BT's Business Confidence Index: Will Q4 bring happy tidings?

Over the past several months, the economy—both in India and globally—has been on a roller-coaster ride, with positives and negatives intermingling to create a heady concoction of sentiments. Almost fittingly, the Business Today-C Fore Business Confidence Index (BCI) has mirrored this sway between hope and despair. In the January-March 2022 quarter, the index had risen to 55.2 from 48.4 in the previous quarter. In April-June 2022, it fell to 51.2. Then in July-September 2022, the BCI rose again to 52.5, only to fall again to 51.4 in the October-December 2022 quarter, the second- lowest for calendar year 2022.

Having said that, business confidence looks to be assuredly on an upward trajectory. In the 12 quarters between calendar years 2019 and 2021, not even one had seen the BCI cross the 50 mark. In 2022, all four BCI surveys returned index values of more than 50, something that was last seen in 2015. So, overall, business confidence appears to be improving. “There are several other indications of cautious optimism for the coming year—including the Reserve Bank of India Consumer Confidence Survey, which indicates recovering consumer confidence and improved perceptions of general economic situation, employment and household income; the S&P index shows rising industrial output and improved PMI (purchasing managers’ index, an indicator of business activity); and the IIP index is rebounding,” says Richa Roy, Partner at Cyril Amarchand Mangaldas. “A combined reading of various indices indicates cautiousness but also measured optimism for the year.”

Looking at a few individual parameters in the BCI survey for October-December, the 500 respondents of the survey were positive on overall economic conditions, financial situation of their business, and demand conditions, with all three returning values of more than five (on a scale of 10). But hiring conditions and profit margins returned values of less than five, indicating poor expectations. In particular, the IT industry has seen large-scale employee layoffs recently. “The hiring in the IT/ ITeS sector continues to be impacted by gradually rising inflation in domestic as well as exports markets, and fear of recession in the developed markets, particularly the US and Europe,” says Hetal Gandhi, Director-Research at CRISIL Market Intelligence and Analytics. “The trend is likely to continue in the near term as some companies are focussing on utilising the excess employee strength built up over prior quarters and giving impetus to upskilling or reskilling existing employees.”

When asked about projections for the next quarter (January-March 2023), here too, the respondents were positive about prospects for their business, overall economic situation, and demand conditions. However, they remained low on confidence on hiring conditions and profits. “Hiring conditions are unlikely to change materially in Q4 given that recessionary environment in global markets continue to weigh over incremental employee strength required for IT/ ITeS companies,” says Gandhi. “However, the same may not translate into rising profits due to an expected slowdown in the order book in the near term.”

And, not unexpectedly, most respondents said ‘no’ to a query on capex plans for the next quarter. Roy, though, says that conditions are conducive for private sector investments in both greenfield and brownfield areas—deleveraged corporate balance sheets; strong bank balance sheets with historically low NPAs; strong FDI and portfolio flows, improving business climate and structural reforms.

Meanwhile, on other questions, inflation remained a top worry for businesses, despite retail inflation moderating to 5.7 per cent in December 2022. “Inflation has come down faster than expected (following the RBI’s repo rate increases), but it has come down because of vegetable price declines, which are very unpredictable,” says Dharmakirti Joshi, Chief Economist of CRISIL. “The non-vegetable inflation is still at 7.2 per cent, and core inflation is showing no signs of budging as of now.”

In the overall macroeconomic scheme of things, the respondents of the survey said they were happy with India’s economic growth, although we should be concerned given headwinds being faced by the developed western economies. “Three factors have turned adverse in the current fiscal and will show up even more in the next fiscal—first, slowdown in advanced countries that will hit our exports; second, the central bank has been increasing interest rates and all rates are now above pre-pandemic levels; and third, the geopolitics has become messy and it keeps playing on the sentiments,” says Joshi of CRISIL.

Another roller-coaster ride in 2023? Good question.

@alokeshb