Business confidence of India Inc. has hit a two year low on rising cost of capital due to aggressive monetary tightening by the Reserve Bank of India (RBI) and weak domestic demand amid fears of a recession in the US and some European countries, a survey reveals.
Both global and domestic developments seem to have dented the level of confidence of India Inc., the Federation of Indian Chambers of Commerce and Industry (FICCI) said in its latest business confidence survey.
Overall business confidence index value declined to 51.6 during the first quarter of the current fiscal as compared to 63.7 in the January-March 2011 quarter.
"At the domestic level, rising interest cost and weak domestic demand, both in part attributable to the contractionary monetary policy pursued by the RBI, are taking toll," the survey said.
The RBI has hiked key policy rates 11 times since March 2010. In its latest monetary policy review last month, the RBI hiked key policy rates by 50 basis points.
At the global level, with both the US and the Eurozone countries reeling under a fiscal crisis, there were growing apprehensions about the world economy entering into another recession, it said.
The report said that interest rates charged from surveyed firms by their banks for both working capital loan and term loan had increased appreciably over the last six months.
While the average interest cost for working capital loans had gone up from 11.6 percent to 13.1 percent, the average interest cost for term loans had gone up from 11.2 percent to 12.6 percent, it said.
On the issue of impact of another round of interest rates hike on companies' near-term investment plans, 44 percent of the respondents said it would have a "serious" impact on their investment plans, while 36 percent said it would have a "moderate"affect.
The survey was conducted in July. It brings out expectations of members of corporate India for the period July-December 2011. Nearly 300 companies with turnover ranging from Rs 1 crore to Rs 250,000 crore, participated in the survey.
The respondents, who took part in the survey, mentioned the following issues as being high on the industry's agenda for improving sentiments:
-- Address issues related to land acquisition expeditiously.
-- Bring down the cost of credit particularly for small and medium enterprises.
-- Ensure introduction of the Goods and Services Tax and Direct Tax Code from April 2012.
-- Further foreign direct investment reforms in areas like insurance and multi-brand retail.
-- Increase spending on the infrastructure sector as this would have a multiplier effect across sectors.
-- Improve the governance framework to ensure quick policy implementation and fast-track project clearances.