CII Business Confidence Index for SMEs – Q3, 2011 – 12

OCT - DEC, 2011

  1. Highlights
  • The overall Business Confidence Index (BCI) of SMEs for quarter Oct - Dec, 2011 is estimated at 54.7 on a scale of 0-100 (from most unfavorable to the most favorable). This is a decline from the BCI of last quarter estimated at 57.2 and on a Year – on – Year basis decline from a value of 67.0.
  • Within SMEs, service sector is expected to fair much better in the current quarter than Manufacturing Sector.
  • Gross sales, new orders and capacity utilization are variables amongst the variables which have fired relatively better, these have recorded a value of over 60, indicating these variables are going to have salubrious impact than some of the other variables. The situation is worse off from the last year and last quarter when these variables recorded a value of more than 70 and sometimes even 80.
  • Remaining variables, except input costs, credit cost for capacity expansion and working capital have values of BCI in the range of 51 - 60, Input Costs this quarter have gone below 25 on the back of intolerable inflationand this quarter has seen a decline on (Y-o-Y) basis as well as on a Quarterly basis.
  • Gross sales will get their push from the strong domestic demand, as outlook on exports prospects for SMEs have come down significantly in the current quarter to 57.5 points from 62.5 points last quarter. The exports on the back of prolonged monetary tightening will affect the manufacturing sector much more than the service sector, where the prospects remain slightly brighter.
  • Employment prospects in SMEs look Stable with BCI value estimated at 67.5 points.
  • The credit availability for SME sector is a matter of concern, with many manufacturers worried with the rise in costs; with government borrowings increasing bankers have admitted that their credit will become more expensive. On the plus side the export credit subvention to the labour-oriented and small scale sector firms will help a great deal. This along with the revival of dollar credit scheme for exporters will ensure availability of timely credit to them. The credit cost for Indian MSMEs is also a big concern with untenably high interest rates affecting production adversely, with increased costs being passed on the customers.
  1. Overall Business Confidence Index of SMEs

The overall (industry plus services) Business Confidence Index (BCI) of small and medium enterprises (SMEs) for Jul -Sep, 2011 quarter is estimated at 54.7 on a scale of 0-100 (from most unfavorable to the most favorable).[[1]] Based on responses from MSMEs all over India on 14 critical business outlook indicators[[2]], this indicates that SMEs are expecting an unfavorable change in business prospects as compared to previous quarter (Jul - Sep) when index stood at 57.2 points. Within SMEs, services are expecting larger improvement than the industrial sector. The BCI for services is calculated at 61.2 compared to 48.2 for industrial sector. The Index for Q2 2010 -11 was at 67.0 points.

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Reflecting continuity in decline of the business outlook, the BCI for Oct-Dec stood lower by 2.5 percentage points over the same for previous quarter (Jul-Sep). While both manufacturing and services MSMEs recorded a decline, services SMEs did a better scoring on this front. The BCI for services MSMEs decreased by just 0.1 points compared to a decline of 4.9 percentage points in case of manufacturing SMEs. Services SMEs, hence, do not only show higher expectancy levels than their manufacturing counterparts but they also show higher resilience and resistance.

  1. Decomposition of Overall Business Confidence Index

Decomposition of overall BCI in various sources reveals a varying degree of confidence with respect to each variable for the current quarter. Gross sales (69.9), New orders / contracts (67.0), Capacity utilization (61.2), and Employment (67.5) recorded a value higher than 60 indicating Stability in outlook of these variables during the current quarter over the previous one. However there has been a decline in the confidence for these variables in comparison to the figures reported 12 months ago and indeed three months ago. Issues related to delayed payments, labour issues lack of adequate technology have dented confidence in SME ranks.

Remaining variables, except Input costs, credit cost for working capital and capacity expansion have registered BCI values in the range of 51-60, some indicating a favorable change while others showed a downward trend in the outlook. The highest BCI in these categories is held by Capacity expansion (59.9); followed by Credit availability for Capacity expansion (58.8), net profit margin stands at (51.5) and others. On a (Y-o-Y) basis there has been a significant decline in the variables. Variables have declined by 10-15 percentage points from where they stood a year ago. The decline is also palpable from the previous quarter.

The BCI for, Input cost (23.9), Credit cost for working capital (44.9) and Capacity expansion (46.9) fell in the range of 25-49%, confidence levels. This is also supported by the fact that there exist a stringent monetary policy and inflation has been at a concerning levels for quite some time now.

With the current economic scenario as it is and the interdependency on each other it is hardly surprising that the confidence is low as reflected by index. Sales for the MSMEs are expected to be generated through domestic demand. With many of the countries of the west having their ratings lowered. Indian exports will have to bear the brunt of the recession that we find ourselves in. it comes as no surprise then that new orders/contracts have also registered a lower value. The value for new orders stands at 67.0 a full 7.4 points lower than in the previous quarter. However one must give credit where credit is due the government has recently announced 2 percent interest subsidy on rupee export credit to the labor-oriented and Small and Medium Enterprise (SME) sectors to help them from slowdown in the major markets like the US and Europe. Steps like these are sure to give Indian MSMEs a much needed morale boost to carry on doing their businesses.

Increasing and stringent interest rates along with persistently high inflation are creating trouble for Indian MSMEs. Not only is the credit availability a problem whenever it is available, it is available at exorbitant costs and that is not affordable to many of the Indian MSMEs. This then affects the profit margin of the MSMEs and the inventory levels of the companies which cannot be transferred to the buyers, as the products will loose its competitiveness. It comes as no surprise that these two variables have registered a decline from where they were last quarter. The inventory level stood at 46.7 against 51.3 in the last quarter, where as the net profit margin was at 51.5 against 56.8. The two variables have also recorded lower values than they did in the corresponding quarter last year. Employment of labour in the MSMEs has seen a decline in the current quarter with it being at 67.5 as against 70.7 in the last quarter and a further 2.8 percentage points behind where it was a year ago. MSMEs usually have their problems with the labour and a constant revolving door will only escalate the things.

Note: CE and WC represent capacity expansion and working capital, respectively.

  1. BCI of Industry and Services Sector: A Comparison

Within the overall confidence index, the BCI values for Services sector have totally and utterly outperformed the manufacturing sector. Services have done better than the industrial sector in 12 out of the 14 variables discussed. Manufacturing sector did better than the services sector in terms of the input costs which improved to (27.7 against 20.1) and Inventory Level (50.1 against 43.3). Services sector recorded higher BCI in cases of Gross sales (74.6against 65.1), New orders / contracts (75.8 against 58.3), Capacity expansion (63.8 against 55.9), Exports (63.1 against 52.0), Selling prices (64.5 against 51.0), Credit cost for working capital (57 against 32.7) Employment (77.4 against 57.5), Net profit margin (54.7 against 48.3), Credit availability for working capital (64.9 against 39.8), Credit availability for capacity expansion (73.8 against 43.8), and credit cost for capacity expansion (58.4 against 35.4)

Note: CE and WC represent capacity expansion and working capital, respectively.

On the basis of the individual values of BCI for industrial and services sector of SMEs, the following broad observation can be made:

(i)Prospects of Gross sales in Services sector are brighter than that in case of Manufacturing sector, attributable to better prospects of new orders / contracts, selling prices and Credit availability for capacity expansion. Exports of the manufacturers have also been much badly affected than the service based entrepreneurs.

(ii)MSMEs in manufacturing 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. This is because manufacturing requires relatively higher credit for investment and working capital.

(iii)Net profit margin in MSMEs belonging to the manufacturing sector is far lower than that in Service sectorMSMEs. This isowed to rising costs both in terms of raw materials and higher amounts of credit required.

[[1]] The range of 0-100 has been dividend in the following four parts: (i) 0-24, indicating significantly unfavorable change to the extent of more than 10%, (ii) 25-49, indicating unfavorable change to the extent of 1-10%, (iii) 51-74, indicating favorable change to the extent of 1-10%, and (iv) 75- 100, indicating most favorable change to the extent of greater than 10%. The values of 0, 50 and 100 would indicate most unfavorable change, no change and most favorable change, respectively.

[[2]] The respondent were asked to compare the business prospects in third quarter of 2010-11 with quarter just passed by (July- Sep) on the following 14 outlook indicators: Gross sales, Employment generation, New orders / contracts, Capacity utilization, Capacity expansion, Exports, Selling prices, Overall input costs, Inventory level, Net profit margin, Credit availability for working capital, Credit availability for capacity expansion, Credit cost for working capital, and Credit cost for capacity expansion. The responses received on each of these questions were adjusted in such a manner that they were neither biased towards large number of small firms (financially) nor towards the financially large firms.