BT’s Business Confidence Index on a 7-Year High. Will the Good Times Last?

Try walking on a bed of burning coal. Or a sheet of very thin ice. You feel exhilarated. Thrilled. You also feel frightened. Any slip would mean serious trouble. Yet, till that happens, you are on a high. That seems to be the emotion seeping through the latest edition of the BT-C Fore Business Confidence survey. On the face of it, the Indian economy has powerful headwinds battering it—inflation at high levels, the war in Ukraine leading to commodity price surges, Covid-19 just refusing to go away, questionable demand, falling productivity, rising fuel prices—one could go on.

Yet, we have a situation where despite the obvious challenges, businesses are not just hopeful, but positively, well, positive. That sentiment comes through in BT’s Business Confidence Index or BCI for Q4 of FY22, which finds itself at 55.2, a peak that was scaled as far back as Q2 of 2014-15 and Q4 of 2011-12, when it had hit 55.4. This time, the index scaled 50+ across all segments of industry (services, light industry and heavy engineering) and all sizes, from big- to micro-sized businesses. Overall, the BCI survey respondents gave ratings above five (on a scale of 10) to every parameter for Q4 of FY22—overall economic conditions, financial situation of the companies, demand conditions, hiring conditions and profit margins (see charts).

The reason is actually not hard to fathom. For the Indian entrepreneur and business executive, if the business is growing, the other metrics and concerns can take a walk. And the BCI value accurately reflects the predictions that brokerage houses had made for corporate earnings in Q4 of FY22. For example, in its prediction, Axis Securities had said that Q4FY22 is expected to be a roller-coaster quarter with Covid 3.0 impacting the first month, yet the NSE Nifty companies would deliver revenue, Ebitda, and PAT growth of 32 per cent, 19 per cent and 25 per cent, respectively. And overall growth for all securities covered by the brokerage would have comparable numbers of 29.9 per cent, 17 per cent, and 23 per cent, respectively. That’s enough to make any businessperson confident of success and growth.

“The K-shaped recovery appears likely to continue with the formal sector gaining market share in FY23,” says ICRA’s Chief Economist, Aditi Nayar, adding that while mid- to lower-income segments would see less disposable incomes due to rising prices, in the mid- to upper-income segments, “normalisation of behaviours after the third wave is set to result in a pivot of consumption towards the contact-intensive services that were avoided during the pandemic, constraining the growth in demand for goods in FY23”.

And what of the next quarter? Sentiments in the BT BCI are actually even more positive for Q1FY23, with ratings above six for two parameters—confidence in business prospects and overall economic situation—and 5.9, 5.4 and 5.7, respectively, for demand conditions, hiring conditions and profitability. However, the respondents are not blindsided to challenges that are extant. For Q1 of FY23, 57 per cent of respondents predict rising fuel prices to impact their business negatively, 61 per cent expect to raise prices of their products and services, and 56 per cent expect the conflict in Ukraine to impact their business negatively. However, the question on Covid-19’s impact evoked mixed response (see chart What’s Coming).

Madan Sabnavis, Chief Economist, Bank of Baroda, aggregates the sentiment well: “Business confidence was higher in Q4 of FY22 mainly due to improved environment in terms of restrictions on services post-December when the Omicron wave set in. However, this had been dented considerably due to the results of the war, especially on inflation where rising prices have upset consumption baskets, which in turn has the potential to slow down the investment cycle. The uncertainty will further dent confidence.” Dipti Deshpande, Principal Economist, CRISIL Ltd., points to the challenges for the next fiscal: “As we go into fiscal 2023, cost pressures show no signs of abating despite weak demand. Rising cost pressures emerging from global supply chain disruptions and high international commodity prices from the Russia-Ukraine conflict will add to the inflationary impulse in fiscal 2023… As the economy opens further and demand conditions improve, core inflation is expected to rise with pressure from the services segment as well. The rise in CPI inflation therefore is expected to be broader based across components.”

The hardest hit by these challenges would be, not the Nifty 50 or BSE 30, but the micro, small and medium enterprises or MSMEs. Tushar Sood, Founder and CEO of Noida-based organic vegetable delivery app Sabzikart.com, points to the risk: “We are on the brink of what could be cost push inflation (which occurs due to rise in production costs). Increased fuel prices are bound to create these pressures, especially in logistics-dependent sectors, and the end user may have to brace for impact.” To mitigate the impact on MSMEs, Aniket Dani, Director of CRISIL Research, says some quick steps need to be taken, including aggregation of raw material requirement of MSMEs by the government for better economies of scale; PLI (production-linked incentive) support for ancillaries in sectors such as automotive, batteries and pharmaceuticals, and a six-month moratorium on GST payments for MSMEs to alleviate working capital stress, among other necessary measures.

Unusual times need unusual fixes. Brace for a stormy ride.

With inputs from Rajat Mishra

@alokeshb