81st Business Outlook Survey

October-December 2012

Highlights
The CII Business Confidence Index (CII-BCI) for October-December 2012 fell by 1.4 points to 49.9, after rising to 51.3 in July-September 2012 and 55.0 in April-June 2012. The survey reveals that most of the respondents (34 per cent) expect GDP growth to lie within a range of 5.5-6.0 per cent for 2012-13. Worryingly, a close 33 per cent of the respondents expect growth to lie within an even lower range of 5.0-5.5 per cent for 2012-13. 36.8 per cent of respondents expect average WPI inflation to lie in a range of 7.0-8.0 per cent, while another 29.2 per cent expect it to come in a range of 8.0-9.0 per cent for 2012-13. Additionally, 17 per cent of the respondents also expect inflation to jump above 9 per cent. The survey shows that majority of the respondents (54.8 per cent) expect the fiscal deficit to lie in a range of 5.5-6.0 per cent of GDP, while 24 per cent expect it to climb to a range of 6.0-6.5 per cent of GDP in 2012-13. According to the survey, majority of the respondents (51.5 per cent) expect the domestic investments of their firms to show a decline or no change in the October-December 2012 quarter while 41.6 per cent expect it to increase. Most of the respondents (42.0 per cent) expect international investments to show a decline or no change in the third-quarter 2012-13, while 34.6 per cent of respondents expect it to record any increase. In a sign of improving capacity utilization, a most of the respondents (41.2 per cent) expect it to remain above 75 per cent in the third-quarter of the current fiscal. The survey reveals that most of the respondents expect no change in their value of production, inventory levels and employment in the third-quarter of 2012-13. In contrast, only overall sales and new orders are expected to increase by bulk of the respondents in the third-quarter of 2012-13. An overwhelming majority of respondents (81.7 per cent) saw the availability of credit decline or remain unchanged in the period July-September 2012 mainly due to high interest rates prevailing in the economy. Expectations for the third-quarter 2012-13 too reveal almost similar trend. In line with high inflation, high international crude oil prices, power shortage and high input costs, 61.2 per cent of the respondents recorded an increase in raw material while 81.8 per cent saw their electricity & fuel cost going up during July-September 2012. Expectations for the October-December 2012 quarter are however more sanguine as it shows that lower proportion of respondents are expecting raw material cost (45.5 per cent) and electricity & fuel cost (63.7 per cent) to increase. The 81st Business Outlook Survey reveals that unlike in the previous survey Domestic

Economic/Political Instability has emerged as the topmost concern for most firms, followed by High Interest Rate and Infrastructure and Institutional Shortages.

I. Business Confidence Index

Corporate performance in the last few quarters has been lackluster reflecting the downbeat sentiments in the Indian Economy. The global environment confronting Indias corporate sector is without precedent in the post-reform era since early 90s. The exports have contracted and private consumption demand growth has decelerated. Reflecting the rising uncertainty amongst the corporates regarding the current economic conditions, the CII Business Confidence Index (CII-BCI) for October-December 2012 fell by 1.4 points to 49.9, after rising to 51.3 in July-September 2012 and 55.0 in April-June 2012. This is only the second time since the quarterly survey was started in third-quarter of 2010-11, that the BCI has fallen below 50, thus indicating weakening growth momentum.

The worsening of the index value for October-December 2012 is mainly attributable to domestic economic & political instability, high interest rates, infrastructural & institutional shortages and persistently high inflation. Surprisingly, faltering global growth took a back-seat as one of the major concerns cited by the respondents. The respondents in the survey were asked to provide a view on the performance of their firm, and the economy based on their perceptions for next quarter. The CII-BCI is then constructed as a weighted average of the Current Situations Index (CSI) and the Expectation Index (EI). The Expectation Index (EI) which reflects the expectations of the respondents for the OctoberDecember 2012 quarter fell by 2.6 points from the level in the previous survey.

Quarterly Business Confidence Index (BCI)

Index Business Confidence Index Current Situation Index Overall Economy Own Activity Sector Own Company Expectation Index Overall Economy Own Activity Sector Own Company Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13

66.7 62.7 59.9 63.0 63.4 68.7 65.6 68.8 69.7

62.5 62.6 61.1 61.8 63.7 62.4 61.1 61.1 63.7

53.6 52.7 49.2 51.8 54.4 54.0 48.5 53.7 56.1

48.6 47.7 44.5 46.0 50.0 49.1 44.2 47.5 51.7

52.9 54.7 49.4 46.9 56.3 51.9 48.9 46.9 56.3

55.0 51.9 48.9 46.9 56.3 56.5 52.8 53.5 59.7

51.3 47.5 36.3 44.6 53.2 53.2 44.6 49.8 58.4

49.9 48.6 44.5 45.9 51.7 50.6 47.5 48.1 53.3

Business Confidence Index

71 .8 63.9 66.3 61 .0 56.3 58.7 53.6 48.6 52.9 55.0 51 .3 49.9 66.1 67.6 66.2 66.7 62.5

65.7

67.2

69.3

H1 2005-06

H2 2005-06

H1 2006-07

H2 2006-07

H1 2007-08

H2 2007-08

H1 2008-09

H2 2008-09

H1 2009-10

H2 2009-10

H1 2010-11

Q3 2010-11

Q4 2010-11

Q1 2011-12

Q2 2011-12

Q3 2011-12

Q4 2011-12

Q1 2012-13

Q2 2012-13

II. General Business Prospects

Growth
The slowdown of economic growth in the last fiscal has spilled over to the current fiscal as well, with the first half GDP growth slowing to 5.4 per cent as compared to 7.3 per cent in the same period last year. The sluggish momentum of value added in the first-half was evident across all sectors of the economy, and particularly in industry. After notching up a below-trend performance in the first-half of the fiscal so far, the growth outlook for the second-half does not look too bright either. With the governments new revised target of 5.7-5.9 per cent growth for 2012-13, the second-half needs to grow by at atleast 6 per cent. Achieving this would indeed be a tough task for the economy. Reflecting the subdued growth trends in the economy, the survey also reveals that most of the respondents (34 per cent) expect GDP growth to lie within a range of 5.5-6.0 per cent. The growth expectations for the current fiscal seem to have worsened, as the last survey had revealed that most of the respondents expected growth to lie in a range of 6.0-6.5 per cent. Worryingly, a close 33 per cent of the respondents expected growth to lie within an even lower range of 5.0-5.5 per cent for 201213.

Q3 2012-13

Expected Econom ic Grow th in 2012-13 (% of Respondents) 2.80.9 18.9 33.0

10.4

34.0

<5.0%

5.0% -5.5%

5.5% -6.0%

6.0% - 6.5%

6.5% - 7.0%

> 7.0%

Inflation
In contrast to sharp slowdown in growth, whole-sale price based inflation (WPI) has continued to remain persistently high in the current fiscal. Headline WPI (wholesale price index) inflation averaged above 9 per cent in the last two fiscal years. This year too it has remained sticky at around 7.5 per cent so far. Adverse shocks from shortfall of food articles due to sub-par monsoon this year, and higher global fuel and commodity prices have triggered inflationary pressures. Inflation has only marginally abated in the last few months and upside risks to inflation continues to persist. Accordingly, the survey also reveals that 36.8 per cent of respondents expect average WPI inflation to lie in a range of 7.0-8.0 per cent, while another 29.2 per cent expect it to come in a range of 8.0-9.0 per cent for 2012-13. Additionally, 17 per cent of the respondents also expect inflation to jump above 9 per cent.

Expected Average Inflation (WPI) in 2012-13 (% of Respondents)

0.9 1 6.0 1 7.0

29.2

36.8

<6.0%

6.0% -7.0%

7.0%-8.0%

8.0%-9.0%

>9.0%

Fiscal Deficit
The fiscal deficit target for 2012-13 is under the danger of being breached by a wide margin. For the first eight months of the current financial year up to November 2012, the fiscal deficit of the union government has already touched close to 80 per cent of the budgeted amount. Slowing growth momentum of the economy has resulted in lower realization of tax revenues, especially from indirect taxes. The failure to raise targeted revenues from the recent auction of 2-G spectrum has also compounded the difficulties of the government. Further, the expenditure of the government has been increasing much beyond the budgeted target. The government had revised the fiscal deficit target to 5.3 per cent for the current fiscal. However, in light of the precarious situation of the government finances, the survey shows that majority of the respondents (54.8 per cent) expect the fiscal deficit to lie in a range of 5.5-6.0 per cent of GDP, while 24 per cent expect it to climb to a range of 6.0-6.5 per cent of GDP in 2012-13.

Expected Fiscal Deficit as a % of GDP in 2012-13 (% of Respondents) 8.7 12.5 24.0

54.8

5.0% -5.5%

5.5% -6.0%

6.0% - 6.5%

6.5% - 7.0%

Exchange rate
Exchange rate movement has remained quite volatile in the fiscal year 2012-13 so far. After slipping to a low of 57.2 per US$ in late June 2012, it recovered to reach a high of 51.6 per US$ in early October. However in the last few months, Rupee has once again depreciated against the greenback and is currently hovering around 54.0-55.0 per US$. Such huge volatility in exchange rate has deleterious impact on the business plans of the firms. As per the survey, more that three-fifth of the respondent firms (45.1 per cent) expect exchange rate to remain in between 53-55 per US$ by March 2013, while only 16.5 per cent expect it to weaken it to 55.0 per US$.

Expected Exchange Rate by March 2013 (% of respondents) <Rs. 50, 4.4 >Rs. 55, 16.5 Rs. 50-51, 13.2

Rs. 51-52, 11.0 Rs. 54-55, 20.9

Rs. 52-53, 9.9

Rs. 53-54, 24.2

Will the recent reforms make any difference to growth prospects?

In order to cushion falling growth, government had announced a slew of policy reforms in the last few months. The winter session of the Parliament saw the passage of crucial bills such as the Banking Bill and Companies bill. Additionally, in order to provide a fillip to investment, Cabinet Committee on Investment was formed and government won the crucial vote on FDI in multi-brand retail. Earlier in September 2012, government had set the reforms juggernaut rolling by enhancing the FDI investment limit in broadcasting services and power trading exchanges. All these cumulatively are expected to have a positive impact on the growth prospects of the economy going forward. However, the survey revealed that most of the respondents (37.4 per cent) did not expect these policy reforms to improve the GDP, while only 31.8 per cent replied in the affirmative. In contrast, 38.9 per cent of the respondents expected the recent policy reforms to kick-start domestic investments, while only 31.5 per cent answered in the negative. In sum, there is a mixed picture emerging on the expected impact of the recent policy reforms on both growth and investment by the respondents. It will be critical for the government to not buckle under the political opposition to these reforms and implement these measures without any further delay.

Policy Reforms to Improve GDP (% of Respondents)

Policy Reforms to Kick-Start Domestic Investment (% of Respondents)

30.8 31.8

31.5 38.9

29.6

37.4 Yes No Not Sure

Yes No Not Sure

III. Business Prospects

Capacity Expansion & Capacity Utilization
In tandem with the weak economic prospects of the economy for the current fiscal, the respondent companys spending on capacity expansion has also remained tepid. The survey revealed that 49.1 per cent of respondents expected no change in the spending on capacity expansion in October-December 2012 quarter, while an equal percentage of respondents (25.5 per cent) expected it to increase and decrease during the third quarter of 2012-13. Encouragingly, most of the respondents (41.2 per cent) expect capacity utilization to lie in a range of 75-100 per cent in the October-December 2012 quarter which is indeed a propitious sign as it indicates that companys expect demand to recover in the months to come. 39.2 per cent of the respondents also expect the capacity utilization to lie within a range of 50-75 per cent in the comparable period.

Expected Spending on Capital Expansion in October-December 2012 (% of Respondents) 49.1

Expected Capacity Utilisation in October-December 2012 (% of respondents) 41.2

39.2

25.5

25.5
13.4 6.2

Increase

Decrease

No Change

Below 50%

50-75%

75-100%

> 100 %

Investment Plans
Notwithstanding the announcement of the recent reform measures to prop up investment demand in the economy, investor sentiments still remain bleak. The reform measures are expected to positively impact investment demand with a lag and we might see some improvement in the next few quarters. The present situation, however, continued to remain grim. The survey too reveals a similar scenario. According to the survey, majority of the

respondents (51.5 per cent) expect the domestic investments of their firms to show a decline or no change in the October-December 2012 quarter. Of those expecting an increase in domestic investment, 30.7 per cent expect it to increase by 0-10 per cent, while 7.9 per cent expect it to increase by 10-20 per cent. Mere 3.0 per cent of respondents expect it to record a more than 20 per cent jump in the third-quarter of 2012-13.

Mirroring the trend of domestic investment trends, most of the respondents (42.0 per cent) expect international investments to show a decline or no change in the third-quarter 2012-13, while 34.6 per cent of respondents expect it to record any increase. Amongst those expecting the international investments to increase, 23.5 per cent expect it to increase by 0-10 per cent, while 9.9 per cent expect the jump to be between 10-20 per cent.

Expectation on Investm ent Plan for October-Decem ember 2012 (% of Respondent 51.5 42.0 30.7 23.5 9.9 1.2 Decline or no change Increase by 10-20% Not Applicable Increase by 0-10% Increase by >20% Not Applicable 23.5

7.9 3.0 Decline or no change Increase by 10-20% Increase by 0-10% Increase by >20%

6.9

Domestic Investments

International Investments

Impact of the recent reform measures on firms

Interestingly, the survey reveals that most of the respondents replied in the negative when asked about the direct or indirect impact of the recent reform measures such as raising FDI in aviation sector, power trading exchanges and single/multi-brand retail on their companys fortune. In fact, majority of respondents (59.6 per cent) did not feel that raising the FDI limit in aviation sector would benefit them, while 45.5 per cent and 37.9 per cent felt the same about raising FDI in power trading exchanges and single/multi-brand retail respectively. This is not a good sign for government as it had hoped that these policy makers would help lifting the pall of gloom which has currently descended over the Indian economy.

10

Will the recent reform m easures directly or indirecly benefit the com panies (% of respondents) 59.6 45.5 35.0 25.7 20.2 20.2 28.7 37.9 27.2

Yes

No

Can't Say

Yes

No

Can't Say

Yes

No

Can't Say

Aviation Sector

Pow er Trading Exchanges

Single and Multi-brand Retail

IV. Overall Trends

Overall sales
In an encouraging sign, majority of respondents (50 per cent) expect their sales to record a jump in October-December 2012 quarter, while 20.9 per cent expect it to decline. As for the actual sales trend in July-September 2012, again majority (41.3 per cent) of the respondents saw their sales increasing while 37 per cent of the respondents saw no change. This is indeed a good sign for the economy and bodes well for growth prospects.

11

Expected Sales (% of respondents) 50.0 41.3 37.0 28.1 21.7 21.9

Increase

No Change

Decline

Actual July-September 2012

Expected October-December 2012

New Orders
The survey revealed that bulk of the respondent firms (47.2 per cent) witnessed no change in the new orders in the second-quarter of 2012-13, while 32.6 per cent saw an increase in the same. Only 20.2 per cent posted a decline in new orders in the second-quarter. The outlook for new orders is positive in the third-quarter (October-December) of 2012-13; with most of the respondent firms (48.9 per cent) expecting the new orders to increase and only a few (16.3 per cent) expecting a decline.

New Orders (% of Respondents) 48.9 34.8 20.2

47.2 32.6

16.3

Increase

Increase

No Change

Decline

No Change

Actual July-September 2012

Expected October-December 2012

12

Decline

Value of Production
The results of the 81st Business Outlook survey showed that majority of the respondent firms (50.0 per cent) witnessed stagnancy in their value of production in the period from JulySeptember 2012, while 32.9 per cent of them saw an increase. The expectations for the October-December 2012 quarter are somewhat on similar lines, with most of the respondent firms (41.4 per cent) expecting no change in their value of production and 39.1 per cent expecting an increase. Only a few (19.5 per cent) expect it to decline in the third-quarter due to rising cost of inputs.

Value of Production (% of Respondents)

50.0 32.9 17.1 39.1 41.4 19.5

No Change

Increase

Actual July-September 2012

Expected October-December 2012

Inventory
According to the survey results, most of the respondent firms (48.8 per cent) saw no change in the inventory levels in the second-quarter of 2012-13 as due to rising uncertainty in both domestic and global scenario; they preferred to keep their production plans on hold. 36.9 per cent of respondents also reported an increase in inventory level compared to 14.3 per cent expecting a decline. As for the expectations for the October-December quarter of 2012-13, once again majority of the respondent firms (50 per cent) expect their inventory levels to remain unchanged, while 30.7 per cent expect to see the levels increasing.

13

Increase

No Change

Decline

Decline

Inventories (% of Respondents)

14.3 48.8

19.3

50.0

36.9 Actual July-September 2012 Increase

30.7 Expected October-December 2012 No Change Decline

Availability of Credit
As regards to the availability of credit, an overwhelming majority of respondents (81.7 per cent) saw their availability of credit either unchanged or decline during the July-September 2012 quarter, while another 18.8 per cent saw it increasing. This was attributable mainly to the persistently high interest rates prevailing in the economy currently. Expectations for the third-quarter 2012-13 too reveal almost similar trend, with bulk of the respondent firms (79.3 per cent) expecting the availability of credit to either remain stagnant or decline, in contrast to 20.7 per cent expecting an increase in credit availability.

Availability of Credit (% of Respondents)

Decline

16.5

18.4

No Change

64.7

60.9

Increase

18.8

20.7

Actual July-September 2012

Expected October-December 2012

14

Employment
The survey showed that that majority of the respondent firms (73.3 per cent) kept their employment levels unchanged in the second-quarter of 2012-13 as opposed to 13.3 per cent which saw either an increase in their employment levels. Expectations for the OctoberDecember of 2012-13 reveal that, once again majority of the respondent firms (64.8 per cent) expect no change in their employment levels, while 19.8 per cent expect it to decline. Only 15.4 per cent expect an increase in their employment levels in the third-quarter as compared to 13.3 per cent in the second-quarter.

Employment (% of Respondents)
73.3 64.8

13.3 15.4

19.8 13.3

Increase

No Change

Decline

Actual July-September 2012

Expected October-December 2012

Pre Tax Profits

Mirroring the gloomy macroeconomic scenario, the survey revealed that majority of the respondent firms (43.3 per cent) saw their pre-tax profits declining in the second-quarter of 2012-13, while only a minority (25.6 per cent) posted an increase in the profits. 31.1 per cent saw stagnancy in their pre tax profits in the second-quarter. The good news is that the number of respondent firms expecting a decline in their pre tax profits in the third-quarter of 2012-13 is now lower at 36.3 per cent, while an even higher 30.8 per cent expect the profits to increase as compared to the second-quarter of the current fiscal.

15

Pre Tax Profit (% of Respondents)

43.3

36.3

31.1

33.0

25.6 Actual July-September 2012 Increase No Change

30.8

Expected October-December 2012 Decline

Raw Material Cost

In line with high inflation, high international crude oil prices, power shortage and high input costs, 61.2 per cent of the respondents recorded an increase in raw material while 81.8 per cent saw their electricity & fuel cost going up during July-September 2012. Expectations for the October-December 2012 quarter are however more sanguine as it shows that lower proportion of respondents are expecting raw material cost (45.5 per cent) and electricity & fuel cost (63.7 per cent) to increase. Cost of credit on the other hand is likely to remain unchanged according to 57.8 per cent of the firms in the third-quarter 2012-13, albeit lower than the second quarter.

16

Raw Material Cost (% of Respondents) Actual July-September 2012

81 .8 61 .2 45.5 47.7 32.9 36.3 1 8.2 5.9 6.8 0.00.0 2.3 1 .1 63.7 55.6 51 .7 43.3 46.0 33.3 28.9 1 3.3 3.7 63.0 57.8

Expected October-December 2012

Raw Material Cost

Decrease

Electricity and Fuel Cost

Decrease

Wages & Salaries Cost

Decrease

Cost of Credit

VI. Export and Import Trends

Volume of Exports and New Orders
In the second quarter of 2012-13, 22.4 percent of the respondent firms recorded a decline in export volumes, while 23.9 per cent recorded an increase and 53.7 per cent recorded unchanged levels of export volumes. The respondent firms had been largely able to maintain their exports volumes due to selling in new markets other than the traditional ones which are going through tough phase. Expectations show that majority continue to expect volume of exports to increase or remain unchanged, while little less than a fourth (22.2 per cent) expects it to decline in October-December 2012-13.

With regards to new orders, the survey revealed that most of the respondent firms (62.5 per cent) witnessed unchanged levels in July-September 2012, while 20.3 per cent registered an increase and 17.2 per cent saw a decline in new orders. However, during October-December 2012, majority (81.2 per cent) expect new orders to increase or remain unchanged.

Volume of Imports

According to the survey, volume of imports in July-September 2012 remained unchanged for majority of the respondent firms (67.2 per cent) as compared to the previous quarter, while 21.3 per cent of firms registered an increase in import volumes and mere 11.5 per cent

17

Decrease

Increase

Increase

Increase

Increase

No Change

No Change

No Change

No Change

registered a decline. It appears that strong domestic demand has superseded the dampening impact of rupee depreciation on imports. Expectations for October-December 2012 show similar trends, with majority expecting volume of imports to either increase or remain unchanged. However, the share of respondents who expect import volume to decrease plunged slightly to 10.3 per cent.

Trade (% of Respondents) Actual July-September 2012 Expected October-December 2012

No 67.2 Change 64.7

No 62.5 Change 52.2

No 53.7 45.8 Change

23.9 31.9

20.3 29.0

22.4 22.2

17.2 18.8

21.3 25.0

Increase

Decrease

Increase

Decrease

Increase

Volume of Exports

New Orders

Volume of Imports

VII. Business Concerns

The 81st Business Outlook Survey reveals that Domestic Economic/Political Instability is the topmost concerns of most firms, followed by High Interest Rate and Infrastructure and Institutional Shortages. Stagnancy in reforms was, however the topmost concern in the last survey. The current survey revealed that Inadequate Skilled Labour is the lowest ranked concern for businesses at this point in time.

18

Decrease

11.5 10.3

Business Outlook: Concerns 3.71

3.66 3.60 3.57 3.55 3.51 3.51 3.49

3.43 3.34 3.25

Domestic Economic/Political Instability

Burgeoning Fiscal Deficit/High Fiscal Deficit

Global Economic/Political Instability

Currency Risks

High Interest rates

High Raw material Cost

VIII. Coverage & Methodology

CIIs 81st 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 NovemberDecember 2012.

Majority of the respondents (51 per cent) belonged to large-scale firms, while 30 per cent were from medium-scale firms and 23 per cent and 4 per cent each were from small-scale and micro firms respectively. Sectoral break up shows that 78 per cent of the respondents were from manufacturing sector while 29 per cent and 1 per cent were from services and primary 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 respondents 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.

19

Threat to Reforms Process

Infrastructure and Institutional Shortages

Inadeqaute skilled labors

Persistent High Inflation

Slackening Consumer Demand

In the construction of the two sub-indices, the highest weight is given to the questions related to the performance of the individual firm, and the lowest weight is assigned to the questions on the economy. The weights are assigned on the basis of the premise that the average respondent would possess more detailed and accurate knowledge on the current and expected performance of his own firm than the economy as a whole.

*************************

DISCLAIMER Copyright 2012 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 can be held responsible for any financial consequences arising out of the use of information provided here in. CII Business Outlook Survey is a quarterly survey conducted by the CII Economic Research Group. Reach us at ecoresearch@cii.in

20