FICCI survey says corporate India’s investment plans unaffected by rising bank lending rates
Tuesday, November 02, 2010
FICCI survey says corporate India’s investment plans unaffected by rising bank lending rates

New Delhi: Corporate India is brimming with confidence. Its investment plans remain uninhibited by the rising lending rates by banks and its faith in the continuance of
good performance of the Indian economy is unswerving despite the uncertainty about the global economic situation, reveals FICCI’s Business Confidence Survey for the second quarter (Q2) of 2010-11.

The FICCI Survey shows that the confidence level of corporate India is on the upswing. All three confidence indices computed by FICCI – Current Conditions Index, Expectations Index and Overall Business Confidence Index – have seen an increase in their values.

While an improvement in the performance level of corporate India over the last six months is noteworthy, what is more significant is their outlook for the coming six months. Companies are confident and are expecting to put up a good show in the next two quarters. Seventy six (76) per cent of the firms do not intend to defer their investment plans even in the wake of rising lending rates by banks. This is due to the fact that companies have several other avenues and some of which are more competitive as compared to bank lending for raising resources.

The good performance of the stock market makes issuance of fresh equity an attractive option for firms to raise funds. Further, given the large interest rate differential that exists between India and western countries, raising funds through the ECB route is another option for firms planning to undertake investments. Also, as banks have raised their lending rates, companies are raising money through issuance of commercial paper and corporate bonds. Finally, many mid and large sized Indian firms are in a cash surplus position and they will use these internal reserves for proposed investments.

The FICCI Survey notes that the strength of their positive sentiment about domestic economy can be gauged by the fact that nearly 70 per cent of the firms have brushed aside current uncertainty about the global economy as a factor having any bearing on the their outlook for the domestic economic situation.

The demand situation in the economy remains comfortable with every three out of four firms expecting sales volume to increase in the coming six months. The results pertaining to the order book position of firms also confirm the buoyancy seen in domestic demand.
62 per cent of the surveyed companies have reported that their current order book position is better vis-à-vis last six months.

A whopping 84 percent of the firms said that they expect an improvement in their order book position in the next six months. This is a substantial improvement, of almost 20 percentage points, from result obtained in the previous survey wherein 64 percent of the companies had reported likewise.

This strong performance is compelling companies to firm up their investment plans. Nearly 50 per cent of the surveyed firms have reported that they would scale up their investments in the coming six months. Companies have reported that successive doses of monetary policy tightening by the central bank have now started affecting the lending rate structure, with 86 per cent of the firms of the view that lending rates would further go up in the coming months. Yet, this upward revision of lending rates would not lead to deferment of investment plans with 75 per cent of the firms saying that investments would go ahead as planned. Strong balance sheets of the companies, buoyancy seen in the capital markets and the option of raising funds through the ECB route are providing liquidity and ensuring sufficient funds flow to finance investments.

However, even as companies seem to be a little insulated from the point of view of funding investments, rise in interest rates will impact their cost of working capital as this is primarily linked to funding from banks.

Another point to note in context of rising interest rates is the impact this is expected to have on consumption demand in the months ahead. Here we find that nearly 45 percent of the firms feel that consumption demand, particularly demand for consumer durables, will moderate in the months ahead following an unabated increase in interest rates.

The Survey reveals that there are two major issues which firms have to contend with. The first relates to the rising cost of raw materials. In the present survey nearly 80 per cent of the participating firms have said that rising cost of inputs is putting a lot of pressure on their business performance. Till about a year back this figure was about 50 percent, but since then we have seen this figure shoot up significantly indicating the rising trend in raw material prices. The second issue relates to rise in manpower costs. In the latest FICCI BCS, we see close to 60 per cent of the firms reporting rise in wage costs and salaries as a factor putting tremendous pressure on the operational costs.

FICCI’s Business Confidence Survey for the second quarter of fiscal 2010-11 drew responses from 359 companies with a wide geographical and sectoral spread. Companies participating in this survey had a turnover ranging from Rs. 1 crore to Rs. 2,00,000 crore. Respondents to FICCI’s Business Confidence Survey were from sectors such as textiles, steel, chemicals and fertilizers, oil and gas, auto and auto components, food processing, electrical equipment and machinery, cement, FMCG, pharmaceuticals, paper, metal and metal products, insurance, transportation, hospitality and other business services. The survey was conducted during the month of October 2010.

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