Despite economic uncertainty, the BT-C Fore business confidence index for Q2 has come out warm. What gives?

It’s a time of pessimism. It’s a time of optimism. Both appear to be perfectly valid statements, if we consider the outcome of the latest edition of the Business Today-C Fore Business Confidence Index (BCI). In the July-September 2022 quarter (Q2FY23), the BCI has bounced back to 52.5 against 51.2 in Q1FY23, which was a fall from the 28-quarter high of 55.2 in Q4FY22. 

Consider the mixed signals emanating from the data. After moderating for three straight months (May to July 2022), Consumer Price Index (CPI)-based inflation has resumed its upward trajectory, rising to 7 per cent in August and 7.41 per cent in September. Wholesale Price Index (WPI)-based inflation, on the other hand, has continued its downward curve, moving from a high of 16.63 per cent in May to 10.7 per cent in September. That, too, can’t be said to be low. 

As the US dollar strengthens and creates trouble for emerging economies, India is also affected. The rupee has been constantly sliding, despite the Reserve Bank of India’s (RBI) interventions, and now (October 31, 2022) stands at more than `82 to a dollar, and flirting with 83; that effectively also increases the trade deficit. In the first two quarters (April to September), exports have climbed 18 per cent year-on-year (YoY) to $233.58 billion. But imports have accelerated much faster, growing at 38 per cent YoY to $380.14 billion. 

Meanwhile, the stock markets have moved up and down so much that, when charted, the past three months’ lines of the BSE Sensex and NSE’s Nifty 50 look like spectacular mountain ranges of sharp peaks and deep valleys. Since mid-October, though, they are again largely moving in an upward direction. Other indicators, too, are not very positive. Brent crude oil, which was trading above $100 to a barrel all the way from March to July 2022 following the outbreak of the Russia-Ukraine conflict, has cooled a bit, but is still trading around the $90-mark, making India’s biggest import mighty expensive, albeit some hedging has been done by the government through the purchase of discounted Russian oil. 

So, what then has made India’s business community so positive? “The revival in business confidence stems from the correction between global commodity prices and improving demand, particularly around the festive season,” says Aditi Nayar, Chief Economist of ICRA Ltd. Adds Suman Chowdhury, Chief Analytical Officer of Acuité Ratings & Research: “Despite the unfavourable global backdrop marred by geopolitical uncertainty and an increasingly tight financial environment, India’s economy has remained broadly resilient with high frequency indicators witnessing a buoyancy, primarily supported by festivity-induced pent-up demand.” Chowdhury further points out that the Acuité Macroeconomic Performance (AMEP) index recorded a peak of 132.1 in September 2022 as against 120.7 in August 2022, which translates into a double-digit expansion of 14.1 per cent YoY in September 2022 compared to 12.4 per cent in August 2022; sequentially, the index expanded by 9.4 per cent month-on-month (MoM) from two consecutive negative months in July-August 2022. 

“Clearly, several supportive factors in the domestic economy have helped improve business optimism— above-average monsoon, delayed recovery in kharif sowing, improved reservoir position, capex-oriented government expenditure, a broad-based revival in credit growth, and significant correction in commodity prices along with the receding pandemic threat. A similar narrative is also seen in the CMIE consumer confidence survey, both at the urban and the rural levels, which have soared to their respective 30-month highs in September 2022,” says Chowdhury. 

He has a point. In fact, the BT-C Fore BCI shows positive sentiment both about the past quarter’s performance and the outlook for the next quarter. And that is consistent across different kinds of industries and sizes of businesses. For Q2FY23, heavy engineering, light industry and services, all clocked higher index values than the previous quarter at 53.2 (52.1 in Q1), 52.4 (51.1) and 51.8 (50.4), respectively. The trend is the same for business sizes, with big business showing 55.1 in Q2 (compared to 53.7 in Q1), and medium-sized, small and micro businesses clocking index values of 54.5 (52.4), 50.4 (49.5) and 50.2 (49.1), respectively. On specific parameters, too, the index values came in at over five (on a scale of 10) for Q2, including overall economic conditions at 5.2, financial situation (5.3), demand conditions (5.8), and hiring (5.0). Only profit margins, at 4.9, was a tad below five. 

The outlook for the next quarter (October to December) is even more positive, with businesses’ projections for economic prospects, overall economic situation, demand conditions and hiring conditions being placed at 5.5, 5.4, 5.6 and 5.1, respectively. However, businesses expect profit margins to be squeezed further in Q3, with the index value coming in at a low 4.7. 

Going forward, of course, there are challenges to the positive outcome being sought by industry. The primary concern is the value of the rupee, which seems to have stabilised a bit in recent days. However, 73 per cent of the BT BCI survey’s respondents felt the rupee will surely depreciate beyond 83 to the dollar in the next quarter, and the overwhelming vote was that this is a worry. 

The other big concern is inflation, especially retail inflation, which refuses to climb down despite the RBI’s repeated repo rate hikes. In fact, CPI inflation has been way higher than the RBI’s ‘tolerance limit’ of 6 per cent this entire calendar year. Even after taking into account the fact that such monetary policy interventions see outcomes with a lag, inflation remains a worry, and the question is whether hiking repo rate is the right instrument to deal with the nature of inflation we are seeing today. The respondents of the BCI survey almost unanimously feel the repo rate hikes won’t work, with 72 per cent respondents saying this is supply-side related inflation and rate hikes are not useful in containing it; and another 21 per cent saying that the rate hikes are merely increasing the borrowing rates for the common people and small businesses. 

But things are not so straightforward. Economists Nayar and Chowdhury give some insights. “Rate hikes will have an impact on demand with a lag, but may not be successful in rapidly cooling inflation, as it is being driven more by global supply-demand issues and food items,” says Nayar of ICRA. Chowdhury elaborates, saying that 55.1 per cent of the CPI comprises food and beverages (including pan, tobacco, etc.) and fuel and light. “The price trajectory in these categories is primarily driven by supply dynamics as we have seen in the case of fuels and edible oils over the past one year. With improvement in the supply scenario, the inflation in these products has visibly come down. But in the case of cereals, inflation is on the rise due to an expectation of lower kharif harvest and lower stock levels, reinforcing the relevance of the supply factor,” says Chowdhury. 

Inflation in the rest of the CPI basket (44.9 per cent), comprising non-food and non-fuel items, is shaped by demand. This part of the CPI inflation, also called core inflation, is at 6.3 per cent in September, and so creates scope for further moderation through more rate hikes. But inflation in the food and fuel part can only be addressed through fiscal policy moves. “However, apart from supply- and demand-induced price pressures, higher imported inflation, led by significant rupee depreciation, is currently also a factor behind higher domestic inflation; tighter monetary policy can help stabilise the rupee and thereby, mitigate imported inflation risks,” says Chowdhury. 

Still got no sense of the real direction? Well, that’s the ground reality at present. Bottom line: hold on tight. 

(With inputs from Rajat Mishra)

@alokeshb