Rising raw material prices forcing companies to relook at their price line but many feel pricing power could return only after 9-12 months
New Delhi, April 29, 2017: Results of FICCI’s latest Business Confidence Survey indicate that the impact of demonetization move of the government seems to have ebbed at much faster pace than earlier anticipated. And with remonetisation of the economy at a much advanced stage, things seemed to be turning normal for the corporate sector. In the latest survey, confidence level has seen a rebound, touching an eight quarter high, vis-à-vis a drop seen in the previous survey wherein confidence was hit due to a demand squeeze caused by demonetization.
Participating companies reported an improvement in the current conditions and performance level as well as expressed hope of a better turn-out in the coming six months. This could be a harbinger for better economic growth in the current year – signs of which are on the anvil – and about which the government also is becoming increasingly confident.
FICCI’s Business Confidence Survey is a quarterly survey conducted amongst industry members from across sectors and from diverse geographies. The latest survey was conducted during the months of March-April 2017 and saw participation of nearly 185 companies.
Survey results show that nearly 54% of the participating companies feel that current economic conditions are ‘moderately to substantially better’ compared to the previous six months. Further, the economy is expected to do even better in the coming six months according to 79% of the participating companies. Similar trends are seen when we look at the numbers pertaining to current performance and expected performance at the industry level and individual firm level.
A theme closely related to demonetization is the greater use of digital modes for transactions and results of FICCI’s Business Confidence Survey show that this is an area which has been embraced by companies in a big way. Nearly 7 out of 10 companies which participated in the survey have confirmed that they have detailed out plans for deploying with greater intensity digital modes of payments including payments to be made to all vendors and reimbursements for employees. This is an encouraging result and shows corporate India’s commitment to the national objective of ‘going digital’.
A look at the numbers pertaining to operational parameters shows that during the period April 2017 to September 2017, nearly 65% of the companies expect better sales performance, 42% expect profits to increase, 40% expect to invest more than their current investments levels, 31% expect export demand to be better than what it is now and 27% plan to hire more making additions to their workforce. When compared to the results of the previous survey, things look better on most parameters other than exports where a degree of conservatism is now being reflected after an improvement in expected performance that was reported by a much larger group in the previous survey. This trend therefore will have to be monitored carefully going ahead. While global growth is improving gradually with most parts of the world showing better performance, the rising tide of protectionism and advent of inward looking policies to promote growth and jobs ‘at home’ could impact export performance.
Another important finding of the present survey is the slight inching up of the performance of companies on the capacity utilization scale. We see a slightly larger group of companies now reporting capacity utilization level at over 75%. While in the previous survey 40% of the firms belonged to this category, in the latest survey this proportion has moved up to 45% – an indicator of demand situation improving for more companies and more sectors.
Even as the demand situation is improving in the economy, companies are still far from being at a point from where they can enjoy some pricing power. While raw material costs are on the rise – nearly 6 out 10 respondents to the present survey cited increasing raw material costs as an impediment to business performance – and pushing companies to reconsider their price points, the general view is that it could take another 9-12 months for some pricing power to return to companies as they are still operating at less than optimal capacities. As pointed out earlier, while the impact of demonetization on demand situation has eased considerably, the natural build up following improving economic performance is still happening at a slow pace. In the previous survey, nearly 80% of the respondents had mentioned weak demand as a clear dampener – a result flowing from demonetization move of the government – and while this number has come down significantly in the current survey it still lingers around 60%.
With respect to credit, a decline was noted in the survey in the proportion of respondents citing availability and cost of credit to be a constraining factor. In the present round 39% of the participating companies reported cost of credit to be a bothering factor. The corresponding number in the previous survey was 43%.
Both the government and the central bank have taken a slew of measures over the past couple of years to moderate the lending rates in the economy. The Reserve Bank of India has cut the repo rate by 175 bps between January 2015 and October 2016; the interest rates on small saving scheme were reset and marginal cost of funds based lending rate was introduced last year. Earlier this year, following the rapid build-up of deposits, some major banks revised down their lending rates.
In light of these developments, the survey participants were asked to indicate if they have been able to benefit from the recent downward revision in lending rates by banks. Surprisingly, about 67% of the participants responded in negative to this question and this indicates that a large set of companies is not getting the benefit of credit flow at lower rates. Out of the remaining who said they have been able to benefit from the decline in lending rates, the extent of benefit varied between 10 basis points to 200 basis points.