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Relevance of business confidence index in revival story

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A business confidence index (BCI) is an indicator of the business sentiments prevalent across the industry. This index can be used to anticipate turning points in economic activity and growth in output levels in the country. Mint explains:

A business confidence index (BCI) is an indicator of the business sentiments prevalent across the industry. This index can be used to anticipate turning points in economic activity and growth in output levels in the country. Mint explains:

How is BCI relevant to economic climate?

The BCI, which is computed by using macroeconomic indicators, is useful in assessing sentiments among investors. The index calculated by the economic policy research think tank, the National Council of Applied Economic Research (NCAER), is one of the most extensive, and insightful index, which is released on a quarterly basis. NCAER has been tracking business sentiments since 1991. A rise in business confidence is indicative of a higher level of optimism and also shows that industry is upbeat about the overall economic conditions and the expected investment climate for the approaching six months.

What has been the BCI trend like in last 1 year?

In the 115th round of the BCI, the NCAER found that business sentiments showed a V shaped recovery in Q3 of FY21. After witnessing a decline for two consecutive quarters, Q4 FY20 and Q1 FY21, it increased from its lowest point of 46.4 in Q1 FY21 to 65.5 in Q2 FY21 and 84.8 in Q3 FY21. The last year was marked by despair because of the adverse impact of the virus, and hope in the wake of approval and the consequent roll-out of the vaccine. As a result, the Index of Industrial Production for Q1 FY21 had fallen by 46.2% and manufacturing by 56.2%, negatively influencing business sentiments.

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How is business confidence index calculated?

The business confidence index takes into account financial positions of firms, the overall expected economic condition six months from date, the existing investment climate, and level of capacity utilization.

All four indicators have equal weights assigned to them. NCAER tracks business sentiments of nearly 500 companies across the country.

Why is the CCS crucial to the BCI?

RBI’s consumer confidence survey (CCS) is an estimation of household expectations across India of general economic conditions, the jobs scenario, overall price levels, and income and spending levels of citizens. The lowest point of the CCS was seen in May 2020. The CCS is key to growth levels in the country as rise in consumption levels signify an upbeat economic environment that, in turn, has a positive impact on business sentiments. Higher consumption leads to increased capacity utilization.

Has BCI set the FY21 performance trend?

With economic activities picking up after the unlock in Q2 and Q3 of FY21, the BCI rose by 29.6 % between Q2 and Q3. Business sentiments in Q3 were indicative of the overall economic conditions picking up for the next six months. Present capacity utilization rose by 14.4% while sentiment on the investment climate picked up in Q3 FY21. The consumer durables, intermediate and capital goods sector, as well as the services sector improved in round 115 of the BCI.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

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