Reversal of Gains in Business Confidence Index: NCAER MasterCard Worldwide Index of Business Confidence

Study reflects weak performance of various leading economic indicators leading to dampened business sentiments

India, Bangalore August 22, 2012: The current round of Business Confidence Index (BCI) shows a decline by 6.2 percentage points over the previous quarter, according to the latest NCAER (National Council of Applied Economic Research) MasterCard Worldwide Index™ of Business Confidence. The last quarter of FY 2011–12 showed a remarkable recovery in BCI after registering five continuous declines, thereby reflecting a change in the business environment. However, weak performance of various leading economic indicators has dampened the business sentiments in the present round of the survey which registered a drop to 126.6 points from 134.9 points in April 2012. Although the present index value is comparatively lower than the last quarter, however, it continues to be higher than the BCI recorded in October 2011 and January 2012. This clearly indicates a reversal of gains seen in April 2012.

The 81st NCAER MasterCard Worldwide Index of Business Confidence is based on a quarterly 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 weightage.

 The decline registered by the present round of survey is all-pervasive with all the four components of BCI registering a decline in the optimism level. The lower business sentiments reflect the impact of slowdown in the economy.  India's GDP growth slipped to 5.3 percent in the last quarter of 2011 - 12 as against 6.1 per cent in the previous quarter. This is the lowest growth rate recorded in nine years mainly due to poor performance of the manufacturing sector.

"After reflecting a positive change in the Indian business environment during the quarter ending March 2012, the present round of the NCAER MasterCard Worldwide Index of Business Confidence reveals lower optimism levels in the pattern of business sentiments. However, different sectors have responded differently to the changing economic scenario, and 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 Mr. T. V. Seshadri, Division President, South Asia, MasterCard Worldwide.

Dr. Shashanka Bhide, Senior Research Counselor, NCAER, notes that there are both external and domestic factors causing decline in business optimism. The advanced economies have shown weak recovery and capital markets are not supportive of investments. The overall WPI inflation rate has remained below the high levels in 2011-12 but food prices have kept the consumer price index high. The economy requires a policy stimulus to expand production capacity to ease price pressures.

Overall, the manufacturing sector firms are less optimistic about improvement in sales in the next six months, while the service sector firms’ show improved expectations. The lower expectations with reference to sales are one of the factors behind the drop of the business sentiments in manufacturing sector. Among sectors, while consumer goods and service sector firms reflect higher optimism for exports, the firms in intermediates and capital goods sector show lower expectations. Among the sectors showing a decline in BCI, the highest fall is registered in intermediates sector followed by capital goods sector. Consumer non-durables sector shows marginal decline of less than one per cent. Overall, the BCI is the highest in services sector (138.7), followed by consumer non-durables (134.6) and consumer durables (133.3). Capital goods sector BCI is at 121.9, while intermediates sector has recorded the lowest business confidence among the five sectors at 116.8.

There is an expectation of moderation in input cost per unit of output in the short run. The survey also points towards weak employment conditions and no significant improvements in the wage rates for labor in the next six months. The survey shows no change in the average inventory levels. The length of order books shows decline. The survey also captures moderation in the expectations of output prices in the next six months.

 Regional Patterns of Business Confidence

According to the findings, disaggregation of responses by regions shows that except South, the other three regions show a decline in BCI. Overall, the survey reflects weakened business sentiments in all regions except the South where situation has improved. Capacity utilisation shows decline across all the regions, although the main concerns emerging from this survey responses are the overall economic conditions and financial position in the short run as both these indicators have reported significant decline in the present survey. The investment climate is also not favourable, especially in the East and the West. Among all the four regions, western region has emerged as the one with continued low sentiments, while the northern region has recorded the highest BCI among the four regions despite a decline in regional level BCI.

Business Confidence by Size of firm and Ownership Type

The present survey reflects diversity in the perceptions between public and private sector firms. Unlike the previous round when business sentiments in public sector firms showed decline while private sector showed improvement, the present survey reveals the opposite trend. In July 2012, the survey reflects improvement in public sector firms while private sector firms showed decline. There is also a difference in the perceptions across size categories of firms. The smallest category firms revealed an improved situation, whereas, the sentiments in the largest category firms have remained stable. All other categories of firm size reflected a decline in optimism. Overall, the present round of the survey reveals weakened capacity utilisation for all categories of firm size. While economic conditions and financial position are still the main area of concern for middle and larger sized firms, investment climate remains the issue for larger categories of firm size.

The survey that focuses on trends within firm-specific business outlook indicators also includes a Political Confidence Index (PCI) and a special section on Assessment of Three Financial Market Rates in FY 2012–13. The latest survey was conducted in June 2012 and received 548 responses. The data was collected through personal interviews and questionnaires sent to a diverse range of businesses across various regions in India. The Index and its accompanying report do not represent MasterCard financial performance.

Special section on Assessment of Three Financial Market Rates in FY 2012–13

The latest survey has a special section on Assessment of Financial Market Rates in FY 2012-13. This study aimed to capture the expectations and assessment of business sector with regard to future trends in light of the current macroeconomic scenario. The results indicate that while inflation rate is expected to be lower, it will still be in the range of 8-9 percent during April- September 2012 and 7-8 percent in the next six months. Although interest rate on working capital is expected to decrease, the longer term credit is expected to be more expensive. Similarly, rupee is expected to regain some of its value but more not significantly. Polices to revive investment climate and grants will have to be more effective to translate their impact on business decisions.

 Political Confidence Index (PCI)

The current round of Business Expectations Survey (BES) in the latest survey results shows that the Political Confidence Index (PCI) has dropped further in the quarter by 12.9 per cent over the previous round. As in the last round, where seven out of eight indicators showed decline, the current round shows decline in six out of eight indicators such as (i) managing overall economic growth, (ii) managing government finances, (iii) managing unemployment, (iv) managing exchange rates, (v) external trade reforms, and (vi) pushing economic reforms forward.

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

Factors

July - 12

April - 12

Managing Overall Economic Growth

29.4

33.2

Managing Government Finance

34.1

37.2

Managing Inflation

19.0

18.8

Managing Unemployment

16.4

18.8

Managing Exchange Rate

17.7

28.3

Managing Conducive Political Climate

20.3

19.9

External Trade Negotiations (both bilateral /multilateral)

23.9

27.9

Pushing the Economic Reforms Forward

22.1

26.0

Political Confidence Index

72.2

82.9

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 seven out of eight PCI components showed decline, the current round shows decline in six out of eight components. The highest fall is reported in the case of managing exchange rate by a whopping 10.6 points followed by managing external trade negotiation (4.0 points) and pushing economic reforms forward (3.9 points). Exchange rate plunged to the lowest level ever against the US dollar in June 2012. Managing inflation shows slight improvement in the current round perhaps because of decline in inflation rate in the last six months of the previous fiscal year.

 The survey results indicate that the aggregate PCI in consumer non-durables, consumer durables, intermediate sectors, capital goods, and services witnessed a decline of 6.5, 6.5, 11.9, 9.5, and 13.5 points, respectively. This has also lead to a decline in PCI across both manufacturing and services sectors. The highest decline in PCI in the current round is reported in service sector with 13.5 points and the lowest decline is reported both in consumer durable and non-durable sectors with 6.5 point each.

 Region-wise results suggest a fall in three regions except South as was the case with BCI. Among all the regions, South registered the highest improvement in six out of eight indicators. The highest decline is seen in eastern region followed by western region.

Firms in all the five different sizes have witnessed a declining trend. Respondents in small size firms having annual turnover of less than Rs 1 crore and large size firms having annual turnover between Rs 100 and 500 crore reported a declining trend in all the components of PCI. In terms of aggregate political confidence by the type of ownership, public sector firms exhibit significant increase in PCI from 65.9 per cent in the previous round to 75.9 per cent in the current round. This increase in aggregate PCI may be largely attributed to perceived improvement in managing government finances, managing inflation, managing exchange rate, and managing conducive political climate by the government. Remaining components showed a declining or unchanged assessment.


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