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CFOs Expect Economy To Worsen In 2012

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CFOs in India are battling economic as well as industry level concerns, apart from facing individual organisation level challenges. Despite the uncertainty in their internal and external environment, CFOs are optimistic about future growth. In fact smaller enterprises are more optimistic about better performance in the coming year as compared to larger ones. This was the finding of the Deloitte India  2012 CFO Survey, released by Deloitte Touche Tohmatsu India Pvt Ltd. on 11 September.
 
According to the study, a majority of senior finance executives of India Inc feel that the country's macro-economic conditions are likely to either worsen or remain the same by the end of FY’13 indicating weak business sentiments.

The Indian economic outlook has taken a toll on the corporate sector. Private investors have pulled back in recent months amid increasing borrowing costs. India's industrial output has been falling on the back of declining consumer demand and corporate investments. Infrastructure projects are showing delayed timelines, and investments in these projects have significantly slowed down. This has led to CFOs identifying decreasing consumer demand, both global and domestic, as one of their organisation’s key economic challenges.

The survey reveals that nearly half of the Indian CFOs expect further rise in prices, tapering of GDP growth and stagnation in industrial growth in 2012-13.  It also reveals that 43 per cent of them view that political inefficiency is causing policy paralysis and hence arresting economic growth. This was substantiated with 60 per cent of the CFOs citing flawed regulatory policies, inflationary pricing and rising input cost as key deterrents to industrial growth. In contrast, a third of Indian finance heads expect stabilisation in macroeconomic factors and a mere 15 per cent expect an improvement on these counts. However, 31 per cent of the respondents believe that their organisations would perform better going forward and 35 per cent is apprehensive about poor performance due to increasing financial risks.
 
Nearly half the CFOs surveyed said that they are more positive about their company’s future as compared to last year, mainly due to internal/company-specific factors such as products, services, operations,  financing, etc., even though maintaining margins and talent management are perceived as key challenges.

Other organisational challenges include maintaining consumer demand for their products/services and framing business strategies in an uncertain and dynamic global economic environment. The survey highlights that CFOs are more concerned about the state of the domestic economy rather than the global slowdown, both of which have consequently reduced their overall risk taking appetite. In line with this, key economic challenges faced by organisations today, include sustaining consumer demand, which is tending to show a declining trend, rising input costs, fluctuating exchange rates and an uncertain political environment.

Key challenges continue to be growth, inflation and value of rupee. Since the global crisis of 2008,
growth fell below 7 per cent year on year in the third quarter of 2011-12. Deteriorating global outlook and domestic policy missteps hampered business confidence and dragged down growth. The survey highlights that 78 per cent of the CFOs expect the GDP growth rate to be 7.5 per cent or below and almost 37 per cent foresee a growth rate of below 7 per cent by the end of FY12.

Survey findings also revealed that competition was the biggest concern for technology, media and
telecommunications firms, whereas industry regulations and pricing trends have come out as the top challenges for the life sciences and healthcare industry, with new FDI rules and almost 60 per cent of  products likely to come under price control as per the new pharma policy. Deloitte experts also believe that the Power sector faces challenges of cost and time overruns in large scale projects, fue availability and delayed regulatory processes (such as licences issue, land acquisition, environmental clearances, etc.), whereas administered pricing is a key concern for the Energy & Resources sector.

The survey further states that factors impacting the economy were also having an influence on consumer spending. Two thirds felt consumer demand would be low. Other challenges, two thirds of those surveyed felt, were domestic political uncertainties and declining export. According to Sanjoy Sen, Senior Director, DTTIPL, “CFOs are looking forward to policies that would ensure long-term economic sustenance,  spur consumer growth and bolster investor confidence. As in the earlier survey, CFOs in this survey identified decreasing consumer demand as one of their organization’s key challenges. The others being fluctuating exchange rates and rising input costs.”

 


However, in the wake of current economic downturn, 60 per cent expect more companies would access foreign market to hedge risks. As many as 136 CFOs from listed and unlisted companies in India spanning across sectors participated in the survey. A majority of CFOs share a common concern that the economic recovery is still hindered by concerns about consumer demand, squeezing margins, rising inflation and government inertia, among others.  A recent few downgrades by International credit rating agencies and slew of scams have only added to the concerns.


Based on the survey findings and associated sentiments on economic indicators, CFOs are faced with the need to (1) continue revenue growth/preservation, (2) as well as implement cost containment initiatives. In addition, their future strategies may include access to foreign markets to hedge risks, deliver better consumer solutions and/or products, rationalise resource and/or capacity/productivity, streamline operations and ensure prudent investments on business projects. Such practices may help them tailor business models that adapt swiftly to changes in the global economy.