The Business Confidence Index in India continued its decline in December 2011 according to the latest NCAER (National Council of Applied Economic Research) - MasterCard Worldwide Index of Business Confidence. The latest Business Confidence Index (BCI) slipped marginally by 0.2 per cent to 125.2 points from 125.4 points in September 2011. The slippage indicates a steadying pattern of business confidence after a steep fall (13.6 per cent) in September 2011. The drop in the Index marks the fifth consecutive decline. This is also the lowest index value recorded since October 2009.
The prevailing low level of business sentiments is also consistent with the weak economic performance data. The GDP growth rate declined to 6.9 per cent in Q2 of 2011–12, the lowest quarterly GDP growth in the past two years. The decline in GDP growth is mainly due to the drop in the growth of manufacturing, mining and quarrying sectors. The Index of industrial production, another barometer of economic activity, grew only 1.9 per cent in September 2011 from a year earlier, far below market expectations. The improvement in IIP growth in November to 6 per cent points to the source of stability in sentiments
Now in its 10th round, the 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 capacity utilisation’. All four indicators carry equal weight. The Index is released every quarter.
The survey, which looks at trends within firm-specific business outlook indicators, also includes a Political Confidence Index (PCI) and a special section on credit scenario. The latest survey was conducted in December 2011 and received 543 responses. 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.
“The latest NCAER—MasterCard Worldwide Index of Business Confidence captures the sentiments of the weakening global economic environment and persistent high inflation. However, the slight improvement seen in the Political Confidence Index hints that India’s economic reforms may move forward. This study continues to provide great insights on the key factors that affect the business and political environment in India as well as its impacts,” said Mr. T. V. Seshadri, general manager, South Asia and country president India, MasterCard Worldwide.
“Weak and uncertain global economic conditions have had their impact on business sentiments. However, the relatively stable BCI in the current round of the survey reflects the economy may now have adjusted to these shocks and finding avenues for renewed growth” notes Dr. Shashanka Bhide, Senior Research Counsellor, NCAER.
An analysis of the four indicators reveals a mixed view of the respondents on business conditions. In the present round of survey, the first two components of BCI relating to expectations in the short run show further decline while the remaining two indicators capturing an assessment of the present situation show improvement. Sector wise analysis of BCI reveals a turnaround in the sentiments in three of the five major sectors of the economy as compared to the pattern in the previous quarter. The sectors that show improvement in the business sentiments in the present survey are consumer non-durables (up by over 12 per cent over October 2011) and durables and capital goods (up less than 2 per cent over October 2011). Firms in the intermediates (down by 2.6 per cent over October 2011) and services (down 3.6 per cent over October 2011) sectors show a drop in the business confidence.
The disaggregation of survey responses by regions also reflects differences in perceptions – two regions show turnaround in BCI while the other two continue the previous declining trend. In the present survey, among the four regions, East and South show improvement in the level of optimism whereas West and North show a decline. In the East, the confidence level has gone up by almost 3.8 per cent over the previous quarter whereas in South, it has improved by just 0.9 per cent. While West shows a drop in business sentiments by 3.9 per cent, North shows drop of 0.9 percent.
The pattern of changes in the business sentiments across firms of various sizes also reveals variations in the perceptions as well as across regions. Improvement is registered in the two smallest categories of firm size, that is with annual turnover of up to Rs.10 crore and those in the category of annual turnover of Rs.100–500 crore. The large and medium sized firms, however, show a decline in January 2012 by 1.1 per cent and 3.5 per cent, respectively. Despite the decline in the level of business optimism, the large sized firms (with annual turnover > Rs.500 crore) collectively have the highest BCI at 135.9 points, followed by the next largest firm-size category of Rs.100–500 crore at 127.2 points.
The heterogeneity in the perceptions of business environment is also carried over to the classification of firms by type of ownership. Two categories of ownership show improvement, while the other two show decline in business optimism. Public sector firms show significant improvement in the present round of survey from a weak base in the previous quarter. The BCI for this category has gone up by 14 per cent, reaching 146.2 points in January 2012 compared to 128.2 points in October 2011. On the other hand, private sector firms reflect mixed perceptions. While public limited firms show improvement in BCI, the other two categories, private limited and individual-owned or partnership firms show decline.
The latest survey has a special section on the credit scenario. This study aimed to capture the experience of the business sector with respect to credit and capital market conditions. As compared to the situation in April 2011, the availability of both working capital and investment finance has remained the same for more than half of the business sector respondents in the sample. The availability of investment finance is perceived to be less favourable than working capital finance. Respondents from the service sector find credit availability, for working capital or investment, to have remained unchanged in the last nine months as compared to the firms in the manufacturing sector. A smaller proportion of respondents in the service sector have found improvement in conditions relative to manufacturing sector. Across regions, perceptions of availability of credit have improved to a greater extent in the West, and North relative to the other two regions. About 47 per cent of the respondents in the category of smaller firms see improved conditions in credit and investment finance from April 2011. About 83 per cent of the respondents cite public sector banks as the source for working capital credit and 75 per cent for investment finance. Private sector banks are cited only by 46 per cent for working capital and 56 per cent for investment finance.
The current round of BES in the latest survey results shows continued improvement in Political Confidence Index (PCI) in the current round of BES following a marginal improvement in the previous round. The index has improved by 9.6 points from 79.3 in October 2011 to 86.9 in January 2012. Nonetheless, the index still remains well below its level recorded in January 2011. the components which have improved in the current round are (i) managing government finances, (ii) managing inflation, (iii) pushing economic reforms forward (iv) exchange rate, and (v) managing overall economic growth. The highest increase is reported in the case of managing government finances. The survey results also indicate a sharp decline in the management of unemployment relative to the assessment in the previous round. Management of conducive political climate, on the other hand, has declined marginally from 20.9 in October 2011 to 20.4 in December 2011.
The survey results indicate that the renewed optimism reflected in PCI is not uniform across the sectors. While PCI improved in the four major sectors, that is consumer non-durables, consumer durables, capital goods, and services, it witnessed a decline in intermediates sector.
Region-wise results suggest that PCI has declined only in one out of four regions in the current round similar to the findings of the previous round. There is considerable decline of PCI in western region and improvement in all the other regions. The responses from the western region show a decline of PCI from 70 in July 2011 to 60 in October 2011, a fall of 10 points. On the other hand, respondents from eastern, southern and northern regions reported an improvement of PCI by 9.4, 9.1 and 19.1 points, respectively, in the current round as compared to the previous one.
The perceptions on government’s political ability to manage the economic policies in coming months have varied by firm size. Out of the five firm size groups, three reported an increase of PCI in the current round over the previous one. Three firm sizes which have reported increase of PCI in the current round are with annual turnover of Rs 1–10 crore, Rs 100–500 crore and more than Rs 500 crore. Interestingly, both BCI and PCI declined in the present survey in the category of annual turnover of Rs 10-100 crore. But this consistency between BCI and PCI is not observed in all the categories.