India's Business Confidence Index declines due to reduced economic activity

The second wave of COVID-19 is waning, but states are yet to ease local lockdown-like restrictions, leading to reduced economic activities, which has eroded the gains businesses made over the last few months. Many businesses in the country are again facing a crisis, disrupting the sentiments across the board, according to the latest round of FICCI's Business Confidence Survey. The survey that has shown a sharp deterioration in the optimism of corporate India, captured the expectations of the respondents for the period April to September 2021. Here are some of the concerns raised in the latest round of the survey.

Muted Expectations

The latest survey revealed a sharp deterioration in the optimism level of corporate India in comparison to the previous survey. According to FICCI's latest report, the Overall Business Confidence Index (OBCI) has plunged sharply due to an impacted demand. The near-term growth expectations of businesses remained muted. The OBCI nosedived to 51.5 in the current survey after touching a decade high of 74.2 in the previous round. Worsening economic conditions pulled down the overall index value by over 20 points.

Lower demand a big concern

More than 70 per cent of participants referred to weaker demand as a worrying factor, indicating businesses are more concerned about lower demand, which can impact sales for a longer period, even after the second wave. The FICCI survey further escalated demand concerns raised by the Reserve Bank of India (RBI) in its recent May 2021 bulletin.

Lower household spending

The survey noted that household incomes have been severely impacted by the second wave, and could weaken demand conditions for a longer period. "There is a call to put in place measures to support demand revival, most believe these measures will be crucial for the economy to recover from the latest pandemic-induced shock," it added. As per corporates, one such measure is to ramp up the pace of vaccinations that will allow states to relax restrictions faster and pave way for increased economic activity. Around 65 per cent of the participants cited higher raw material costs as a constraining factor in the present survey in comparison to 59 per cent stating likewise in the previous round.

Lower sales prospect

The companies remained unsure about the sales prospects, with 31 per cent of respondents hoping for better sales in the near term, much lower than 66 per cent who showed optimism in the previous round. "The proportion of respondents citing higher profits over next six months declined to 16% in the latest survey vis--vis 36% respondents stating the same in the previous round," the survey noted.

Restrictions hurt businesses, new hirings

The impact of localised restrictions has impacted around 80 per cent of the companies who participated in the survey. The firms agreed to facing issues in carrying out businesses due to localised lockdowns. As a result of lower sales and demand, only 19 per cent of the companies were optimistic about hiring over the next two quarters, which was at 35 per cent in the previous round.

Weak consumer sentiment

The survey flagged weak consumer sentiment as their topmost concern followed by non-availability of raw materials and manpower shortage, owing to various factors such as increased infections in family and hesitancy to travel. Increased exposure to risks and logistical delays as a result of fresh lockdowns were also highlighted as constraining factors. A majority of the participants highlighted that they were strictly following government-mandated rules and encouraging COVID appropriate behaviour in their premises. Also, an increased level of digitisation helped businesses tide over the current wave in a more planned manner. Respondents also stressed that they were ensuring ample liquidity and were maintaining buffers of key inputs as well as final product stocks.

Credit hurdle, moratorium and relief package

A large proportion of the participating companies emphasised problems in availing credit and called upon the banking community to further enhance lending at a reasonable rate. The firms believe that the need of the hour is ensuring ample liquidation in the system and asked RBI to ensure the same. They believe the central bank 'must take additional measures to encourage banks to lend more'. The companies also highlighted that the process for approval of loans has become extremely time-consuming and is severely dampening business prospects. They felt that any refusal by banks to lend to companies must be backed by a reason and the same must be formally communicated as this would increase transparency. A majority of the firms also called for an extension of the moratorium on loans, principal and interest payments, for at least another six months. The companies emphasised the need for a stable interest rate regime for about 12-18 months and recommended that the RBI must continue being accommodative till sustainable normalcy returns to the system.

Tax relaxations and better hiring opportunities

The participants highlighted the need for the continuation of liquidity support and credit enhancement measures to MSMEs as announced in the previous year. They called for targeted fiscal support, in the form of tax waiver and financial assistance, to sectors that were previously kept out of the stimulus package, but were deeply impacted by it (including travel, tourism, hotels and hospitality and civil aviation).

Employment-based incentive

Another demand highlighted by the companies was for the government to provide employment-based incentives to employers to avert any job losses. This could include temporary fiscal support towards payments of salary for employees in the MSME sector and/or exempt employers' contribution to PF and ESI for the current fiscal year. Many companies also felt that frontloading capital expenditure, by both central and state governments, was the need of the hour as it would build, sustain market sentiments and demand.