The 2nd quarterly survey of CII, measuring the Business Confidence Index (BCI) of SMEs, shows bullish outlook of the sector for the quarter Oct-Dec, 2010. The BCI for the current quarter is estimated at 67.0 on a outlook scale of 0-100, moving from most unfavorable to favorable situation. A value of 50 is the dividing line between favorable and unfavorable change in the outlook. What is even more significant is that the outlook of this critical sector has improved over the last quarter by a significant 1.4 points. “This is a positive sign of a sector emerging from the shock of the global economic meltdown, and having a huge employment potential” said Mr. Chandrajit Banerjee, Director General, CII.
According to Survey, much of the buoyancy in SMEs performance is on account of domestic demand rather than exports. Exports prospects for SMEs have come down significantly from the last quarter, which is not surprising given the slow and uncertain economic recovery in large part of the Western globe. Appreciating Indian rupee against US dollar is further adding to the woes of the SME exporters, mentions the Survey.
CII Survey, which aims at gauging the mood of the SMEs a quarter in advance, shows that services sector on average are expecting to perform better than the industrial sector. Estimated BCI value of services SMEs stood at 67.5 compared to 66.5 for industrial SMEs. Services exuberance even in the previous quarter had surpassed the industrial sector by some margin.
Based on a list of 14 exhaustive outlook indicators, the CII Survey has highlighted four variables - Gross sales, New orders / contracts, Capacity utilization, and Capacity expansion – that have done exceptionally well to cross the mark of 75 on BCI scale to indicate significantly better outlook (more than 10%) from the previous quarter. This, in turn, is also keeping the prospects of employment in the sector bright with its BCI standing at 73.6
Most of the other variables in Survey registered BCI values in the range of 51-75, indicating a favorable improvement (1-10%) in the outlook over the previous quarter. Only Input costs (28.9) fell in the range of 25-49%, indicating that firms expected an increase in the inputs costs to the extent of 1-10% over the quarter ending September, 2010.
The CII in the Survey reports improved outlook on the prospects of credit availability for SMEs, even though it continues to be far below to be stated as ‘most favorable’. Significantly, the rising credit cost has so far not started affecting the SME businesses adversely, with BCI value of it staying above 50. This, among other factors, could be attributed to implementation of Benchmark Prime Lending Rate (BPLR) from 1st July 2010. However, CII is worried about relatively low and declining value of BCI for Credit cost for undertaking capacity expansion. With given upward pressure on interest rates, it may not be too long before Credit cost starts adversely impacting the capacity expansion of this critical sector of the economy, warns the CII Survey.
Within SMEs, Industrial sector is found to have outshined the services sector with regard to Gross sales, New orders / contracts, exports, selling prices and inventory levels. In most of the other resects, however industrial sector is found to be much lacking. CII has found that SMEs in industrial sector seem to be relatively less favorably placed in terms of credit availability and credit cost of working capital as compared to their counterparts in services sector, possibly highlighting the role of a pro-active policy interventions in these area. Further, the prospects on Net profit margin for Oct-Dec quarter in industrial SMEs is found to be far lower than that in Services SMEs, owing primarily to greater adversity of rising input costs in former than in later.