28 lakh crore for sectors such as healthcare, infrastructure, agriculture, exports and tourism. As many as 88 per cent corporate leaders who responded to the survey had wanted the government to come out with a stimulus package right away.

The survey also shows that nearly 32 per cent respondents expect the government to go for direct cash transfers, while another 26 per cent believe that boosting public expenditure can revive economic growth. Just 18 per cent think a stimulus for the private sector can bring the economy back on track.

Since the beginning of the pandemic, countries such as the US and the UK have been sending out cheques to their citizens. But the situation in India is different.

“India already has a public finance problem. It cannot afford to pay money to everybody,” says U.R. Bhat, Director at Dalton Capital Advisors, adding, there is a need to address some parts of the economy. “About a third of the population can take care of itself as either they are employed in the formal sector or have government jobs. The rest, who are in the agriculture sector or run small businesses, need help. The government is feeding nearly 80 crore people for the next five months,” he says, adding, “small companies and unorganised vendors have been unable to deal with the crisis. Data also shows that listed companies are gaining market share at the cost of small businesses. These people have benefitted through the government scheme where banks lend with a guarantee from the government. Given the constraints of the economy, this is a more scientific way of dealing with the issue rather than sending out cheques.”

Unlike the June quarter, the respondents were hopeful about the September quarter. They gave better ratings than in the previous survey on all five parameters — economic prospects of the business, overall economic situation, demand conditions, hiring and profits. Their rating for the overall economic situation in the next quarter was the highest at 4.7.

According to the survey, 75 per cent respondents said demand for their products and services fell 30-75 per cent in the last quarter. Economists say this demand slump is an outcome of substantial increase in savings as people prepare for the worst due to Covid-19 and the resulting economic slowdown. “Demand has been drastically cut. There would be a corresponding increase in savings. As a result, businesses have suffered because they are sitting on huge inventories. Demand pick-up will take more time. In terms of direct and indirect measures, the impact of recently-announced stimulus would be positive but limited. It is more important for the government to spend out of the budgeted expenditure in the earlier part of the fiscal year. At least the government should spend on its own. That should give some push to demand,” says EY’s Srivastava.

The survey also shows that 68 per cent of respondents don’t plan to make fresh investments in FY22. This has been the trend for several quarters now. Even though Reserve Bank of India data points out that aggregate capacity utilisation rose from 63.3 per cent in Q2 FY21 to 66.6 per cent in Q3 FY21, these levels are not substantial enough for businesses to start fresh investments at the moment.

As a supplement to the survey, we do an assessment of other economic indicators, including export-import, index of industrial production (IIP) and consumer price inflation (CPI). In April, IIP surged 134.44 per cent on an annual basis due to low base of the previous year. Retail inflation (CPI) rose to 6.3 per cent in May after staying below 6 per cent for five months before that.

While lockdown restrictions have eased over the past few weeks, the fear of a third Covid-19 wave is still right on top of the mind of consumers and businesses. The economic recovery over the next few quarters will depend on the speed of vaccination and how it can give confidence to businesses and people to spend.