Early indicators suggest a slowdown in economy, warns IIM-A survey of 1300 businesses

The latest Business Inflation Expectations Survey (BIES) of the Indian Institute of Management-Ahmedabad (IIM-A) has suggested that while business inflation expectations have decreased significantly by 29 basis points, falling to 4.21% in July 2024 from 4.50% in June 2024, and the average inflation expectation among firms over the past 12 months stands at 4.44%, overall, "early indicators suggest a slowdown in the economy."

The survey, carried out monthly at the Misra Centre for Financial Markets and Economy, IIM-A, said, the sales expectations for July 2024 continue to show a subdued trend. Also, approximately 64% of firms reported ‘somewhat lower than normal’ or diminished profits in July 2024, an increase from of 59% reported in May and June 2024. Approximately 1,300 companies -- primarily from the manufacturing sector -- participated in the survey.

The BIES claims to be a tool to assess economic slack by surveying business leaders about their short and medium-term inflation expectations. The monthly survey focuses on year-ahead cost projections and the factors impacting price fluctuations, such as profit levels and sales volumes. The survey targets businesses -- the price-setters -- rather than consumers, offering insight into their price level expectations.

A key benefit of the BIES is said to be its ability to provide a probabilistic evaluation of inflation expectations, which also reflects the uncertainty surrounding them. Additionally, it indirectly gauges overall economic demand conditions. The findings from this survey are claimed to be instrumental in grasping business inflation expectations and supplementing macroeconomic data essential for policy formulation.

According to the survey, the cost perception data for July 2024 suggest a moderation in cost pressures; however, the percentage of firms experiencing significant cost increases (over 10%) has slightly risen to 15%, up from about 13% in June 2024. The percentage of firms reporting moderate to significant cost increases (3.1% to 10.0%) has decreased to 46% in July 2024, down from 49% recorded in June 2024, it said.

At the same time, the survey regretted, sales expectations remained lacklustre in July 2024, with about 32% of firms reporting ‘much less than normal’ sales, a rise from 28% in June 2024. Additionally, approximately 56% of firms have indicated ‘somewhat less than normal’ or lower sales in July 2024, an increase from 54% during the March to June 2024 period.

The survey noted, around 64% of firms report ‘somewhat lower than normal’ or reduced profits in July 2024, an uptick from 59% noted in May and June 2024. Here, 'normal' refers to the average profit levels observed over the previous three years, excluding the Covid-19 period. "Overall, expectations regarding profit margins remain subdued in July 2024", it concluded.

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