There is a sharp deterioration in the level of optimism among Indian corporates amid the second wave of COVID-19.
The latest round of FICCI’s Business Confidence Survey showed that the Overall Business Confidence Index nosedived and stood at 51.5 in the current round after reporting a decadal high value of 74.2 in the previous survey round.
The survey said that worsening current conditions as well as muted expectations about the near-term prospects on the back of a sweeping second wave of coronavirus infections pulled down the overall index value by over 20 points.
However, the Overall Business Confidence Index in our latest round was higher than the value of 42.9 (which was the lowest since the financial crisis) registered a year back.
In the present round, the proportion of respondents citing weak demand situation once again noted a significant increase. Here, 70 percent participants reported weak demand conditions as a bothering factor in the current survey as compared to 56 percent stating the same in the previous round. The corresponding number a last year was 77 percent.
With household income being severely impacted and past savings already drawn down during the first wave of infections, demand conditions are expected to remain weak for longer this time around.
Since a much larger proportion of the population has been impacted in the current wave, the survey said there has been permanent impairment to income for many households who have faced job losses or have lost bread earners to COVID-19.
"Measures to support demand revival will be crucial for the economy to recover from the latest pandemic induced shock. Moreover, pace of vaccination must be significantly increased for achieving faster normalisation," the survey said.
While business confidence has dived, the participating companies did report improved capacity utilisation rate in the present survey despite weak demand conditions.
This can be attributed to imposition of localised restrictions instead of a complete lockdown, which ensured industry remaining largely functional throughout.
Raw material cost rise
The participants in the survey cited increasing raw material costs as a major bothersome factor for the fourth consecutive survey round. About 65 percent of them stated higher raw material costs as a constraining factor in the present survey as compared to 59 percent stating likewise in the previous round.
Given the evolving situation, the near-term outlook of the participating companies on major operational parameters has been visibly impacted.
The survey was conducted during the months of April/May 2021 and gauges expectations of the respondents for the period April to September 2021. The survey covers participants belonging to a wide array of sectors.
In the current survey, the proportion of respondents anticipating better sales prospects in the near term declined significantly to 31 percent versus 66 percent respondents stating likewise in the previous round.
Consequently, companies have lost some control over their pricing power. A dip in sales prospects impacted the outlook of respondents on near-term profits as well. The proportion of respondents citing higher profits over next six months declined to 16 percent in the latest survey vis-à-vis 36 percent respondents stating the same in the previous round.
Employment and consumer sentiment
There is also an impact on employment. The survey said that only 19 percent respondents were optimistic about better hiring prospects over the next two quarters (as compared to 35 percent stating the same in the previous round).
Respondents 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, hesitancy to travel, fear).
Increased exposure to risks as well as logistical delays as a result of fresh lockdowns were also highlighted as constraining factors.
Since the second wave of the pandemic led to severe health crisis in the country, imposing lockdowns became imperative. In this backdrop, companies were asked to share the measures they have taken to ensure business continuity.
A majority of the respondents highlighted that they were strictly following government mandated procedures and encouraging Covid appropriate behaviour in their premises. Additionally, increased level of digitisation from the first phase of infections has helped businesses tide over this wave in a more planned manner.
Apart from the drop in optimism, a majority of the participating companies called for extension of the moratorium on loans, principal and interest payments, for at least another six months.
Participants emphasised on the need for a stable interest rate regime for about 12-18 months. They also recommended that the RBI must continue with being accommodative till sustainable normalcy returns to the system.
On the fiscal side, companies unanimously felt the need for another fiscal package, focusing majorly on addressing the demand side. Demand boosting measures such as direct income support to rural as well as urban poor, income tax reductions for the middle class and temporary reductions in indirect taxes must be urgently considered.
In addition, the government must 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.
Lastly, a majority of the respondents felt that frontloading capital expenditure, by both central and state governments, was the need of the hour as this would greatly build and sustain market sentiments and demand.