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Manufacturing.9.Thmb.jpg Indian industry jittery on rising costs

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SME Times News Bureau | 17 May, 2010
Business confidence of India Inc. is up pushed by rising demand but high input costs and fear about a possible interest rate hike by banks are still a big worry for the the industry, according to a new survey by the industry body Federation of Indian Chambers of Commerce and Industry.

According to the latest Business Confidence Survey (BCS) by FICCI for the last quarter of 2009-10, "The demand situation in the economy is improving rapidly and companies are looking at better performance over the next six months" but at the same time it says "the upbeat mood is dampened by worries about a possible rise in interest rates and costs."

The FICCI survey reveals that an investment cycle is under way and 40 percent of the respondent firms are planning ‘higher’ to ‘much higher’ investment in the coming six months.

However, a big worry voiced by the respondent firms is the rising manpower costs and raw material prices. As high as 72 percent of the respondents cited rising manpower costs as challenging and an even higher 82 percent cited raw material costs as the key area of concern. At the start of 2009-10, these figures stood at 45 percent and 55 percent respectively.

"The cost pressure on the bottom line has breached the absorptive capacity of a large number of firms. Running out of options, many companies are now looking at raising prices. Companies are willing to take this extreme step even at the cost of some compression in demand," the survey says.

There is also concern that the next few months may see banks jack up lending rates for corporates by as much as 100 basis points on average. This is going to be a fallout of the recent tightening of monetary policy by the RBI.

On the export front, according to the survey, business is worried over the steep appreciation of the rupee against the US Dollar and the Euro.

"Although in recent months, India’s exports have turned in a good performance, those in the business of exports have once again become cautious about their near term performance. The proportion of firms expecting improved export performance in the next six months has not changed between the last two surveys," the survey points out.

There are two major concerns that are playing on the minds of exporters. Firstly, Rupee’s appreciation against the Dollar and now even the Euros and secondly, the sovereign debt crisis in the EU region, which is one of the largest destinations for India’s exports, adds the survey.

The study also says that the positive atmosphere created by improving demand and price realization is clouded by inflation perception. "Although the job market is not tightening as much, it is the heightened inflation level which may be forcing companies to re-look at the wage structure of their employees to compensate for a higher cost of living," the FICCI study says.
 
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