Business Today

India Inc sees sharp slowdown in economy over interest rates, raw material costs

The Business Confidence Index (CII-BCI) for the second quarter has declined by a sharper 8.9 points compared to a decline of 4.2 points in the previous quarter.

Mail Today Bureau   New Delhi     Last Updated: September 5, 2011  | 17:13 IST

India Inc expects the economy to slow down during the current financial year in the wake of uncertainties in the global markets and rising interest rates and raw material costs at home.

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According to the quarterly business outlook survey of the Confederation of Indian Industry (CII) released on Sunday, the Business Confidence Index (CII-BCI) for the second quarter of 2011-12 has declined by a sharper 8.9 points compared to a decline of 4.2 points in the previous quarter.

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The CII survey, which is based on a large sample size of 250 companies, revealed that a majority (29 per cent) of the respondents expect gross domestic product (GDP) growth rate to moderate to 7.5 to eight per cent, while 23.7 per cent expect it to be in the range of eight to 8.5 per cent. As many as 55.6 per cent of the respondents expect average inflation for 2011-12 to be above eight per cent.

The survey was carried out over a month ending mid-August 2011.

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CII-BCI reflects respondents' assessment of the performance of their company, sector and the economy in the current quarter and the expectations from the coming quarter.

The CII business survey comes close on the heels of a Federation of Indian Chambers of Commerce and Industry (Ficci) survey, which had shown the business confidence index at a two-year low.

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The CII business outlook survey revealed that 78 per cent and 50.6 per cent of the firms in the manufacturing and services sector respectively, experienced increase in overall input costs in the first quarter of 2011-12 and majority expect it to remain high.

A major concern that emerges in the current survey is that most firms do not plan to increase investment plans in the second quarter of 2011-12.

While most firms were planning to increase their spending on capacity expansion in the previous survey, the current survey reveals that a majority of firms are expecting no change in their spending. Capacity utilisation of a majority of firms was 75-100 per cent in the first quarter and a marginal increase is expected in the second quarter.

WAIT & WATCH POLICY
  • CII business outlook survey for Q2 of 2011-12 has dipped by 8.9 points against a decline of 4.2 points in the last quarter
  • Earlier, the Ficci survey had shown the business confidence index at a two-year low
  • CII survey revealed that 78% and 50.6% of the firms in manufacturing & services sector respectively, experienced increase in overall input costs in Q1 of 2011-12
  • Most firms do not envisage hike investments in Q2 FY' 12
  • Capacity utilisation of most firms was 75-100% in Q1 and a marginal rise is expected in Q2
  • However, most firms expect sales, production, new orders and exports to rise in Q2
On a brighter note, despite a fall in the overall business confidence index, most firms expect sales, production and new orders to increase in the second quarter of 2011-12 after having witnessed stagnation in the first quarter.

Also, majority of exporters are optimistic that volume of exports will increase in the second quarter of 2011-12 despite signs of a global slowdown.

The top two business concerns revealed in the survey were high interest rates followed by high raw material costs. Global economic and political instability, inadequate skilled labour and infrastructural and institutional shortages tied for the third rank.

"The CII survey reveals the impact of the global economic downturn as well as domestic factors that are generating uncertainty about the economic outlook," said Chandrajit Banerjee, director general, CII. "However, expectations for the second quarter indicate a modest recovery," he added.

According to a Ficci statement, if the current trends are any indication the GDP growth in the current fiscal may be in the lower band of 7.5 per cent to eight per cent with some significant downside risks.

Ficci estimates that in order to clock a growth rate of 8.2 per cent for the current fiscal, as projected by the Prime Minister's Economic Advisory Council (PMEAC), GDP has to grow at 8.3 per cent in the remaining period of the current fiscal.

Agriculture would have to grow at 2.7 per cent, industry at 7.7 per cent and the services sector at a significant 10 per cent to achieve this target. It is unlikely that these growth rates will now be achieved as going forward, industry growth rates are unlikely to be better, said the Ficci statement.

The growth in the services sector is also to be lower than 10 per cent, given that there is a clear slowdown in community, social and personal services of the public expenditure component.

The latest available data on corporate sector performance reveals that during the quarter ended Jun' 11, many sectors saw a significant downward pressure on profit margins, it added.

Courtesy: Mail Today

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