Indian Business Inflation Expectations Survey – November 2020

Measuring uncertainty and the overall demand in the economy

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BIES Survey November 2020
The Indian Business Inflation Expectations Survey by IIM Ahmedabad – One year ahead business inflation expectations in %. Graphic IIM-A

The Business Inflation Expectations Survey (BIES) provides ways to examine the amount of slack in the economy by polling a panel of business leaders about their inflation expectations in the short and medium-term. This monthly survey asks questions about year-ahead cost expectations and the factors influencing price changes, such as profit, sales levels, etc. The survey is unique because it goes straight to businesses – the price setters – rather than to consumers or households to understand their expectations of the price level changes.

One significant advantage of BIES is that one can get a probabilistic assessment of inflation expectations and thus get a measure of uncertainty. It also provides an indirect evaluation of the overall demand condition of the economy. Therefore, the results of this survey are useful in understanding the inflation expectations of businesses and complement other macro data required for policymaking. With this objective, the BIES was introduced at the Indian Institute of Management, Ahmedabad (IIMA) in May 2017. The BIES questionnaire is finalized based on the detailed feedback received from the industry, academicians, and policymakers. A copy of the questionnaire is available.

Companies are selected primarily from the manufacturing sector. The BIES – November 2020 is the 43rd round of the survey. These results are based on the responses of around 1100 companies.

Professor Abhiman Das, the RBI Chair Professor in Finance and Economics and chairperson, Economics Area, Wing 14F at the Indian Institute of Management Ahmedabad reports briefly on the November BIES survey that, one year ahead business inflation expectations in November 2020 have increased sharply by 50 basis points to 4.28% from 3.78% reported in October 2020.

Secondly, the cost perceptions data indicates a further hardening of cost pressures.  Around 1/3rd of the firms in this round of the survey perceive a significant (over 6%) cost increase. About 17% of the firms perceive that costs have increased very significantly (over 10%).

Thirdly, Eexpectations of sales have further improved – reflecting improved demand conditions. For the first time in the year 2020, about one-third of the firms report that sales are normal or above normal. However, firms’ expectations of ‘about normal’ or greater profit margin have not improved.

Lastly, while sales have further improved, profit margins are adversely affected by increased cost concerns.

Inflation expectations

One year ahead, business inflation expectations in November 2020, as estimated from the mean of the individual probability distribution of unit cost increase, have witnessed a sharp increase of 50 basis points to 4.28% from 3.78% reported in October 2020. The trajectory of one year ahead business inflation expectations is presented in Chart 1. Above, Chart 1 – One year ahead business inflation expectations (%).

As captured by the square root of the average variance of the individual probability distribution of unit cost increase, the uncertainty of business inflation expectations has increased to 2.2% in November 2020 from 1.9% reported in October 2020.

Costs 

The cost perceptions data indicates a further hardening of cost pressures. Around one-third of the firms in this round of the survey perceive a significant (over 6%) cost increase. About 17% of the firms perceive that costs have increased very significantly (over 10%).

Over 58% of the firms find that the current cost increase is ‘3.1% and above’ compared to the same time last year – further up from 55% reported in October 2020 (Chart 2). This is primarily driven by the firms indicating a very significant cost increase (over 10%).

BIES Survey November 2020. Chart 2 – How do current costs per unit compare with this time last year? IIM-Ahmedabad
BIES Survey in November 2020. Chart 2 – How do current costs per unit compare with this time last year? IIM-Ahmedabad

Sales Levels

Expectations of sales have further improved – reflecting improved demand conditions. Over 37% of the firms in November 2020 report that sales are ‘much less than normal’ against 46% firms reporting in October 2020. For the first time in the year 2020, about one-third of the firms say that sales are normal or above normal (Chart 3).

BIES November 2020. Chart 3 – Sales Levels ‘Normal’ means compared to the average level obtained in the preceding three years. Graphic IIM-Ahmedabad
BIES November 2020. Chart 3 – Sales Levels ‘Normal’ means compared to the average level obtained in the preceding three years. Graphic IIM-Ahmedabad

Profit Margins

Over 47% of firms in the sample in November 2020 report ‘much less than normal’ profit – up from 40% reported in October 2020 (Chart 5). However, the responding firms’ expectations of ‘about normal’ or greater profit margin have not improved in this round of the survey.

BIES Survey November 2020. Chart 4 – Profit Margins – %. Graphic IIM-Ahmedabad
BIES Survey in November 2020. Chart 4 – Profit Margins – %. Graphic IIM-Ahmedabad

The Business Inflation Expectation Survey (BIES) – Questionnaire.

Past reports are available at https://www.iima.ac.in/web/faculty/faculty-profiles/abhiman-das. All aggregate data is also made available on the website. 

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