Reduced margins dent India Inc's confidence

After riding high in four successive quarters of the 2005-06 financial year, the confidence of corporate India is waning, according to a survey by the Federation of Indian Chambers of Commerce and Industry (Ficci).

The Business Confidence Survey, for the first quarter of the current financial year, shows that the rise in oil prices and hardening of interest rates have dented the overall business confidence, with the index being only a notch higher than that recorded in Q1 2005-06.

According to the survey, high oil prices and hardening of domestic interest rates have squeezed profit margins and put investment plans under pressure. Corporate India is concerned about its near term performance on all operational parameters, namely sales, selling price, profits, investments, employment and exports.

All the three confidence indices computed by Ficci in the present survey have dropped in comparison to the last round. While the current conditions index and the overall business confidence index have been relegated to the 'moderately optimistic' zone, the expectations index continues to remain in the 'significantly optimistic' zone.

The rising input price is seen as a key constraint for corporate India. Also, rising fuel prices due to geopolitical instability in West Asia has accentuated supply side pressures. Inflationary pressures were persistent globally and economies such as the European Union and the United States reacted by tightening interest rate, a measure that would impact global growth in the current year.

Above all, the July-end increase in interest rates in India has combined to create anxiety about the future. The survey, conducted in July-August this year, shows that there has been a strong moderation in the views of the Indian industry with regard to economy, industry and firm level performance.

The small and medium enterprises (SME) sector is feeling the pinch even more as the cost of borrowing has gone up. The survey points out that the rising input prices continue to pose a challenge for companies attempting to maintain and improve their growth performance.

For the third quarter in a row, 70 per cent of the companies have reported rising cost of raw materials as a constraining factor. Rising fuel prices have further limited the operational flexibility of the companies.

Moreover, the profit margins have also come under increasing pressure. Fewer companies have reported higher selling prices this quarter and more have reported lower profits.

The survey notes that the increased cost of credit has been affecting the companies' investment plans. Both service and heavy industry reported much lower expectations of investments in the near future.

The indicative slowdown in investments is accompanied by a marginal weakening of domestic consumer demand. Also, with lower export expectations over the next six months, caused by slackening global growth, capacity utilisation levels are expected to reduce.

The proportion of firms with capacity utilisation of over 75 per cent has gone down from 77 per cent in the last round to 57 per cent in the present survey.