Rising growth expectations pull up business sentiment in Q2FY21: CII Survey

Latest quarterly survey shows capacity utilization improving, but firms worried over low profits, weak domestic demands and rising inflation

As economic activity returns to normalcy, higher expectations on sales and exports in the second quarter have boosted the overall sentiment, according to the latest Business Confidence Index (BCI) of the Confederation of Indian Industry (CII).
 

Released on Sunday, the BCI surged to the level of 50.3 in the July-September quarter. It bounced back from the historic low of 41 recorded in the April-June quarter, during the initial days of the pandemic and lockdown.
 

The BCI is made up of two major components, the Current Situations Index (CSI) for the April-June 2020 quarter, and the Expectation Index (EI) for the July-September 2020 quarter.
 

Recovery of the BCI in the July-September quarter was driven by the notable increase in EI, which rose 46 per cent quarter-on-quarter to the level of 55.2, as the nationwide lockdown restrictions were lifted.
 

The CSI, on the other hand, was recorded below the psychological level of 50, at 40.6. This is because stringent lockdown restrictions led to complete shutdown of most business operations for a larger part of the quarter.
 

The survey, conducted during August-September, saw the participation of more than 150 firms of all sizes from across industry sectors.

 

It showed that nearly half the respondents anticipate an increase in new orders (49 per cent) and sales (46 per cent) during the second quarter, even though a majority of them witnessed decline in sales and new orders in the preceding quarter.
 

As a result, capacity utilisation levels are also expected to improve. A major share of the respondents (41 per cent) foresee higher utilisation levels of 50-75 per cent in the July-September quarter, closely followed by 37 per cent, who anticipate capacity utilisation at 75-100 per cent.
 

“It is heartening to note the recovery in CII’s Business Confidence Index for the July-September quarter that indicates an improvement in business conditions during the period. However, while a recovery is under way, it could be tremendously expedited through continued government support and handholding of businesses during this crisis,” said Chandrajit Banerjee, director-general of the CII.
 

Major worries remain
 

With regard to general economic prospects, more than a third of the respondents (35 per cent) foresee a contraction higher than 4 per cent in India’s gross domestic product (GDP) in fiscal year 2020-21.
 

On the inflation front, nearly half the respondents (46 per cent) feel that inflation may inch up further in the current fiscal year as supply-side disruptions, caused by the lockdown-led business shutdowns, have stoked pricing pressures.
 

As a result, a large proportion of the respondents (37 per cent) feel the Reserve Bank of India (RBI) may keep policy rates unchanged in the remaining part of FY21. The continued strain on economic activity will dissuade the central bank from raising rates despite inflation overshooting the target range for the fifth consecutive month, the respondents felt.

 

Profitability was flagged as harder to achieve during the pandemic as nearly half the respondents continued to expect a decline in profits in the July-September quarter after a majority of them (76 per cent) experienced this in the preceding quarter.
 

As businesses still struggle to recover from the pandemic, more than half of the respondents (51 per cent) have indicated that the weakness in domestic demand is likely to be the topmost risk to business confidence in the next six months.
 

Moreover, nearly 30 per cent feel that business activity may return to the pre-pandemic levels only by Q1 FY22.
 

The heightened uncertainty led by the recurrent lockdown in certain states is impacting operations and lengthening the recovery time. This is despite a majority of the workforce returning to the place of work, said 42 per cent of the respondents.