- Demand conditions continue to witness recovery
- Capacity utilization improves further
- Outlook on various operational parameters promising
The latest round of FICCI’s Business Confidence Survey marks a further improvement in the optimism level of members of India Inc vis-à-vis the previous survey. Improvement in both current conditions as well as expectations index has pulled the Overall Business Confidence Index value to a decadal high in the current survey. The Overall Business Confidence Index stood at 74.2 in the current round, vis-à-vis the index value of 70.9 reported in the previous survey and 59.0 reported a year back.
The recently announced Union Budget 2021-22 has been forward looking. This together with measures announced as a part of the Atmanirbhar Bharat package has infused optimism amongst industry members and the same is corroborated in the improved outlook for various operational parameters.
In the current survey, though the proportion of respondents anticipating better sales prospects in the near term remained unchanged at 66% from the previous survey round; however, the companies were buoyed to regain some control over pricing power. About 27% respondents expect an increase in the selling price of their products over the next six months as compared to 21% stating the same in the previous round and 14% a year back.
Improved economic conditions and greater pricing power is likely to drive profits of corporate India over the next two quarters. The percentage of participants citing higher profits over next six months increased to 36% in the latest survey from 33% respondents stating likewise in the previous round.
Outlook on employment and exports also reported a discernible improvement. About 35% respondents were optimistic about better hiring prospects over the next two quarters (up from 22% stating the same in the previous round). Export prospects were also reported to be better in the current round with 41% respondents indicating higher outbounds shipments. The corresponding number in the previous round was 27%.
Furthermore, the proportion of respondents citing ‘higher to much higher’ investments in the coming six months witnessed an upswing in the current survey when compared to the previous round. 31% participants said that they foresee higher to much higher investments over coming six months as compared to 19% participants stating likewise in the previous round.
The present survey drew responses from a wide array of sectors and was conducted during the months of January/February 2021. The survey gauges expectations of the respondents for the period January to June 2021.
With regard to the constraining factors for business, the demand situation has improved on back of the release of the pent-up demand build up during the lockdown. However, rising raw material costs is emerging as a bothersome factor for members of India Inc. The rise in fuel and other commodity prices is beginning to exert pressure on the input costs of companies.
In the present round, the proportion of respondents citing weak demand situation as a concern further declined and stood at a nine-quarter low of about 56% (vis-à-vis 58% respondents stating the same in the previous round). In the first quarter 2020-21 (April-June) round of the survey, 80% of the participants had cited demand as a constraining factor – this was at the peak of the pandemic induced crisis.
With demand situation slowly turning positive, an improvement was also noticed in capacity utilization rates. In the current survey, around 77% participating companies reported capacity utilization of more than 50% as compared to 68% stating likewise in the previous round.
However, the participants did express some scepticism about the sustenance of buoyancy in demand. The rise in the number of COVID-19 cases across some states can act as a dampener.
Even though participants were largely optimistic about the overall economic prospects, increasing raw material costs has been cited as a major bothersome factor for the third consecutive survey round.
About 59% of the participating companies stated higher raw material costs as a constraining factor in the present survey round. This was higher than 52% participants stating likewise in the previous survey round. Besides, the respondents were also asked to share their opinion on key trends to watch out for in 2021, top challenges and opportunities for the industry in 2021 and additional ways to boost manufacturing.
Regarding top global trends to watch out for in 2021, the respondents pegged the risk from new COVID-19 strains as the most important global trend to watch out for in 2021 – with about 57% respondents stating the same. In addition, rise in inward looking policies worldwide, improvement in trade prospects, changes in global supply chain network and retraction of global fiscal and monetary policies were also cited as important developments that companies will be watchful of in 2021.
While on the domestic front, 62% participating companies said that they expect rising risks to inflation. About 50% respondents pointed out that consumption trends would be monitored closely in 2021. Furthermore, slowdown in economic reforms, fresh wave of COVID-19 infection and higher than expected stressed asset creation are other possible developments that will be keenly observed.
The year 2020 was full of uncertainties, it ended on a positive note with countries around the world going on a vaccination drive against COVID-19. However, the virus is mutating, and this has raised fresh concerns. Given this backdrop, participating companies were asked to share their views on the top challenges and opportunities they foresee for their businesses in the year 2021.
Companies participating in the survey cited high input costs (including manpower costs), weak demand conditions and lack of availability of affordable credit as their topmost concerns for the year 2021. In fact, a near unanimity was observed as far as input costs were concerned. This along with high interest costs on loans, higher inward and outward transport and logistics costs, greater compliance burden on the back of frequently changing statutory compliances and increased manpower costs are further pushing the cost of doing business in India. This does not bode well in the current environment where in a shift in global supply chains is being witnessed.
In this context, respondents also added that leaving trade policy issues unaddressed will create an even bigger challenge with China as well as other countries including Vietnam regaining market share to become global suppliers. Lack of adequate export incentives is also making it difficult for Indian entrepreneurs to compete globally.
Subdued economic conditions in advanced economies has led to global slowdown in consumption activity. Alongside, impact of COVID-19 pandemic on the Indian economy left consumers fending for basics, raising the precautionary motive of spending amongst them. This impacted domestic consumption gravely. While some improvement in demand has been witnessed over the past few months, participating companies fear that fresh waves of COVID-19 infections, as seen in other nations, would be extremely challenging to cope with. They believed that retaining the revival in demand conditions can get challenging going forward.
Furthermore, respondents also felt that availability/ retaining of skilled labor would be a worrisome factor in 2021.
Nonetheless, the participants believed that government policies including those announced under the ambit of Atmanirbhar Bharat package as well as policy provisions in the Union Budget 2021-22 will not only support economic revival but also give a thrust to Make in India by encouraging competition.
Surveyed companies also believed that recent initiatives such as vocal for local will go a long way in developing Brand India. They are focusing on creation of newer products as well as diversification of existing product categories to tap new markets globally. Companies expect higher export orders in the coming months on the back of global economic recovery led by large scale vaccination drive against COVID-19 around the world.
Furthermore, respondents emphasized that given the current global sentiment, India could easily become the preferred sourcing destination for western countries if adequate and timely steps taken to support this change.
The respondents highlighted that the pandemic caused massive shifts in the way businesses operate, with level of digitization playing a major role in determining success in the post COVID-19 world. Sectors have witnessed emergence of new trends and many businesses have undergone substantial transformation during this time. Larger internet penetration in the country has unlocked new ways of transaction between businesses and consumers. Businesses are witnessing increased automation, shift towards OTT platforms, growth in digital advertisements and adoption of new technologies to not only remain relevant but also support business expansion.
For further boosting manufacturing, the respondents opined that improving ease of doing business remains the most important component to give a thrust to India’s manufacturing prowess. Greater transparency and clarity of regulatory procedures, processes & policies; definite timelines and smooth approvals of licenses, projects & other government services; truly single window approval system; reduction in bureaucratic interference; simplification of GST refund process were some of the areas that were highlighted by the participants for further action. They added that efforts must also be made to reduce the cost of doing business by enhancing infrastructure creation as well as achieving cost efficiency in logistics and supply chain management.
In addition, continuous availability of credit at a reasonable cost to the entire industry, with special focus on improving credit flows to MSMEs will be vital to sustain recovery.
Respondents to the survey suggested that long term incentives to industry, particularly towards skill upgradation of employees/ workforce was the need of the hour. They were looking forward to the new and simplified labor laws as these would enhance our manufacturing competitiveness.
In addition, companies stressed on the need for reducing customs duty on imports to curtail rising domestic prices of raw materials. Commodity prices have risen drastically in the past few weeks and this is impacting profitability and viability of business. Participants of the survey highlighted that restrictions on imports must be removed at least until India achieves some level of Atmanirbharta in production of industrial inputs such as components and parts.
Lastly, it was felt that Industry 4.0 initiatives including artificial intelligence, machine learning, internet of things, increased automation/ digitization must be promoted more rigorously to remain ahead of the curve. Greater focus and incentives must be spelt out for R&D activities of industry to enable faster technological adoption.