India Inc’s Business Confidence At Lowest Levels Since Global Financial Crisis

The latest round of FICCI’s Business Confidence Survey revealed the sharpest moderation in the confidence level of members of India Inc since the global financial crisisGlobal economic prospects have worsened conspicuously with the outbreak of coronavirus pandemic. Many countries including India have had to adopt strict social distancing norms and lockdowns to prevent the pandemic from spreading resulting in a near halt of economic activity.

The Overall Business Confidence Index stood at 42.9 in the current round vis-à-vis an index value of 59.0 reported in the last survey. The index value had slipped to a low of 37.8 in Q2 of 2008-09 –at time of the global financial crisis. Sharp moderation both in current conditions as well as expectations about the future was responsible for pulling the overall index value down during the quarter.

Multilateral institutions have revised down the growth and trade forecast for the year 2020 considerably. The IMF in its recent release has downgraded global growth forecast and placed it in the contractionary zone for the year 2020. WTO too projected global merchandise trade flows to plummet anywhere between 13-32% during the year 2020.

India’s economy is also facing a triple shock through demand, supply, and financial channels. In fact, most of the companies participating in the FICCI survey indicated that the spread of coronavirus pandemic has had an adverse impact on their businesses. Around 72% of the respondents said that their operations have been hit hard by the virus outbreak. Only 5% of the respondents were not impacted by the pandemic.  In addition, 90% of the respondents of the survey said that their supply chains have been impacted.

Also, the participating companies were less optimistic about their forecasts for operational parameters over the period April-September 2020. In the current survey round, a sharp increase was noticed in the proportion of respondents anticipating lower sales in the next six months. About 53% of respondents expected lower sales over the next two quarters, vis-à-vis 17% stating the same in the previous round. Likewise, an increase was noted in the proportion of respondents citing a decline in investments going ahead. About 38% of participants anticipated lower investments in the next six months vis-a-vis 30% stating likewise in the previous round. With consumption demand plummeting amidst the nationwide lockdown, companies are seeing freeing up of their existing capacities. The present environment is not very conducive for undertaking fresh investments.

On the export front, more than half of the respondents expected lower exports in the coming six months. The global supply chains stand disrupted and trade linkages have been severely impacted amid the pandemic outbreak.

Moreover, in the present round, majority of respondents continued to cite worsening in the demand situation. In the current survey, 77% of participants reported weak demand conditions as a bothering factor. As a result, companies have cited worsening capacity utilization rates for the past few quarters and the same was reiterated in the latest round as well. Only 26% of the participating companies cited a capacity utilization rate of more than 75% in the current survey as compared to 28% stating likewise in the previous round.

In the present round, the proportion of respondents citing the availability of credit as a major concern also noted a considerable increase. Around 54% of respondents cited the availability of credit as a bothersome factor. This was 39% in the previous survey. Availability of credit has been a concern despite sufficient liquidity available in the system.

Respondents were also asked to share the measures they were planning to undertake to support their business in these unprecedented times. The most prominent theme that was seen across the board was the emphasis on inward-looking measures – that is towards meeting domestic demand and sourcing products/inputs from domestic suppliers.

Many participants felt they were majorly dependent on imports for their raw materials supply and are now looking at developing alternate local supplies to meet their requirements. Moreover, as global supply chains have more or less come to a standstill, participating companies are focusing more on serving domestic customers. For this, they plan to increase their marketing spends while learning ways to serve customers through digital means.

Companies are trying to be more flexible in their product mix execution and are prioritizing production of essential goods portfolios. They are utilizing this time to find innovative ways to restart their operations and regain demand for their products and services. These include updating products and services, improve quality and ensure cost-efficiency.

Apart from this, companies are keeping a close watch on their cash flows and undertaking requisite steps to cut costs. Alongside, many firms have indicated that they are looking at increased automation.

Furthermore, participants have expressed concerns and are worried about their employees’ health and are ensuring that all possible support is extended to protect their health. Companies have enabled work from home wherever possible and are also preparing for health checks post lockdown phase.

Participating companies unanimously agreed that prior planning along with adequate government support was necessary to enable the smooth restart of their operations. Timely action taken by the government should enable a quicker return to normalcy for the domestic economy at least. The companies are regularly monitoring the situation on the ground and are taking necessary and feasible measures for course correction in these unprecedented times.

Respondents were hopeful about the future and were of the view that the impact of COVID-19 would significantly lower over the next twelve months across the globe and allow businesses to flourish sustainably thereon.

Further Suggestions for:

Reserve Bank of India 

  • RBI should undertake direct purchase of corporate bonds.
  • Reduce the repo rate by an additional 100 bps.
  • Start direct purchase of NBFCs NCDs to provide them with long term durable liquidity.
  • Direct banks to enhance credit limit by at least 25% without requiring any collateral security. Further, the need for collateral for MSMEs and Startups must be completely done away with for some time.
  • Relax repayment/ NPA norms from 90 days to 360 days.
  • RBI should ensure that the benefit of reduction in repo rate and in MCLR is passed on by banks to the borrower’s irrespective of the interest rate format agreed upon by borrowers.
  • Moratorium provision must be extended across India Inc. for a period of minimum six months. The same can be taken forward by increasing the loan period.
  1. Suggestions for Banks:
  • Banks need to expedite the decision-making process and expedite lending.
  • Adopt RBI guidelines in letter and spirit and ensure effective transmission of repo rate cuts into lower lending rates.
  • Enhance funds available to the industry especially the small and medium scale industry. 
  1. Suggestions for Government:
  • Financial package for the entire industry (especially MSMEs) must be provided in the form of subsidies, policy support, tax holidays, a special dispensation of funds to sustain employment levels before COVID-19 pandemic etc.
  • Immediate measures need to be taken to instil confidence in the decision-makers of banks. Simultaneously, efforts must be made to make the entire lending process foolproof which will ultimately enable swifter decisions.
  • Serious reforms in the labour market are the need of the hour and must be taken up on priority.
  • Adequate policy support and facilitation must be provided to attract all companies leaving China amidst the COVID-19 outbreak.
  • The government must make all efforts to increase the disposable income of consumers who are battling their fears on the health as well as income/ employment front.
  • The government must kick start a few large infrastructure projects to uplift credit and employment situation
  • Process payments on time to industries handling Government contracts
  • Support MSME Vendors by enhancing procurement from them
  • Any incentive/ financial support should be kept simple and practical while ensuring quick implementation.
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