The Hindu Business Line : Business confidence index soars on feel-good factor

THE pervasive feel-good factor sweeping the economy has its echoing effect on the barometers of business confidence index (BCI) which has witnessed an unprecedented spurt of 8.7 percentage points in a single survey period in the quarterly business expectations survey of the premier research institute, the National Council of Applied Economic Research (NCAER).

According to the latest business confidence survey, with few exceptions, the increase in BCI from the level of 1229.4 in October 2003 to 138.1 in January 2004 is fairly based across sectors and regions.

Unlike earlier, all four components of BCI have shown improvement.

While the indicators of overall economic conditions and financial position are up by three and 3.7 percentage points, respectively, the indicators of investment climate and capacity utilisation are up by 9.8 and 1.8 percentage points, respectively.

"Convergence in the assessment of both micro and macro indicators of business confidence this quarter is a clear pointer that optimism in business outlook is broad-based," the Council said.

"A much higher rating suggests that the mood has swung and revival in investment demand is on the cards."

The large hikes in production capacity in automobile and ancillaries, metals, chemicals, electronics and pharmaceuticals also corroborate revival of investment, it added.

While most of the spending will be spread over two to three years, adding up to a figure of Rs 50,000 crore, it might not result into a boom for the banking sector as a large part of the investment would come from internal accruals.

"This perhaps is a signal that the capacity overhang that has dragged down investment since mid-nineties may finally be over", the Council said.

The impact of the current upswing in the economy has been rather mixed on the sales of the companies.

While 41 per cent of the firms reported increase in sales, 46 per cent declared a fall.

The Council said that while increase in domestic demand was the single most important factor pushing current sales volume, foreign demand was not far behind.

While firms are more optimistic on the export front in this round, their expectation about domestic sales during the next six months is somewhat subdued, it added.

Hiring of workforce is likely to increase during the coming six months, though this trend might be more pronounced for the managerial and skilled workforce.

The BCI — measured as a net outcome of the perception of firms pertaining to capacity utilisation, investment climate, financial position of the firm and overall economic condition — has gone up in the eastern and western regions. But the magnitude of increase is sharper in the western region compared to the eastern region.

On the other hand, while the southern region showed only a modest gain in BCI, northern region witnessed stagnation. With the exception of the eastern region, BCI was down in all the other regions in the previous round.

Finally, the general expectation is that the interest rate on all types of loans would fall during the coming months. More of the larger firms, compared to the smaller firms, are expecting expenditure on information technology and related equipment and software to go up in the coming six months, the Council added.