Highlights of D&B Optimism Index for India for Q2 2008
Outlook for Q2 2008 - Key Highlights
· Composite Business Optimism Index down 9% q-o-q
· Services and Capital Goods sectors least optimistic
· Optimism Index for Net Profits at 14 quarter low
· 5 of the 6 Optimism Indices register decreases
D&B Optimism Index for India for Q2 2008
The D&B Business Optimism Index for Q2 2008 was conducted in March 2008. GDP growth has slowed down from 9.3% during Q1 FY08 to 8.9% during Q2 FY08 and further to 8.4% during Q3 FY08. Index of Industrial Production growth has also slowed to an average of 6% during the last three months for which data is available (i.e. during Nov 07 to Jan 08) from an average of 9.9% during Apr-Oct 07. High interest rates, a strong rupee and a slowdown in global growth are some of the factors that are expected to have played a role in dampening growth. Further, even while economic growth has witnessed a slowdown, inflation has started to rear its head. WPI inflation crossed the RBI threshold limit of 5% for the first time in more than eight months towards the end of Feb, spurred by an increase in prices of primary articles, oils and metals. Supply side constraints, in particular, have pushed commodity prices higher in both domestic and global markets. Even though the Government has taken measures such as the reduction of customs duties on commodities like edible oils, these measures will have a limited impact, given that international prices of these commodities are high.
On the global front, tight liquidity conditions have increased investor risk aversion to emerging markets such as India and has raised concerns over a possible slowdown in FII inflows. In fact, the BSE Sensex declined by as much as 20% since the last survey conducted and FIIs were net sellers in equities to the tune of Rs 1.30 bn during the month of Mar 08. The BSE Capital Goods Index, in particular, has declined by about 30% since the last survey conducted in Dec 07.
Reflecting the sentiment prevailing in the economy, the Composite Business Optimism Index stands at 153.7, a decline of 9% as compared with the previous quarter. On a yearly basis, the Composite BOI declined by as much as 23.6%; however, this is in part due to the high base of the previous year. Based on the responses received, it was observed that five of the six optimism indices – volumes of sales, net profits, selling prices, new orders and inventory levels have declined as compared with the previous quarter. Amongst the sectors, the services sector and the capital goods sector were the least optimistic.
Since a majority of the services sector respondents belong to the IT, financial services, broking houses and trade segments, it is possible that the strong rupee, a slowdown in global growth and the bearish sentiment in stock markets have dampened expectations of respondents from this sector. A number of firms have also postponed their capital raising plans on concerns that it would be difficult to garner adequate funds given the current bearish sentiment in stock markets. Further, with the global credit squeeze, firms' access to external funds has been limited while the domestic cost of capital remains high. Accordingly, with a few firms deferring their capacity expansion plans, it is possible that there is lower demand for certain types of capital goods. Further, with rising input costs, respondents from the capital goods sector are less optimistic on profit expectations. Q2 expectations for each of the six parameters and their comparisons with those of the previous quarters are discussed on the following pages.
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