Uncertainty surrounding the global economy, rising cost of inputs and high interest rates have led to a decline in business confidence during the current quarter, especially among smaller firms, according to a survey by the Confederation of Indian Industry (CII).
According to CII's quarterly business outlook survey, the business confidence index for the third quarter of 2011-12, has declined by 2.5% compared to the previous quarter.
The survey said the going had become tough particularly for small-sized firms and the continuous rate hikes by the Reserve Bank of India (RBI) had made credit costlier.
"The credit whenever it has been available, its costs have scared many SMEs (small and medium enterprises) away. Many bankers have also admitted that if these tight policies continue the costs will be passed on to the buyers," CII said.
Rising credit costs were affecting working capital requirements and plans of capacity expansion. High inflation too was named as one of the major problems faced by the companies.
According to Gurpal Singh, deputy director general of CII, the decline in confidence is a matter of concern but does not come as a surprise as uncertainty surrounding the global economy is expected to take a toll on Indian industry.
"We live in an age where everything is interlinked and nothing happens in isolation, the tightening policies around the world will affect MSMEs (Micro, small and medium enterprises) in particular," said Singh.
CII, however, said some steps taken recently by the government such as giving a two% interest subsidy on rupee export credit to SMEs would help them in dealing with the slowdown in major markets like the US and Europe.
"These are excellent steps and should remove some pessimism amongst Indian MSMEs and act as a platform for some positive developments in the months ahead," said Ramesh Datla, chairman of CII's national MSME council and managing director of ELICO.