CII - 85th Business Outlook Survey October- December 2013

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Information about CII - 85th Business Outlook Survey October- December 2013
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Published on February 19, 2014

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85th Business
Outlook Survey
October- December 2013

Confederation of Indian Industry th 85 Business Outlook Survey October- December 2013 www.cii.in

Copyright © 2013 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 or employees can be held responsible for any financial consequences arising out of the use of information provided herein However, in case of any discrepancy, error, etc., same may please be brought to the notice of CII for appropriate corrections. Published by Confederation of Indian Industry (CII) The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi-110003 (INDIA) T: +91-11-24629994-7; F: +91-11-24626149; E: info@cii.in; W: www.cii.in

85th Business Outlook Survey : Oct. - Dec. 2013 Contents • Highlights 1 • Business Confidence Index 2 • General Economic Prospects 3 • General Business Prospects 5 • Overall Trends 6 • Export and Import Trends 9 • Business Concerns 10 • Coverage & Methodology 10

85th Business Outlook Survey : Oct. - Dec. 2013 Highlights • Indicating sharp improvement in investors’ sentiments, the CII Business Confidence Index (CIIBCI) for Oct- Dec 2013 quarter increased sharply to 54.9 from 45.7 in the previous survey. Breaching the psychological 50-level mark, index reached its highest value since Q2FY13. • Majority of the respondents (42 per cent) felt that GDP growth in the current fiscal would lie in the range of 4.5-5.0 per cent. Only 28 per cent of them expected it to fall in the range of 5.0-5.5 per cent. • Inflation is expected to cross 7 per cent mark during the current fiscal, according to largest 41 per cent of the respondents. • The largest 32 per cent of respondents expect fiscal deficit to lie in a range of 4.5-5.0 per cent of GDP in 2013-14. This would be in line with the government’s target of 4.8 per cent for the year • 63 per cent of respondents expect current account deficit to lie in a range of 3.5-5.0 per cent of GDP in 2013-14, which would be above the comfort level of RBI, even though the current account deficit moderated sharply to 1.2 per cent of GDP in second quarter of the current fiscal. • 55 per cent of the respondents expect exchange rate to reach Rs 61-63 per US$ by March 2014. • In a worrying sign of company’s performance, 56 per cent of respondents have been running their companies at less than 75 per cent capacity utilization in the second quarter of the current fiscal. However, in a sign of improvement in the situation, much smaller (only 45 per cent) per cent of respondents expect capacity utilization to fall below 75 per cent in the current quarter. • Majority of the respondents (53 per cent) have not planned an increase in capacity expansion during the third quarter of current fiscal. • The survey reveals that 58 per cent of the respondents expect increase in their sales, new orders and value of production in the third quarter of 2013-14, which is much larger than only 45 per cent who witnessed increase in their sales in the previous quarter. • Majority of the respondents expect increase in input cost in most cases. As regards the input cost in the current quarter as compared to the actual of the previous quarter, there is significant decline in percentage of respondents who expect expenses on raw materials, electricity, and wages & salaries to increase. • As compared to only 31 per cent respondents who witnessed an increase in their pre-tax profit in second quarter, 43 per cent respondents expect an increase in the pre-tax profit in the third quarter of current fiscal. • Majority of respondents (53 per cent) expect their exports to increase in the current quarter. Only 49 per cent of the respondent had seen increase in their exports during the previous quarter. • The largest 56 per cent of the respondents didn’t expect their imports to increase during the current quarter. • 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. 1

85th Business Outlook Survey : Oct. - Dec. 2013 Business Confidence Index Indicating sharp improvement in investors’ sentiments, the CII Business Confidence Index (CIIBCI) for Oct- Dec 2013 quarter increased sharply to 54.9 from 45.7 in the previous survey. Breaching the psychological 50-level mark, index reached its highest value since Q2FY13. The pick-up in BCI for the current quarter comes as a silver lining for the economy, which is otherwise devoid of any positive news. However, it should also be approached with a bit of cautious optimism as the downside risks to growth have still not abated from the horizon. The respondents in the survey were asked to provide a view on the performance of their firm, sector and the economy based on their perceptions for the current and next quarter. The CII-BCI is then constructed as a weighted average of the Current Situations Index (CSI) and the Expectation Index (EI). It is significant to note that both current as well as expectation indices contributed to the sharp increase in BCI. In both indices, respondents rated the situation to improve drastically with respect to all constituents - overall economy, sector, and own activity. Quarterly Business Confidence Index (BCI) Index Q3* Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY11 FY11 FY12 FY12 FY12 FY12 FY13 FY13 FY13 FY13 FY14 FY14 FY14 Business Confidence Index 66.2 66.7 62.5 53.6 48.6 52.9 55.0 51.3 49.9 51.3 51.2 45.7 54.9 Current Situation Index 64.0 62.7 62.6 52.7 47.7 54.7 51.9 47.5 48.6 47.1 48.7 46.1 51.0 Overall Economy 65.0 59.9 61.1 49.2 44.5 49.4 48.9 36.3 44.5 44.2 44.5 35.1 41.6 Own Activity Sector 63.2 63.0 61.8 51.8 46.0 46.9 46.9 44.6 45.9 46.3 46.1 43.9 47.7 Own Company 64.3 63.4 63.7 54.4 50.0 56.3 56.3 53.2 51.7 48.7 51.7 51.3 56.3 Expectation Index 67.3 68.7 62.4 54.0 49.1 51.9 56.5 53.2 50.6 53.4 52.5 45.4 56.8 Overall Economy 66.0 65.6 61.1 48.5 44.2 48.9 52.8 44.6 47.5 49.1 49.4 37.0 50.1 Own Activity Sector 66.3 68.8 61.1 53.7 47.5 46.9 53.5 49.8 48.1 52.2 50.6 43.6 54.3 Own Company 68.4 69.7 63.7 56.1 51.7 56.3 59.7 58.4 53.3 55.7 54.7 49.5 60.7 * The Survey is conducted on a quarterly basis since the 74th Business Outlook Survey Business Confidence Index 66.2 66.7 62.5 53.6 Q3* FY11 2 Q4 FY11 Q1 FY12 Q2 FY12 48.6 Q3 FY12 52.9 Q4 FY12 55.0 Q1 FY13 51.3 49.9 51.3 51.2 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 54.9 45.7 Q2 FY14 Q3 FY14

85th Business Outlook Survey : Oct. - Dec. 2013 General Economic Prospects Growth & Inflation GDP expected to decelerate in the range of 4.5-5.0 per cent in 2013-14, while WPI inflation to lie above 7 per cent GDP growth is expected to decelerate to a range of 4.5-5 per cent in 2013-14 by 42 per cent of the respondents, while only 28 per cent expect it to lie between 5.0-5.5 per cent. Further, most of the respondent firms (41 per cent) expected inflation to lie above 7 per cent for the current fiscal, which is way higher than the comfort level of RBI. Expected GDP Growth in 2013-14 (% of Respondents) 6.0 - 6.5% 2% 5.5 – 6.0% 10% Expected WPI Inflation in 2013-14 (% of Respondents) <5.5% 1% >6.5% 2% <4.5% 16% 5.5 – 6.0% 6% 6.0 - 6.5% 12% >7.5% 41% 6.5 - 7.0% 19% 5.0– 5.5% 28% 4.5 - 5.0% 42% 7.0 - 7.5% 21% The Twin Deficits - Fiscal & Current Account 53 per cent of respondents expect fiscal deficit to lie in a range of 4.5-5.5 per cent of GDP in 2013-14, while 63 per cent expect current account deficit to lie in a range of 3.5-5.0 per cent of GDP in 2013-14 At a time when subsidies have escalated sharply and the expenses of government have upside risk owing to impending Lok Sabha elections in the country, it is comforting to note that the fiscal deficit in the current year may remain below 5.5 per cent mark, as endorsed by 53 per cent of the respondents. However, the upside risks to fiscal deficit are also high this year given the fact that weak economic growth would translate into sluggish tax revenue and the ambitious disinvestment target would be at risk due to the not-so-favorable market conditions. 3

85th Business Outlook Survey : Oct. - Dec. 2013 Even though the current account deficit (CAD) for the second quarter of the current fiscal dipped to 1.2 per cent of GDP, 63 per cent of respondents expect current account deficit to lie in a range of 3.5-5.0 per cent of GDP in 2013-14, much above the comfort zone of RBI. In some respite, only 30 per cent believed that CAD may cross 5 per cent mark. Expected Fiscal Deficit in 2013-14 Expected Current Account Deficit in 2013-14 (% of Respondents) (% of Respondents) <4.5% 7% >5.5% 13% >6.0% 21% 3.5– 4.0% 21% 5.0 - 5.5% 17% 4.5 - 5.0% 32% 5.5 – 6.0% 19% <3.5% 7% 4.5 - 5.0% 22% 5.0– 5.5% 21% 4.0 – 4.5% 20% Exchange Rate Rupee to remain in the range of 61-63 per US$ by March 2014 55 per cent of the respondents expect exchange rate to remain in the range of Rs 61-63 per US$ by March 2014. Given that US has now announced tapering of its monetary stimulus beginning next year, this is a positive news. Only 19 per cent feel that exchange rate my cross Rs 63 per US$ by March 2014. Expected Exchange Rate by March 2014 (% of Respondents) <Rs.59 5% >Rs.63 19% Rs.59-60 10% Rs.60-61 11% Rs.62-63 30% 4 Rs.61-62 25%

85th Business Outlook Survey : Oct. - Dec. 2013 General Business Prospects Capacity Expansion & Capacity Utilization As compared to 56 per cent respondent firms reporting below 75 per cent capacity utilization in second quarter, only 45 per cent expect the same for third quarter 56 per cent of respondents have been running their companies at less than 75 per cent capacity utilization in the second quarter of the current fiscal. In a sign of improvement in the situation, much smaller (only 45 per cent) percentage of respondents expect capacity utilization to fall below 75 per cent in the current quarter. Firms, it appears from the survey, are going slow on adding capacity at the moment. Majority of the respondents (53 per cent) have not planned an increase in capacity expansion during the current quarter. Capacity Expansion during July-Sep, 2013 (% of Respondents) Capacity Expansion during Oct-Dec, 2013 (% of Respondents) >100% 2% >100% 4% Below 50% 13% Below 50% 20% 75-100% 42% 75-100% 51% 50-75% 36% 50-75% 32% Change in Spending on Capacity Expansion during Oct-Dec over July-Sep, 2013 (% of Respondents) Increase 32% No Change 53% Decrease 15% 5

85th Business Outlook Survey : Oct. - Dec. 2013 Investment Plans Majority of respondents expect either no change/decline in their domestic and international investment plans in 3QFY14 According to the survey, majority of the respondents (54 per cent) expect their domestic investments to show either a decline or no change in the Oct-December 2013 quarter. Mirroring this, nearly of half of the respondents (47 per cent) expect their international investments to either decline or show no change in the third quarter of 2013-14. Investment Plans for Oct-Dec, 2013 - Domestic (% of Respondents) >20% Increase 6% Investment Plans for Oct-Dec, 2013 – International (% of Respondents) Not Applicable 5% >20% Increase 4% 10-20% Increase 10% 0-10% Increase 25% Decline or no change 54% Not Applicable 18% Decline or no change 47% 10-20% Increase 11% 0-10% Increase 20% Overall Trends Overall Sales & New Orders A surge in new orders may push sales The survey reveals that 58 per cent of the respondents expect increase in their sales, new orders and value of production in the third quarter of 2013-14, which is much larger than only 45 per cent who witnessed increase in their sales in the previous quarter. This is indeed a healthy sign for the economy and bodes well for the growth prospects. It is significant to note that the percentage of respondents reporting increase in new orders and value of production has increased significantly between the second and third quarter, while the same for inventories declined. 6

85th Business Outlook Survey : Oct. - Dec. 2013 Overall Sales & New orders in July-Sep, 2013 Overall Sales & New orders in Oct-Dec, 2013 (% of Respondents) (% of Respondents) Decrease 14% Decrease 27% Increase 45% Increase 58% No Change 28% No Change 28% Increase No Change Decrease Trends in output indicators: Actual (July-Sep) vs. Expected (Oct-Dec), 2013 (% of Respondents) 55 52 51 45 40 40 39 40 37 33 31 24.0 20.9 20.2 14.1 New Orders (July - Sep) 31 New Orders (Oct - Dec) 12.3 Value of Production (July - Sep) Increase Value of Production (Oct - Dec) No Change 14.9 Inventories (July - Sep) Inventories (Oct - Dec) Decrease Expenditure Majority expect increase in input cost in third quarter even though this number has fallen from the last quarter As regards the input cost in the current quarter as compared to the previous quarter, there is a significant decline in the percentage of respondents who expect expenses on raw materials, electricity, and wages & salaries to increase. However, majority of the respondents expect increase in other input costs during the current quarter. 7

85th Business Outlook Survey : Oct. - Dec. 2013 Input Costs (% of Respondents) 66 62 62 55 45 47 55 54 51 45 45 38 37 35 48 32 8.2 3.4 6.5 1.9 1.3 Raw Materials Raw Materials Electricity Cost (Actual) Cost (Exp) Cost (Actual) 0.7 0.0 Electricity Wages & Wages & Cost of Cost (Exp) Salaries (Actual) Salaries (Exp) credit (Actual) Increase No Change 0.7 Cost of credit (Exp) Decrease Pre-tax Profits Majority expect an increase in profits Majority of the respondents (43 per cent) expect an increase in their per-tax profit margin in the third quarter and this marks a sharp increase of 31 per cent in the last quarter. This may be attributed to expectation of a sharp increase in sales and moderation in input costs. Pre-tax Profits (% of Respondents) 43 37 32 31 32 26 Increase No Change Pre-Tax Profits (Actual) 8 Pre-Tax Profits (Expected) Decrease

85th Business Outlook Survey : Oct. - Dec. 2013 Export and Import Trends Majority expect an increase in export orders and stagnancy in imports Majority of respondents (53 per cent) expect their exports to increase in the third quarter of the current fiscal. Only 49 per cent of the respondent had seen increase in their exports during the previous quarter. Exports are likely to find some support amidst economic recovery in both the US and the Euro Zone. Besides, a weaker Rupee is also likely to aid exports. The largest 56 per cent of the respondents didn’t expect their imports to increase during the current quarter. Only 23 per cent said that they might witness an increase in imports in the third quarter. This is positive news as it is expected to keep the current account deficit in check. Export Volume (% of Respondents) 53 49 39 35 15 8 Increase No Change Actual Decrease Expected Import Volume (% of Respondents) 57 56 24 23 21 18 Increase No Change Actual Decrease Expected 9

85th Business Outlook Survey : Oct. - Dec. 2013 Business Concerns Domestic economic/political instability, slackening consumer demand, high level of corruption, persistent inflation and risk from exchange rate volatility are the top current business concerns th In the 85 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 concerns in order of severity to most firms. Coverage & Methodology CII’s 85th Business Outlook Survey is based on sample survey of firms covering all industry sectors, including micro, small, medium and large enterprises from different regions. The survey also enumerated responses across industry groups both in public and private sectors engaged in manufacturing and services sector. The survey was conducted from October-December 2013, covering 174 firm of varying sizes. Majority of the respondents (63.2 per cent) belonged to large-scale firms, while 12.1 per cent were from medium-scale firms and 24.7 were from small-scale firms. Sectoral break up shows that 65 per cent of the respondents were from manufacturing sector while 35 per cent were from services 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 respondent’s 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. 10

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes. CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's development process. Founded over 118 years ago, India's premier business association has over 7100 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 enterprises from around 257 national and regional sectoral industry bodies. CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensusbuilding and networking on key issues. Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few. The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance. Towards this, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong focus on accountability, transparency and measurement in the corporate and social eco-system, building a knowledge economy, and broad-basing development to help deliver the fruits of progress to all. With 63 offices, including 10 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries, CII serves as a reference point for Indian industry and the international business community. Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road, New Delhi – 110 003 (India) T: +91 11 45771000 / 24629994-7 | F: +91 11 24626149 E: info@cii.in | W: www.cii.in Reach us via our Membership Helpline: 00-91-11-435 46244 / 00-91-99104 46244 CII Helpline Toll free No: 1800-103-1244

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