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October-December 2012
Highlights
The CII Business Confidence Index (CII-BCI) for October-December 2012 fell by 1.4 points to 49.9, after rising to 51.3 in July-September 2012 and 55.0 in April-June 2012. The survey reveals that most of the respondents (34 per cent) expect GDP growth to lie within a range of 5.5-6.0 per cent for 2012-13. Worryingly, a close 33 per cent of the respondents expect growth to lie within an even lower range of 5.0-5.5 per cent for 2012-13. 36.8 per cent of respondents expect average WPI inflation to lie in a range of 7.0-8.0 per cent, while another 29.2 per cent expect it to come in a range of 8.0-9.0 per cent for 2012-13. Additionally, 17 per cent of the respondents also expect inflation to jump above 9 per cent. The survey shows that majority of the respondents (54.8 per cent) expect the fiscal deficit to lie in a range of 5.5-6.0 per cent of GDP, while 24 per cent expect it to climb to a range of 6.0-6.5 per cent of GDP in 2012-13. According to the survey, majority of the respondents (51.5 per cent) expect the domestic investments of their firms to show a decline or no change in the October-December 2012 quarter while 41.6 per cent expect it to increase. Most of the respondents (42.0 per cent) expect international investments to show a decline or no change in the third-quarter 2012-13, while 34.6 per cent of respondents expect it to record any increase. In a sign of improving capacity utilization, a most of the respondents (41.2 per cent) expect it to remain above 75 per cent in the third-quarter of the current fiscal. The survey reveals that most of the respondents expect no change in their value of production, inventory levels and employment in the third-quarter of 2012-13. In contrast, only overall sales and new orders are expected to increase by bulk of the respondents in the third-quarter of 2012-13. An overwhelming majority of respondents (81.7 per cent) saw the availability of credit decline or remain unchanged in the period July-September 2012 mainly due to high interest rates prevailing in the economy. Expectations for the third-quarter 2012-13 too reveal almost similar trend. In line with high inflation, high international crude oil prices, power shortage and high input costs, 61.2 per cent of the respondents recorded an increase in raw material while 81.8 per cent saw their electricity & fuel cost going up during July-September 2012. Expectations for the October-December 2012 quarter are however more sanguine as it shows that lower proportion of respondents are expecting raw material cost (45.5 per cent) and electricity & fuel cost (63.7 per cent) to increase. The 81st Business Outlook Survey reveals that unlike in the previous survey Domestic
Economic/Political Instability has emerged as the topmost concern for most firms, followed by High Interest Rate and Infrastructure and Institutional Shortages.
The worsening of the index value for October-December 2012 is mainly attributable to domestic economic & political instability, high interest rates, infrastructural & institutional shortages and persistently high inflation. Surprisingly, faltering global growth took a back-seat as one of the major concerns cited by the respondents. The respondents in the survey were asked to provide a view on the performance of their firm, and the economy based on their perceptions for next quarter. The CII-BCI is then constructed as a weighted average of the Current Situations Index (CSI) and the Expectation Index (EI). The Expectation Index (EI) which reflects the expectations of the respondents for the OctoberDecember 2012 quarter fell by 2.6 points from the level in the previous survey.
65.7
67.2
69.3
H1 2005-06
H2 2005-06
H1 2006-07
H2 2006-07
H1 2007-08
H2 2007-08
H1 2008-09
H2 2008-09
H1 2009-10
H2 2009-10
H1 2010-11
Q3 2010-11
Q4 2010-11
Q1 2011-12
Q2 2011-12
Q3 2011-12
Q4 2011-12
Q1 2012-13
Q2 2012-13
Q3 2012-13
10.4
34.0
<5.0%
5.0% -5.5%
5.5% -6.0%
6.0% - 6.5%
6.5% - 7.0%
> 7.0%
Inflation
In contrast to sharp slowdown in growth, whole-sale price based inflation (WPI) has continued to remain persistently high in the current fiscal. Headline WPI (wholesale price index) inflation averaged above 9 per cent in the last two fiscal years. This year too it has remained sticky at around 7.5 per cent so far. Adverse shocks from shortfall of food articles due to sub-par monsoon this year, and higher global fuel and commodity prices have triggered inflationary pressures. Inflation has only marginally abated in the last few months and upside risks to inflation continues to persist. Accordingly, the survey also reveals that 36.8 per cent of respondents expect average WPI inflation to lie in a range of 7.0-8.0 per cent, while another 29.2 per cent expect it to come in a range of 8.0-9.0 per cent for 2012-13. Additionally, 17 per cent of the respondents also expect inflation to jump above 9 per cent.
29.2
36.8
<6.0%
6.0% -7.0%
7.0%-8.0%
8.0%-9.0%
>9.0%
Fiscal Deficit
The fiscal deficit target for 2012-13 is under the danger of being breached by a wide margin. For the first eight months of the current financial year up to November 2012, the fiscal deficit of the union government has already touched close to 80 per cent of the budgeted amount. Slowing growth momentum of the economy has resulted in lower realization of tax revenues, especially from indirect taxes. The failure to raise targeted revenues from the recent auction of 2-G spectrum has also compounded the difficulties of the government. Further, the expenditure of the government has been increasing much beyond the budgeted target. The government had revised the fiscal deficit target to 5.3 per cent for the current fiscal. However, in light of the precarious situation of the government finances, the survey shows that majority of the respondents (54.8 per cent) expect the fiscal deficit to lie in a range of 5.5-6.0 per cent of GDP, while 24 per cent expect it to climb to a range of 6.0-6.5 per cent of GDP in 2012-13.
54.8
5.0% -5.5%
5.5% -6.0%
6.0% - 6.5%
6.5% - 7.0%
Exchange rate
Exchange rate movement has remained quite volatile in the fiscal year 2012-13 so far. After slipping to a low of 57.2 per US$ in late June 2012, it recovered to reach a high of 51.6 per US$ in early October. However in the last few months, Rupee has once again depreciated against the greenback and is currently hovering around 54.0-55.0 per US$. Such huge volatility in exchange rate has deleterious impact on the business plans of the firms. As per the survey, more that three-fifth of the respondent firms (45.1 per cent) expect exchange rate to remain in between 53-55 per US$ by March 2013, while only 16.5 per cent expect it to weaken it to 55.0 per US$.
Expected Exchange Rate by March 2013 (% of respondents) <Rs. 50, 4.4 >Rs. 55, 16.5 Rs. 50-51, 13.2
In order to cushion falling growth, government had announced a slew of policy reforms in the last few months. The winter session of the Parliament saw the passage of crucial bills such as the Banking Bill and Companies bill. Additionally, in order to provide a fillip to investment, Cabinet Committee on Investment was formed and government won the crucial vote on FDI in multi-brand retail. Earlier in September 2012, government had set the reforms juggernaut rolling by enhancing the FDI investment limit in broadcasting services and power trading exchanges. All these cumulatively are expected to have a positive impact on the growth prospects of the economy going forward. However, the survey revealed that most of the respondents (37.4 per cent) did not expect these policy reforms to improve the GDP, while only 31.8 per cent replied in the affirmative. In contrast, 38.9 per cent of the respondents expected the recent policy reforms to kick-start domestic investments, while only 31.5 per cent answered in the negative. In sum, there is a mixed picture emerging on the expected impact of the recent policy reforms on both growth and investment by the respondents. It will be critical for the government to not buckle under the political opposition to these reforms and implement these measures without any further delay.
30.8 31.8
31.5 38.9
29.6
39.2
25.5
25.5
13.4 6.2
Increase
Decrease
No Change
Below 50%
50-75%
75-100%
> 100 %
Investment Plans
Notwithstanding the announcement of the recent reform measures to prop up investment demand in the economy, investor sentiments still remain bleak. The reform measures are expected to positively impact investment demand with a lag and we might see some improvement in the next few quarters. The present situation, however, continued to remain grim. The survey too reveals a similar scenario. According to the survey, majority of the
respondents (51.5 per cent) expect the domestic investments of their firms to show a decline or no change in the October-December 2012 quarter. Of those expecting an increase in domestic investment, 30.7 per cent expect it to increase by 0-10 per cent, while 7.9 per cent expect it to increase by 10-20 per cent. Mere 3.0 per cent of respondents expect it to record a more than 20 per cent jump in the third-quarter of 2012-13.
Mirroring the trend of domestic investment trends, most of the respondents (42.0 per cent) expect international investments to show a decline or no change in the third-quarter 2012-13, while 34.6 per cent of respondents expect it to record any increase. Amongst those expecting the international investments to increase, 23.5 per cent expect it to increase by 0-10 per cent, while 9.9 per cent expect the jump to be between 10-20 per cent.
Expectation on Investm ent Plan for October-Decem ember 2012 (% of Respondent 51.5 42.0 30.7 23.5 9.9 1.2 Decline or no change Increase by 10-20% Not Applicable Increase by 0-10% Increase by >20% Not Applicable 23.5
7.9 3.0 Decline or no change Increase by 10-20% Increase by 0-10% Increase by >20%
6.9
Domestic Investments
International Investments
10
Will the recent reform m easures directly or indirecly benefit the com panies (% of respondents) 59.6 45.5 35.0 25.7 20.2 20.2 28.7 37.9 27.2
Yes
No
Can't Say
Yes
No
Can't Say
Yes
No
Can't Say
Aviation Sector
11
Increase
No Change
Decline
New Orders
The survey revealed that bulk of the respondent firms (47.2 per cent) witnessed no change in the new orders in the second-quarter of 2012-13, while 32.6 per cent saw an increase in the same. Only 20.2 per cent posted a decline in new orders in the second-quarter. The outlook for new orders is positive in the third-quarter (October-December) of 2012-13; with most of the respondent firms (48.9 per cent) expecting the new orders to increase and only a few (16.3 per cent) expecting a decline.
47.2 32.6
16.3
Increase
Increase
No Change
Decline
No Change
12
Decline
Value of Production
The results of the 81st Business Outlook survey showed that majority of the respondent firms (50.0 per cent) witnessed stagnancy in their value of production in the period from JulySeptember 2012, while 32.9 per cent of them saw an increase. The expectations for the October-December 2012 quarter are somewhat on similar lines, with most of the respondent firms (41.4 per cent) expecting no change in their value of production and 39.1 per cent expecting an increase. Only a few (19.5 per cent) expect it to decline in the third-quarter due to rising cost of inputs.
No Change
Increase
Inventory
According to the survey results, most of the respondent firms (48.8 per cent) saw no change in the inventory levels in the second-quarter of 2012-13 as due to rising uncertainty in both domestic and global scenario; they preferred to keep their production plans on hold. 36.9 per cent of respondents also reported an increase in inventory level compared to 14.3 per cent expecting a decline. As for the expectations for the October-December quarter of 2012-13, once again majority of the respondent firms (50 per cent) expect their inventory levels to remain unchanged, while 30.7 per cent expect to see the levels increasing.
13
Increase
No Change
Decline
Decline
Inventories (% of Respondents)
14.3 48.8
19.3
50.0
Availability of Credit
As regards to the availability of credit, an overwhelming majority of respondents (81.7 per cent) saw their availability of credit either unchanged or decline during the July-September 2012 quarter, while another 18.8 per cent saw it increasing. This was attributable mainly to the persistently high interest rates prevailing in the economy currently. Expectations for the third-quarter 2012-13 too reveal almost similar trend, with bulk of the respondent firms (79.3 per cent) expecting the availability of credit to either remain stagnant or decline, in contrast to 20.7 per cent expecting an increase in credit availability.
Decline
16.5
18.4
No Change
64.7
60.9
Increase
18.8
20.7
14
Employment
The survey showed that that majority of the respondent firms (73.3 per cent) kept their employment levels unchanged in the second-quarter of 2012-13 as opposed to 13.3 per cent which saw either an increase in their employment levels. Expectations for the OctoberDecember of 2012-13 reveal that, once again majority of the respondent firms (64.8 per cent) expect no change in their employment levels, while 19.8 per cent expect it to decline. Only 15.4 per cent expect an increase in their employment levels in the third-quarter as compared to 13.3 per cent in the second-quarter.
Employment (% of Respondents)
73.3 64.8
13.3 15.4
19.8 13.3
Increase
No Change
Decline
15
43.3
36.3
31.1
33.0
30.8
16
Decrease
Decrease
Decrease
Cost of Credit
With regards to new orders, the survey revealed that most of the respondent firms (62.5 per cent) witnessed unchanged levels in July-September 2012, while 20.3 per cent registered an increase and 17.2 per cent saw a decline in new orders. However, during October-December 2012, majority (81.2 per cent) expect new orders to increase or remain unchanged.
Volume of Imports
According to the survey, volume of imports in July-September 2012 remained unchanged for majority of the respondent firms (67.2 per cent) as compared to the previous quarter, while 21.3 per cent of firms registered an increase in import volumes and mere 11.5 per cent
17
Decrease
Increase
Increase
Increase
Increase
No Change
No Change
No Change
No Change
registered a decline. It appears that strong domestic demand has superseded the dampening impact of rupee depreciation on imports. Expectations for October-December 2012 show similar trends, with majority expecting volume of imports to either increase or remain unchanged. However, the share of respondents who expect import volume to decrease plunged slightly to 10.3 per cent.
23.9 31.9
20.3 29.0
22.4 22.2
17.2 18.8
21.3 25.0
Increase
Decrease
Increase
Decrease
Increase
Volume of Exports
New Orders
Volume of Imports
18
Decrease
11.5 10.3
Currency Risks
Majority of the respondents (51 per cent) belonged to large-scale firms, while 30 per cent were from medium-scale firms and 23 per cent and 4 per cent each were from small-scale and micro firms respectively. Sectoral break up shows that 78 per cent of the respondents were from manufacturing sector while 29 per cent and 1 per cent were from services and primary sector respectively.
CII-BCI is calculated as a weighted average of the Current Situation Index (CSI) and the Expectation Index (EI), with greater weight given to EI as compared to CSI. These indices are based on questions pertaining to performance of the economy and respondents firm. Respondents are asked to rate the current and expected performance on a scale of 0 to 100. A score above 50 indicates positive confidence while a score above 75 would indicate strong positive confidence. On the contrary, a score of less than 50 indicates a weak confidence index.
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In the construction of the two sub-indices, the highest weight is given to the questions related to the performance of the individual firm, and the lowest weight is assigned to the questions on the economy. The weights are assigned on the basis of the premise that the average respondent would possess more detailed and accurate knowledge on the current and expected performance of his own firm than the economy as a whole.
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DISCLAIMER Copyright 2012 by Confederation of Indian Industry (CII), All rights reserved.
No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However, neither CII nor any of its office bearers or analysts can be held responsible for any financial consequences arising out of the use of information provided here in. CII Business Outlook Survey is a quarterly survey conducted by the CII Economic Research Group. Reach us at ecoresearch@cii.in
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