55 Per Cent Biz Leaders State Increase In Costs, Peg Inflation At 5.59 Per Cent: IIMA Study

By: Aekansh Panhotra, BW CFO World

In the recent BIES conducted by IIMA, Indian Business Leaders have expressed their inflation expectations among other business indicators. The study aimed to assess price setters’ inflation expectations, both qualitatively and quantitatively.

In a recent study conducted by Indian Institute of Management, Ahmedabad (IIM-A), different business leaders of the country were asked to fill about a Business Inflation Expectations Survey (BIES). The responses from the study were used to examine the amount of slack in the economy by polling business leaders about their inflation expectations in the short and medium-term.

BIES-July 2021 is the 51st round of the survey and the results are based on the responses of 1200 companies. Questions about profit margins, sales levels, cost per unit, and expected cost per unit were asked in the questionnaire.

The business inflation expectations for the year ahead as recorded in July 2021 have further increased by 30 basis points from 5.27 per cent reported in June 2021 to 5.59 per cent, calculated from the average of the probability distribution of unit cost increase.

The uncertainty of business expectations in July 2021 has declined from 2 per cent in June 2021 to 1.9 per cent.

When enquired about costs, over 55 per cent of the firms indicated significant cost increase (above 6 per cent) which was more than 53 per cent recorded in June 2021. It is also noted from the results that over 29 per cent of the firms recorded a very significant cost increase (above 10 per cent).

However, sales expectations have continued to recover and normalise over time. In July 2021, over 39 per cent of the firms reported that sales are ‘much less than normal’- further improvement as compared to the data from June 2021.

In July 2021, 46 per cent of the firms recorded ‘much less than normal’ profit, down from 50 per cent recorded in June 2021. This change was mostly because of a shift in responses from ‘much less than normal’ to ‘about normal’ category.

Comparing the results to RBI estimates, Professor Abhiman Das who led the study remarked, “The legal mandate of RBI is to achieve a target of 4 per cent CPI (combined) inflation in the economy, with a tolerance band of 2 per cent on either side. In normal circumstances. RBI would have increased the interest rates because of the high inflation over its target and increasing inflationary expectations in the economy. However, RBI s presumably maintaining an accommodative stance and tolerating the rate to 6 per cent because the overall demand is still low.”

He further added, “The inflationary numbers would stabilize for the economy by January in the range 5.5 to 6.5 percent if there is no third wave. But if there is a third wave, the economy will obviously be affected but the businesses would be better prepared now for the worst and the effect would be low on overall demand. However, the economy may witness a much higher inflation in such a case.”

The pandemic has had an uneven impact on the businesses, with larger firms displaying better signs of resilience owing to the size of their balance sheets. Commenting on the state of MSME impact Professor Das observed, “It is the small and medium-size businesses which are facing critical problems due to the situation of the economy as compared to the large firms. The 45 per cent firms which are claiming that their sales are much less than normal, they are the small and medium-size firms whereas the ones with sales nearing normal or above normal are the large size firms or the MNCs.”

But signs of recovery are well on their way if India’s vaccination pace and business resumption remain green. “The manufacturing sector, in a few months, will get back to the level of September 2020 – when Unlock 1 was imposed. f the activities remain the same, the bottom line will not improve much because now the cost is high due to the inflationary statistics. But the sales from the demand perspective will become almost equal to the pre-pandemic period in 2-3 months if there is no third wave,” Professor Das said.

Business resilience post the second wave is expected to have strengthened, with companies better prepared for a third wave, thereby limiting adverse impact on supply and the economy. The pace of vaccination and the renewed focus for healthcare infrastructure are also remain as positive signs.