Amid a debate on green shoots of economic recovery, India Inc's confidence refused to perk the third quarter of 2012-13. It was unimpressed by the much-hyped foreign direct investment (FDI) reforms and remained concerned about political and economic instability, shows a survey by the Confederation of Indian Industry (CII).
The CII Business Confidence Index dropped below 50 points for the first time in the current financial year to stand at 49.9 points in the third quarter, compared with 51.3 per cent in the second quarter and 55 points in the first three months. It was slightly higher than the 48.6 points in the October-December period.
The index is measured on a scale of 1 to 100 points. A score above 50 indicates positive confidence, while above 75 would mean strong positive confidence. Less than 50 indicates a weak confidence.
In the 81st Business Outlook Survey, a majority of respondents rated domestic economic developments, high interest rates, infrastructure bottlenecks and institutional issues among the key concerns. But, the survey revealed that unlike the previous rounds, domestic economic and political instability has emerged as the top most concern for firms.
Respondents, however, did not consider the pace of reforms as a major problem now, buoyed by a slew of reform measures initiated by the government in recent months. "Fall of the index below 50 points is a matter of concern, requiring concerted policy intervention. While reform measures undertaken by the government in the recent months will surely start yielding results, it is important that the momentum on reforms is not lost," said Chandrajit Banerjee, director general of CII.
Many (38.9 per cent) respondents felt the government's reform measures would have a positive impact on investments, though the impact on output might take some time. Most of them replied in the negative when asked about the impact of FDI reforms on furthering their firm's fortune. In fact, 59.6 per cent said they did not feel that raising the FDI limit in the aviation sector would benefit them, while 45.5 per cent felt the same about allowing FDI in power trading exchanges. As many as 39.5 per cent said the reforms in retailing would not better their companies' future. "This is not a good sign for the government as it had hoped that these policy measures would help lift the pall of gloom which has currently descended over the Indian economy," CII said.
Therefore, despite the reform measures, majority of firms expect the gross domestic product growth in this financial year to remain subdued in the range of 5.5-6 per cent.
The economy grew 5.4 per cent in the first half against 7.3 per cent in the corresponding period of last year and the finance ministry expects it to grow by 5.7-5.9 per cent for the entire financial year, with some recovery in the second half.
Bulk of the respondents (51.5 per cent) saw the domestic investments of their firms to register either a decline or no change in the October-December quarter. "This is a worrying sign, and underlines the need for pro-active measures to restart the investment cycle," CII said in a statement.
Among various measures to restart the investment cycle, it is critical that the government increases the deprecation rate on plant and machinery from 15 per cent to 25 per cent for three to five years, encourages state-run firms to use their cash reserves to build new capacity, exempts infrastructure and special economic zone companies from minimum alternate tax and fast-tracks 50 mega industrial projects, Banerjee suggested.
The survey showed that respondents expected inflation and fiscal deficit to remain elevated in the remaining period of the current fiscal.
The survey is based on responses of 150 companies-micro, small, medium and large enterprises from different regions. Majority of the respondents (51 per cent) belonged to large-scale firms, while 30 per cent were from medium-scale firms. The survey included both public and private sectors from the manufacturing and services sectors. It was conducted during November-December 2012.