Tight credit, weak demand plague Indian industry: Survey

New Delhi, Oct 5 (UNI) Runaway inflation, combined with high interest rates and stricter credit availability, have further dented the business confidence of Indian industry, showed a survey by the Federation of Indian Chambers of Commerce and Industry (Ficci) for the first quarter of 2008-09.

The survey revealed that the bulk of SME sector is worst affected and that its interest cost has gone up by 3.5 per cent to 5.5 per cent over the last one year.

In contrast, the interest cost of large companies has gone up by 1.5 per cent to 2.5 per cent over the last one year.

In the global context of acute competition and overall slide, the high cost of credit, reduced availability of funds and weak demand have created added hardship for the Indian corporates in a globalised market.

Nearly 75 per cent of the participating companies agreed that banks have tightened their credit disbursal norms over time and thereby restricted the availability of credit to industry.

Further, nearly 97 per cent of the survey participants agreed that it is the SME segment that is facing the pressure most on account of the hardening interest rates.

Given the present situation and the deteriorating performance of the SMEs, there is a strong demand that the RBI in consultation with the government should look at a scheme that offers productivity linked benefits and incentives to SMEs. This proposal found favour with 82 per cent of the survey participants.

FICCI's latest BCS drew responses from 348 companies in the heavy and light industry and the services sectors with a wide geographical and sectoral spread.

Companies participating in this survey had turnover ranging from Rs 1 crore to Rs 1,26,000 crore.

Respondents to the Survey were largely from sectors such as cement, pharmaceuticals, textiles and apparel, leather, FMCG, heavy equipment and machinery, banking, insurance, real estate, IT&ITeS, paper, metal and metal products, chemicals, auto&auto ancillary and steel.

The rise in the interest rates is seen as having a direct impact on the investment activity of the companies. About 48 per cent of the companies that participated in the chamber's latest survey have reported of reconsidering/postponing some of their project investments.

Further, amongst those that are going ahead with their scheduled investment plans, a clear discernable trend of dependence on internal accruals to support investments is seen.

On the issue of ECBs, just about 20 per cent of the companies mentioned that they have been able to tap the ECB route for raising funds in the last two years.

This was largely due to the tight ECB norms that were put in place by the RBI. However, the recent relaxation of the ECB borrowing limit from 100 million dollars to 500 million dollars for infrastructure projects has been welcomed by industry.

''This move along with the upward revision of the maximum interest rate that companies can pay and which stands at LIBOR plus 450 basis points is certainly a positive measure,'' the chamber said.

The Survey participants, however, are demanding that the RBI now looks at relaxing the ECB guidelines for other sectors as well.

Presently, companies other than those in the infrastructure sector can borrow up to 50 million dollars for Rupee capital expenditure under the approval route.

At the firm level the following three parameters have seen a large jump in the proportion of companies complaining about the same as problem areas.

UNI MP AK HT1530