Mixed cost signals overshadow brighter sales and margin trends: IIMA survey

By A Representative 

Business sentiment in India showed notable improvement in July 2026, driven by a sharp recovery in sales expectations and a gradual easing in the proportion of firms reporting severely depressed profit margins. However, the latest Business Inflation Expectations Survey (BIES) from the Misra Centre for Financial Markets and Economy at IIMA also reveals that cost conditions remain mixed, while one-year-ahead inflation expectations have inched up marginally, accompanied by persistently high uncertainty among firms.

The survey, which polls around 1,000 companies primarily from the manufacturing sector, reported a significant uptick in sales optimism in July. More than 50 percent of firms indicated that their current sales levels were "about normal" or greater, a sharp increase from 43 percent in June 2026. This improvement suggests a broad-based strengthening in demand conditions, with a growing number of businesses feeling that activity is converging toward pre-pandemic averages, which the survey defines as the average level over the preceding three years, excluding the COVID-19 period.

This positive momentum in sales appears to be feeding through to profit margins, which have been a persistent area of concern in recent months. The percentage of firms reporting profit margins as "somewhat less than normal" or below declined further to 70 percent in July, down from 78 percent in May 2026. While this still represents a substantial majority of businesses operating below their normal profitability levels, the steady downward trend over the past two months points to an improving bottom-line performance. The survey's commentary suggests that the overall profit margin expectations are indicating improved performance, signaling that the recovery in sales is beginning to provide some relief to businesses.

Despite the brighter picture on sales and profits, the cost environment remains a source of complex signals. While the proportion of firms perceiving a "significant" increase in costs, in the range of 6 to 10 percent, declined from 27 percent to 24 percent, the percentage of firms reporting a "very significant" cost increase of more than 10 percent held steady in the 20-21 percent range. At the same time, there was a notable shift in the middle of the distribution, with the share of firms reporting costs rising "moderately" – between 3 and 6 percent – increasing to 26 percent from 22 percent in the previous round. This mixed data indicates that while the most extreme cost pressures may be easing for some, a substantial portion of businesses continues to face high input cost inflation, and the overall distribution of cost increases remains broad-based.

These current cost dynamics are reflected in the survey's forward-looking inflation expectations. The one-year-ahead business inflation expectation, estimated from the mean of individual probability distributions of unit cost increases, rose marginally by 10 basis points to 4.94 percent in July, from 4.84 percent in June. This uptick, while small, reverses the previous month's decline and keeps expectations anchored just below the 5 percent mark. More notably, the uncertainty surrounding these expectations, measured by the square root of the average variance of individual probability distributions, remained elevated at over 2 percent for the seventh consecutive month. This persistent high level of uncertainty suggests that firms are finding it increasingly difficult to predict the future trajectory of costs, a factor that could have implications for their pricing and investment decisions in the months ahead.

The survey's unique design, which directly queries business leaders – the actual price setters – rather than consumers, provides a valuable, ground-level perspective on the state of the economy. The July results collectively paint a picture of an economy where demand is showing clear signs of revival, as evidenced by improving sales and profit metrics. However, this recovery is unfolding against a backdrop of stubborn and uneven cost pressures, which continue to shape a cautious and uncertain outlook for inflation among the business community.