CII business confidence index indicates economic turnaround

New Delhi, Dec.30: In an indication of early signs of revival in business sentiments, the CII Business Confidence Index (CII-BCI) rose sharply to 54.9 in the third quarter (Oct ec) from 45.7 for the July-September 2013 quarter.

The pick-up in BCI for the current quarter comes as a major relief for the economy which has been braving the onslaught of the slowdown for the last several quarters and awaiting the return of growth.

However, the survey also strikes a note of caution as the downside risks to growth have still not abated and supply side bottlenecks continue to pose a problem.

“With some positive signals emanating from the global economy, which finds a resonance in our improved export performance and is causing our Current Account Deficit to decline, we believe that the slowdown in the domestic economy may have bottomed out in the second quarter and the trend could reverse henceforth”, observed Chandrajit Banerjee, Director General, Confederation of Indian Industry.

The 85th Business Outlook Survey is based on the responses from over 174 industry members. Majority of the respondents (63 per cent) belong to large-scale firms, while 12 per cent are from medium-scale firms and 25 per cent were from small-scale.

Further, 65 per cent of the respondents were from manufacturing sector while 35 per cent were from services.

Despite the fact that subsidies are likely to cross the budgeted target by a wide margin, and the impending Lok Sabha elections pose upside risk to government expenditure, as much as 53 per cent of the respondents expected fiscal deficit to remain below 5 per cent mark, broadly in line with the government’s target. While welcoming this, Mr Banerjee cautioned that “we need to be careful about the upward risk to fiscal deficit amid the scenario of weak economic growth translating into sluggish tax collection and the growing chances of disinvestment falling well short of target”.

The survey reveals that 58 per cent of the respondents expect an increase in their sales in the third quarter of 2013-14, much higher than 45 per cent who witnessed the same during the previous quarter.

As regards the input cost in the current quarter, majority of the respondents also expect it to increase. The silver lining, however, is that the percentage of respondents who expect expenses on raw materials, electricity, and wages and salaries to increase has declined significantly from the last quarter.

Against the backdrop of an expected improvement in sales growth and moderation in inputs cost, majority of the respondents (43 per cent) expect an increase in their pre-tax profit margin in the third quarter, much higher than 31 per cent in the previous quarter.

Another positive signal emerging from the survey is that an improvement in capacity utilization is expected in the current quarter.

As compared to 56 per cent respondents experiencing less than 75 per capacity utilization in the second quarter, only 45 per cent respondents expect capacity utilization to fall below 75 per cent in the third quarter.

Underlining the need for continuing policy intervention to step up investment, 53 per cent of firms did not expect their capacity to expand in the current quarter.

What is also encouraging is to note that the export prospects look positive in the current quarter whereas imports are seen to be restrained. 53 per cent of firms expected their exports to increase in the current quarter, up from 49 per cent in the previous quarter.

Similarly, 56 per cent of the respondents didn’t expect their imports to increase during the current quarter.

There are some areas of concern emanating from the survey. Majority of the respondents (42 per cent) felt that GDP growth in the current fiscal would settle in the range of 4.5-5.0 per cent, whereas only 28 per cent expected it to be in the vicinity of 5.0-5.5 per cent.

High inflation is another major area of concern which is exerting a downside risk to growth,. The largest proportion (41 per cent) of respondents expected inflation to cross 7 per cent mark during the current fiscal, which is a matter of serious concern.

Banerjee suggested that “Given that inflation is primarily being led by food products, the solution needs to be sought in the supply side in agriculture sector rather than tightening monetary policy.

The expectation of a healthy growth in agriculture output in the current fiscal offers a great opportunity for managing the inflationary tendencies,” he added.

Even though the current account deficit (CAD) moderated sharply to 1.2 per cent of GDP in second quarter, the final figures may be higher. Around 63 per cent of respondents expect CAD to settle in a range of 3.5-5.0 per cent of GDP in 2013-14 and only 7 per cent expect it to fall below 3.5 per cent in the current fiscal.

In the 85th Business Outlook Survey, domestic economic/political instability, slackening consumer demand, high level of corruption, persistent high inflation and risk from exchange rate volatility emerged as the top five current concerns in order of severity to most firms. (ANI)