How Are Businesses in India Doing?

Insights Straight from the Source

Newsreel Asia Insight #43
Nov. 13, 2023

In a country where economic narratives often paint a picture of resilience and growth, recent findings from the Indian Institute of Management-Ahmedabad (IIM-A) serve as a stark contrast, revealing a reality that the government seems reluctant to acknowledge: the economic challenges confronting Indian businesses.

Imagine a bustling marketplace, often seen as a barometer of economic health. Here, the vibrancy and volume of trade reflect the pulse of the economy. However, the latest Business Inflation Expectations Survey by IIM-A, akin to a meticulous shopkeeper, has counted the footfalls and sales, only to find them wanting.

About 56% of firms reported “much less than normal” or “somewhat less than normal” in September 2023, a slight but significant increase from 52% in August. This uptick is akin to fewer customers visiting our hypothetical marketplace.

This is indicative of subdued demand in the economy. This could be due to various factors, such as reduced consumer spending, economic uncertainty or external economic shocks. The immediate concern here is the potential for this reduced demand to lead to a slowdown in economic activity, potentially impacting employment and investment.

Further, one in every three businesses, akin to every third shop in your local market, is grappling with soaring costs. It could be the rising prices of raw materials, the increasing wages they pay their workers, or perhaps the growing expense of keeping their lights on. This persistent challenge, faced by about 33% of firms, hasn’t budged in recent months. It’s like a stubborn knot that refuses to untie, impacting everything from how these businesses operate to the prices you, as a consumer, end up paying.

These increased costs may have squeezed profit margins, especially if businesses were unable to pass these costs onto you due to the subdued demand. This situation can lead to a reduction in business investment and hiring, further dampening economic activity.

The survey also indicates a slight uptick in businesses’ inflation expectations for the coming year, creeping up from 4.32% in August to 4.39% in September 2023. At first glance, this consistent hovering around 4.3% for half a year could be misconstrued as a positive sign, a semblance of stability. However, this is misleadingly optimistic. It’s similar to a patient whose temperature remains steadily elevated – not high enough to be alarming, yet not normal enough to be ignored.

This persistently modest inflation expectation, much like the patient’s temperature, hints at an underlying economic malaise, not immediately threatening but quietly concerning. Persistent inflation expectations can lead to a self-fulfilling prophecy, where businesses raise prices in anticipation of higher costs, contributing to actual inflation.

The survey’s methodology is noteworthy. It doesn’t rely on consumer sentiment but directly taps into the insights of businesses – the actual price setters. This approach provides a ground-level view of the economy, akin to asking the farmers about the crop yield rather than the traders.

The survey, drawing insights from roughly 1,100 companies, provides an indirect yet revealing glimpse into the overall demand conditions within the economy. These insights, like pieces of a larger puzzle, complement other macroeconomic data, playing a vital role in shaping informed and effective policymaking.

Think of it as gathering opinions from a broad and diverse group in a large assembly, each sharing their unique perspective on the market’s pulse. This collective input becomes essential in forming a more complete and nuanced picture of the economic landscape, guiding the decisions that shape our economic future.

The survey’s findings on the grassroots business environment suggest there’s a discrepancy between the government’s public script and the actual economic drama unfolding in the business world.

In essence, the survey acts as a reality check, reminding us to look beyond official narratives.