IMA’s headline Business Confidence Performance Index (BCPI) has fallen just below the half-way mark in the first quarter, which is the April to June period, of financial year 2012-13. While it had shown a slight recovery in the last quarter, which is the January to March period, of financial year 2011-2012, the findings of the current survey suggest that industry has recalibrated its expectations to align them more closely to actual performance. The fall in the index is driven largely by a drop in the macroeconomic subindex, which remains firmly in the red. Business performance – in terms of sales growth, order book expansion, profitability, capacity utilisation, and new (not replacement) hiring – remains muted, and is not very different from the last quarter. Companies continue to control their spending on the ‘soft’ things such as, advertising / marketing, team and morale building, travel, and travel privileges, among others. However, there are signs of a bottoming-out of such expenditure. Importantly, while the headline BCPI indicates deterioration in overall business sentiment, it does not signify any sharp downswing compared to Q4 FY12.

Once again slipping into negative territory¹, the BCPI has hit an all-time low of 48.9 in Q1 FY13 (See Chart 1). While the findings of the previous survey had shown that industry was cautious in its outlook, and yet anticipated better conditions in the coming months, the current survey suggests that the guarded ‘pick-up’ in business sentiment in the last quarter has not sustained.

Comparing actual performance with expectations², the survey analysis finds that on average, respondents’ expectations for Q1 FY13 are in line with their actual performance in the previous quarter (See Chart 2). This is unlike earlier survey rounds where respondents have been more optimistic, and their expectations about coming quarters tended to be stronger than their actual performance. Compared to the previous edition of the survey, therefore, the corporate sector does not appear to be holding out much hope of recovery in the near term from the volatility and uncertainty of the past few quarters. Further, the BCPI in each quarter largely moves in step with quarterly GDP growth, indicating a close correlation between industry sentiments and actual economic growth. Even in this quarter, the subdued expectations are in line with the largely negative outlook for India’s GDP growth – for instance, Morgan Stanley cut its growth forecast for calendar year 2012 from 6.9 per cent to 6.3 per cent.

The negative sentiment this quarter is primarily driven by a nearly 7-point drop in the macroeconomic sub-index to 35.6 (See Chart 3). Reflecting the challenges in the broader macroeconomic environment, 46.2 per cent of the BCPI survey respondents report a worsening of conditions this quarter, compared to only about a fourth who expected them to weaken. It is not all bad news however – a lower 38 per cent expect the macro economy to worsen (and 15.6 per cent expect it to improve, compared to 8.6 per cent who actually reported an improvement). However, this does not, by any stretch, imply that negative perceptions about the operating environment have reduced, particularly when viewed from the longer term perspective – businesses continue to be considerably less confident about their operating environment compared to a year ago.

Among other business parameters, growth in new orders picked up pace for over 42 per cent of the firms, but only 36 per cent expect this to sustain over Q1 of the current fiscal. The pressure on profitability is not easing off – with only 28 per cent expecting growth to be faster, compared to 40 per cent who saw higher growth in Q4. The figures for capacity utilisation are similar. The survey’s findings of a sustained pressure on profitability over the last few quarters is supported by CMIE figures which report an actual drop in profit after tax (PAT) in Q2 (July to September 2011) and Q3 (October to December 2011) FY12, and low single-digit growth for Q1 2012 (April to June 2012). Meanwhile, firms continue to be cautious on new hiring – about a third of firms cut back their hiring and an equal percentage expect to do the same in the current quarter. Further, the index that tracks CapEx remained below 50 this quarter, reflecting industry’s continued caution in investment plans, in line with industry-level data.

A weakening rupee has hit companies in several sectors – including power, automobile and steel. A few other sectors, on the other hand, are gaining due to the weak rupee – for instance, the pharmaceuticals sector, which has high export volumes. The pharmaceuticals / healthcare sector in fact stands out in the current BCPI as the respondents indicate a sharp pick-up in business parameters.

The IT sector, meanwhile, is impacted both ways by the volatile exchange rate. Interestingly, the BCPI survey shows that while the sales growth sub-index for the IT sector continues to be robust, profitability is under stress.

India’s economy also continues to be hurt by costly credit. Passenger car sales – a key indicator of consumer sentiment – are affected by high interest rates, and grew by a low 3.4 per cent in April. The automobile industry is now voicing concerns about the recent petrol price hike.

At 45, the index for discretionary spending – which covers advertising / marketing, team and morale building (including offsites), and travel expenses, as well as travel privileges – remains firmly in the negative space (See Chart 4). To lessen some of the stress on profitability levels and as measures to enhance internal productivity, firms have reined in their discretionary spends quarter-on-quarter. For team-building expenses, this trend is unchanged even in the current quarter. On the whole, however, the bulk of the respondents indicate no change in their discretionary expenses and a vast majority do not plan to change expenditures on this count. Clearly, firms are continuing to hold down their spending on the ‘soft’ things, even as fewer respondents expect to further reduce such spending in April-June.