The second wave of Covid-19 is subsiding, but states have yet to relax local lockdown-like restrictions, leading to a reduction in economic activity. As a result, the second wave has undermined corporate earnings in recent months.
According to the latest round of FICCI’s Business Confidence Survey, many companies in the country are facing another crisis and sentiment is consistently upset.
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Lower expectations
The latest responses showed a large deterioration in Corporate India’s optimism compared to the previous survey. According to the latest report from FICCI. The dropped Overall Business Confidence Index (OBCI) fell sharply as demand was hit hard.
Given the uncertainty, companies’ short-term growth expectations remain cautious. The OBCI fell to 51.5 in the latest poll after hitting a decade high of 74.2 in the preliminary round.
Worsening economic conditions and subdued short-term expectations during the second wave of Covid-19 lowered the overall index value by over 20 points. However, the index rating was higher than the 42.9 registered a year ago.
LOWER DEMAND FOR A LARGE PLANT
At least 70 percent of respondents said that weaker demand in the future is a worrying factor. This suggests that many companies are concerned about lower demand as it could affect sales for an extended period of time even after the second wave has subsided.
The FICCI survey has exacerbated demand concerns expressed by the Reserve Bank of India (RBI) in its most recent bulletin, dated May 2021.
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The survey was carried out in April / May 2021 and records the expectations of the respondents for the period April to September 2021.
LOWER BUDGETARY EXPENDITURE
The FICCI survey also found that household incomes were severely affected by the second wave and could weaken demand conditions for an extended period during the second wave.
“As a much larger part of the population is affected by the current wave, the income of many households that are faced with job loss or have lost breadwinners to Covid-19 is permanently affected,” the survey said.
“Actions are being called to help revitalize demand. Most believe these measures will be vital for the economy to recover from the recent pandemic shock,” she added.
Even so, companies believe that one such measure is to increase the pace of vaccinations. This will allow states to relax restrictions more quickly and pave the way for increased economic activity.
While the situation in terms of operations is better than 2020, the localized lockdowns this year have resulted in increased raw material costs. Around 65 percent of the participants in the present survey stated higher raw material costs as a limiting factor, compared with 59 percent in the preliminary round.
LOWER SALE PERSPECTIVE
Companies that responded to the latest FICCI survey are unsure of their revenue prospects. Only 31 percent of those surveyed hope for better sales in the short term, far less than 66 percent who showed optimism in the preliminary round.
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It should be noted that companies have seen sales decline and profits may suffer in the short term. “The proportion of respondents who reported higher profits in the next six months fell to 16% in the last survey, while 36% of respondents said so in the preliminary round,” the survey said.
RESTRICTIONS VIOLATE BUSINESS, NEW ATTITUDE
The effects of local restrictions affected around 80 percent of the companies that took part in the survey. Everyone agreed that they were facing business issues due to local lockdowns.
Due to lower sales and demand, only 19 percent of the companies that participated in the survey were optimistic about hiring in the next two quarters. In the preliminary round it was 35 percent.
WEAK CONSUMER SENTIMENT
The The respondents indicated weak consumer sentiment as their main concern, followed by the unavailability of raw materials and the shortage of manpower due to various factors such as increased infections in the family and hesitation in traveling.
Increased risk and logistical delays due to new locks were also highlighted as limiting factors.
A majority of respondents stated that they strictly adhere to the rules prescribed by the government and encourage Covid to behave appropriately on their premises. In addition, an increasing degree of digitization has helped companies to cope with this wave more effectively.
Respondents also emphasized that they ensure adequate liquidity and maintain buffers for key inputs as well as end product inventories. In addition, companies are increasingly concentrating on external markets in which demand is picking up. In the domestic market, there is a much greater emphasis on serving zones that are less restricted.
CREDIT HURDLE, MORATORIO AND RELIEF PACKAGE
While the political support provided by RBI on May 5, 2021 was widely recognized and valued by the industry, attendees reflected a few other questions about how the financial system worked.
A large part of the participating companies highlighted problems with the drawdown of credit and urged the banking community to further improve lending at a reasonable interest rate. Companies believe that the need of the hour ensures adequate liquidation in the system. Companies call on the RBI to continue to ensure sufficient liquidity in the system.
Corporations believe that the central bank “needs to take additional measures to encourage banks to lend more”.
“It is important that distressed segments of the industry, as well as segments that have adequate collateral or great potential to generate more cash flows as the economy moves towards normalization, get credit,” the survey said.
The companies also stressed that the loan approval process has become extremely time consuming, which is seriously affecting business prospects.
The participating companies were of the opinion that any refusal by banks to provide loans to companies must be substantiated and formally communicated, as this would increase transparency.
A majority of the participating companies also called for the moratorium on loans, capital and interest payments to be extended by at least a further six months.
The participating companies emphasized the need for a stable interest rate regime for around 12 to 18 months. They also recommended that the RBI continue to be accommodative until sustained normalcy is back in the system.
On the fiscal side, companies unanimously saw the need for another fiscal package that mainly focused on the demand side. Measures to increase demand such as direct income support for the rural and urban poor, income tax cuts for the middle class and temporary cuts in indirect taxes need urgent consideration.
The respondents also emphasized the need to continue the liquidity support and credit enhancement measures for MSMEs announced in the previous year.
They called for targeted tax support – in the form of tax exemptions and financial assistance – for sectors previously kept out of the stimulus package but badly affected (including travel, tourism, hotels, hospitality and civil aviation).
EMPLOYMENT-BASED INCENTIVE
Another demand made by companies was that the government provide employment-related incentives to employers in order to avert potential job losses. This could include temporary tax support for salary payments for employees in the MSME sector and / or exemption from the employer’s contribution to PF and ESI for the current financial year.
Many companies also felt that front-loading investment by both central and state governments was the order of the day as it would significantly boost and sustain market sentiment and demand.
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