Eroding political confidence

That the business community should feel a lot more confident should come as no surprise, given how the economy continues to grow, how industrial production continues to hum and, despite the run of good news for well over a year, corporate results continue to defy all predictions of a slowdown.

Together with these factors, the continuing inflow of funds from foreign institutional investors has ensured the Sensex continues to test new heights. So, when the NCAER’s Business Confidence Index (BCI) touches 144.1, continuing its upward movement for over a year—it fell around the time the government came to power—it is only reflective of the underlying fundamentals.

Yet, amidst all the cheery stuff, the BCI has some disturbing elements. For one, although firms expect pre-tax profits to continue to go up in the next six months, the proportion of firms expecting this to happen is subdued.

Interestingly, this is happening at a time when the number of firms expecting raw material prices to go up has declined—the dichotomy can perhaps be explained by firms not being too certain if the government will be able to contain the hike in oil prices, reckoned to be around Rs 40,000 crore the other day by Petroleum Minister Mani Shankar Aiyar.

Also, there is a slight decline in the confidence index in terms of the investment climate— while it rose from 44 last year in July to 56 in April this year, this is down marginally to 55.7 now. Even on the export front, firms appear a lot less certain than in the past.

What is even more intriguing, and the NCAER has no explanation for it since the survey just reports perceptions and not the reasons for them, is the regional break- up of how firms feel.

Apart from the eastern region, where the BCI has risen from 121.5 to 143.1 between the last round and now, the index for the southern region has fallen from 145.3 to 140.5, from 148.5 to 144.3 for the north, while the index for the western region is more or less constant at around 151.

The most amazing decline, an eye-opener for the UPA surely, is the decline in the Political Confidence Index (PCI), which went up from 100 last year in October to 119.1 in January this year, to 119.5 in April and has now plummeted to 104.

The biggest decline has been on account of factors like “managing overall economic growth”, which fell from 54 to 44 between the last round and this one”, and on “pushing the economic reforms forward”, which fell from 59 to 45 between the two rounds.

Ironically, the score for “managing conducive political climate” has gone up, from 19 to 21, which would suggest India Inc is not afraid of the government falling, but feels that the political compromise will be going slow on economic reforms.

Given how the government has formally announced that the Bhel disinvestment is now on the back burner and that the fiscally stressful suggestions on the rural employment bill have been accepted (which will increase costs nearly four-fold), the survey respondents appear bang on target. The fall in the PCI is the highest in the north, though it is certain the floods in Mumbai will ensure the west will show the largest fall the next time around.