Professional Documents
Culture Documents
Q1 2010-11
July 2010
There are three factors which are taking a toll on companies’ profitability.
♣ One, is the incessant increase in price of industrial inputs and raw materials.
♣ Three, is the fuel price revision that has led to an across the board increase in
transportation costs for both raw materials and finished goods.
Additionally, companies are facing some pressure on account of the borrowing costs. While
the move over from the PLR regime to the Base Rate regime is being seen to lead to greater
competition amongst banks for customers and force them to increase efficiency, companies do
not foresee any benefit accruing to them in terms of lowering of borrowing costs resulting
from this change. Nearly 72 percent of the firms that participated in FICCI’s latest business
confidence survey have subscribed to this view on borrowing rates from banks. Another 24
percent, majority of whom are large corporates, feel that there is a good chance that their costs
will rise with the base rate coming into effect from July 1, 2010.
While high borrowing cost is presently being seen as an impediment to business performance
by nearly 40 percent of the surveyed firms, going ahead this figure is expected to rise. And
this is because of the tight monetary policy stance that has been adopted by RBI. With RBI
already having increased key policy rates earlier this month, there is a strong feeling amongst
firms that another rate hike at the forthcoming monetary policy review on July 27, 2010, will
further jack up their cost of credit. Nearly 87 percent of the firms, which participated in the
FICCI survey, hold this view.
The only consolation that firms seem to have at this point is that if RBI were to hike policy
rates on July 27, 2010, then banks will not increasing lending rates immediately. Nearly 73
percent of companies feel that an increase in lending rates would happen only in the next three
months if RBI were to further tighten monetary policy.
The macro situation is also getting vitiated on account of the stubbornly high inflation rates
and the perpetual question over the state of global economy.
These developments have dented the confidence level of corporate India with all the three
confidence indices computed by FICCI seeing a dip in their value.
♣ Current Conditions Index has fallen by almost five notches from 76.3 in last round to
71.1 this time.
♣ Expectation Index took a value of 72.2, while in the previous survey it was 74.1.
♣ With both the Current Conditions Index and Expectations Index registering a decline, the
Overall Business Confidence Index fell from its value of 74.8 in the previous survey to
71.9 in the present round.
Growing competition from imports is also coming to the fore as a concern area with almost 40
percent of the firms alluding to this factor as a negative development for their business.
Responses to various enterprise level parameters for the next six months are as follows.
FICCI’s Business Confidence Survey for the first quarter of fiscal 2010-11 drew responses from
311 companies with a wide geographical and sectoral spread. Companies participating in this
survey had a turnover ranging from Rs. 1 crore to Rs. 20,000 crore. Respondents to FICCI’s
Business Confidence Survey were from sectors such as textiles, steel, chemicals and fertilizers,
oil and gas, auto and auto components, food processing, electrical equipment and machinery,
rubber and rubber products, cement, FMCG, pharmaceuticals, paper, metal and metal products
and financial services. The survey was conducted during the month of July 2010.
Economy – The results of FICCI’s Business Confidence Survey for the first quarter of fiscal 2010-
11 indicate a moderation in the perception of respondents about the overall economic
situation. Although there has been an evident return of buoyancy in economic activity over the
last few quarters, growing concerns about inflation that continues to be stubbornly high and a
generalized increase in raw material prices that could decelerate the growth momentum are
weakening sentiments of the survey participants.
In the current survey, 78 percent of the respondents said that the overall economic conditions
vis-à-vis last six months are ‘moderately to substantially’ better. Though still high, this figure is
about 10 percentage points lower than the proportion of companies which reported likewise in
the last round. In the survey for the fourth quarter of fiscal 2009-10 around 87 percent of the
participants had reported that overall economic situation had improved over the previous six
months.
Further, while 16 percent of the respondents have said that there is no change in the overall
economic situation vis-à-vis the last six months, another 7 percent reported that economic
condition has weakened over the last six months.
With regard to expectations about economic conditions over the next six months, 72 percent of
the participants said that they foresee a ‘moderate to substantial’ improvement. In the last
survey the corresponding figure was 82 percent. Also, while in the last survey none of the
participants had reported that the economic situation would deteriorate in the near term, this
number marginally rose to 4 percent in the current round. The remaining 24 percent of the
respondents feel there would be no change in the overall economic conditions in the next two
quarters.
Industry – Results pertaining industry level performance also point towards considerable
moderation in opinion of the respondents. While IIP numbers have been encouraging for some
time now, the most recent data point indicates that there may be some moderation taking
place in industrial growth. IIP growth came down from 16.5 percent in April 2010 to 11.5
percent in May 2010. There are also concerns now emerging about how broad based the
industrial recovery process is.
In the present survey nearly 71 percent of the participants said that their current industry
performance vis-à-vis last six months is ‘moderately to substantially’ better. However, this
figure was 16 percentage points lower than the proportion of companies which reported
~5~ FICCI Research Division
likewise in the last survey. Further, the percentage of respondents citing no change in the
industry performance went up from 9 percent in the previous round to 20 percent this time.
The remaining 9 percent of the participating companies indicated weakening of the industry
performance over the last six months.
Looking at the sector wise performance, the results show that among the three sectors - heavy,
light and services, the respondents from the heavy and the services sector were most positive
about their current industry performance. However, there was a conspicuous fall in the
proportion of respondents (particularly from the heavy and light industry segments) citing an
improvement relative to last survey.
Around three quarters of the respondents belonging to heavy industry segment said that their
current industry performance is ‘moderately to substantially’ better vis-à-vis last six months. In
the previous survey, a whopping 92 percent of the companies belonging to the heavy industry
segment had reported likewise. An equal proportion that is about three quarters of the
respondents belonging to the services sector indicated an improvement in the current
performance of the industry compared to last two quarters. However, the participants
belonging to the light industry segment were least optimistic, with only 58 percent of the
With regard to performance over the next two quarters, participants belonging to the services
sector were most confident about their industry performance. Around 75 percent of the
participants from the services sector said that they foresee a ‘moderate to substantially’ better
performance in the coming six months. In terms of expectations about near term
performances, the services sector was followed by the heavy and light industry segments
respectively.
Firm – At the firm level, 73 percent of the participating companies indicated that their current
performance has improved vis-à-vis last six months. This was 11 percentage points lower than
the proportion of participants who reported likewise in the previous survey. About 10 percent
of the respondents said that performance at the firm level has worsened vis-à-vis last two
quarters, which was marginally higher than the corresponding figure of 3 percent in the last
survey.
These results indicate that some consolidation in performance can be expected as we go ahead.
There is an element of caution that is being reflected in the responses received from survey
participants. While the global economy is still vulnerable and this can have a bearing on
performance of industry at home, there are also concerns that are purely domestic. Persistent
and high inflationary situation, rising prices of industrial inputs, possibility of further tightening
of monetary policy by RBI are all factors that are either already constraining or could pose as
impediments to the growth momentum going ahead.
Further, the analysis of the operational parameters at the firm level shows that while the
outlook with regard to sales, investment and employment has become a little better, the
outlook for profits and selling price has become a little subdued when compared to results of
FICCI’s previous Business Confidence Survey.
Profits
Employment
Confidence Indices
Confidence Indices
As per the survey results, the proportion of respondents citing an improvement in the current
conditions vis-à-vis last six months at all the three levels- economy, industry and firm, has
witnessed a decline. As a consequence, the Current Conditions Index fell by almost five
notches from 76.3 in last round to 71.1 this time.
Similarly, moderation was seen in the expectations of the participants about the near term
performance at all the levels. The Expectation Index took a value of 72.2, while in the previous
survey it was 74.1.
With both the Current Conditions Index and Expectations Index registering a decline, the
Overall Business Confidence Index fell from its value of 74.8 in the previous survey to 71.9 in
the present round.
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Constraining factors
Problem Area FICCI BCS FICCI BCS FICCI BCS FICCI BCS FICCI BCS
Q1 Q2 Q3 Q4 Q1
2009-10 2009-10 2009-10 2009-10 2010-11
Weak demand 66 62 37 22 23
Threat of imports 34 34 29 26 38
Constrained availability of credit 27 20 15 19 8
High cost of credit 41 37 33 43 39
Infrastructure 36 35 38 39 35
Rising cost of raw materials 55 52 77 85 77
Rising manpower costs 45 42 66 72 65
It is clearly evident from the survey results that the demand conditions in the economy have
witnessed a significant improvement over the past one year. Weak demand was reported to be
a constraining factor by 66 percent of the respondents in the first quarter of the fiscal 2009-10.
In the current survey about 23 percent of the participating companies reported likewise.
The improving demand situation in the economy is getting reflected in the order book position
of the firms. In the present survey nearly 53 percent of the firms said that their present order
book position was better as compared to the situation six months back. In the previous survey
this figure was just a tad higher at 56 percent.
On expectations about the order book position six months hence, 64 percent of the companies
said that they foresee an improvement in near future. This was about 6 percentage points
higher than the proportion of companies saying the same in the last survey. Further, around 34
percent of the participants said that they see no change in the book position over the coming
six months.
Current order book position vis-à-vis last six months Expectations about order book position six months hen
Rising cost of raw materials and rising manpower costs continues to plague a whopping 77
percent and 65 percent of the companies. We are also seeing that the proportion of companies
complaining about threat from imports has gone up from 26 percent in the previous survey to
38 percent in the present round.
Another important factor that is playing on the minds of respondents is the cost of credit with
nearly 40 percent of the participating firms saying that they are concerned about the interest
rates. In the context of interest rates and the withdrawal of easy money policy stance by RBI,
FICCI asked the participating companies on whether they thought their cost of credit would go
up if RBI continues to increase repo and reverse repo rate. And the responses show that a
majority 87 percent of the companies fear that cost of credit would go up if RBI continues with
monetary policy tightening.
Members of corporate India believe that if the central bank increases the key policy rates in the
forthcoming monetary policy review meeting on July 27, 2010, then the interest costs would go
up over the next three months. This view was shared by 73 percent of the companies that
participated in the FICCI survey.
Following hike of policy rates by RBI, when will interest rates go up?
Proportion of respondents
11 73 16
However, there is general feeling that move over to the base rate regime will not alter the
borrowing costs. This view was shared by 72 percent of the firms. Another 24 percent of the
firms and majority of these were large corporates said that they expect borrowing costs to go
up under the base rate regime. Only a miniscule 4 percent of the companies said that they
expect their interest costs to go down under the base rate regime.
Yes, our borrowing cost will Yes, our borrowing cost will No, there will be not much
rise go down change in borrowing cost
24 4 72
The current situation vis-à-vis the situation in the last six months and
The expected situation in the next six months
Significantly Optimistic
Zone of Indifference
Significantly Pessimistic
____________________________________________________
0 15 30 45 55 70 85 100
Extremely Pessimistic
Moderately Pessimistic
Moderately Optimistic
Extremely Optimistic