Business Confidence Index: Survey shows optimism for Q1FY25, but capacity expansion and hiring stay cautious

Despite the global headwinds, the Indian economy seems to be in a sweet spot for now. Gross domestic product (GDP) growth is widely seen at over 7% for FY25. There are hopes of a revival in rural consumption demand due to a good monsoon. Inflation is on a downward trajectory and high-frequency indicators such as collections from the goods and services tax and industrial production are showing positive trends. 

This is also evident in the Business Today-C Fore Business Confidence Survey of 500 chief executive officers (CEOs) and chief financial officers (CFOs) for the April-June 2024 quarter (Q1FY25). The Business Confidence Index (BCI) rose to 55.6 in Q1FY25, after dipping in the previous quarter (Q4FY24) to 54.3. The reading for Q1FY25 was also the second highest since Q1FY16. The BCI in Q3FY24 (October-December 2023 quarter) was a notch higher at 56.5.

However, despite the headline confidence, India Inc. still harbours some concerns as seen in the hiring sentiment and plans for capacity expansion. Experts believe that a part of it stems from the cloudy global outlook—the continuing conflicts in different parts of the world, the latest being the instability in Bangladesh, and more importantly, the upcoming US elections.

 “There remain certain headwinds. While it is unlikely that the rate hike by Japan will have a significant impact, the continued trouble in the Middle East remains a problem that could at any time lead to a flare-up in oil prices,” notes Devendra Kumar Pant, Chief Economist at India Ratings. He also points out that there remain concerns about how the US economy will pan out in the coming months. The domestic economy is, however, in a steady state, he underlines.

The agency recently revised its FY25 GDP growth estimate for India to 7.5% from the previous forecast of 7.1%, which is higher than the Reserve Bank of India’s forecast of 7.2%. The current growth momentum, led by government capex, deleveraged balance sheets of corporates and banks, and the incipient private corporate capex cycle, has now found support from the Union Budget, it said.

Rumki Majumdar, Economist at consulting firm Deloitte India, however, believes that concerns about a recession in the US economy are probably overstated. “There should be much more certainty around policies and government stability after the US elections. We also expect the US Fed to cut monetary policy rates by the end of the year or early 2025. All this will lead to a more buoyant US economy,” she says. Deloitte India expects strong economic fundamentals and rising domestic demand to drive growth to between 7% and 7.2% in FY25.

Reflecting this optimism around the domestic economy, businesses across sectors and sizes have shown an uptick in business confidence in the quarter ended June 30, 2024, compared to the previous quarter. The light industry sector, consisting of industries such as food products, beverages, cotton textiles, apparel, wood and furniture, amongst others, was the most confident with a reading of 56.9, followed by heavy engineering, which had a reading of 56.2. However, with subdued export markets and low growth in many major export destinations, the mood in the services sector was slightly more cautious, and business confidence came in at 53.6.

In terms of industry size, big and medium industries remained the most confident with a BCI reading of 58.7 and 57.5, respectively, for Q1FY25. Small and micro businesses are, however, not so positive with their BCI at a comparatively lower 53.4 and 52.8, respectively, for the quarter.

Moving forward, businesses are also optimistic about demand conditions as well as profitability in Q2FY25. Companies also remain optimistic about the economic prospects in the second quarter, with a rating of 5.9 out of 10, compared to a rating of 5.7 in the previous quarter. But there remains anxiety beyond this, as hiring sentiment has dipped further to 4.8 for Q2 from 5.1 in Q1.

Even on a specific question of whether they plan to hire more for the upcoming festival season, only 16% of the businesses surveyed said “yes,” while 59% said “no”. Similarly, when asked about fresh investments or capital expenditure in the coming quarter, only 14% of the respondents replied in the positive while 61% said they had no such plans. Experts remain confident that both investments and hiring will pick up in Q2FY25.

Majumdar of Deloitte India is, however, confident that the global and domestic economic environment will be much more conducive to stronger investment and broad-based consumption growth going ahead. “Policy certainties post US elections and policy rate cuts would boost capital flows into India in the latter half of the fiscal year,” she notes. She adds that political stability in India following the General Elections, the assurance of policy continuity, and the thrust on job creation in the Union Budget announcements will further boost consumer confidence.

Surprisingly, only 31% of the businesses surveyed believe that the announcements in the Union Budget 2024-25 will boost demand and maintain the growth momentum. Amongst the proposals, 27% are of the view that those around manufacturing and a higher PLI are the most important focus areas of the Budget that will impact their business, while 21% think that proposals for the micro, small, and medium enterprises are the most pertinent to their business. Only 11% believe that proposals on job creation and skilling are the most important focus areas of the Budget that will impact their business.

With a normal monsoon and the upcoming festive season, it is hoped that businesses will no longer just bide their time but will move into on-ground activity.

@surabhi_prasad