Small and medium enterprises (SMEs) are bullish on the business outlook during the third quarter (October-December) this fiscal following an increase in domestic activities along with improved prospects of credit availability, a Confederation of India Industry (CII) survey said on Sunday.

According to a survey by the CII, the business confidence index (BCI) of SMEs for the October-December quarter is estimated at 67, marking an improvement of 1.4 points over the July-September quarter this fiscal. “This is a positive sign of a sector emerging from the shock of the global economic meltdown, and having a huge employment potential,” CII Director General Chandrajit Banerjee said in a statement.

The global meltdown had impacted the country's SME sector severely and resulted in huge job losses. However, with the global recovery still remaining fragile, the survey found that much of the buoyancy in SMEs' performance has been on account of domestic demand and not exports.

“Export prospects for SMEs have come down significantly from the last quarter, which is not surprising given the slow and uncertain economic recovery in large parts of the Western globe,” the CII said.

The CII survey also revealed that the outlook on prospects of credit availability for SMEs had shown improvement, even though it continued to be far below what can be stated as ‘most favourable'. “With given upward pressure on interest rates, it may not be too long before credit cost starts adversely impacting the capacity expansion of this critical sector of the economy,” it said.

Alongside, the appreciating Indian rupee vis-à-vis the US dollar is further eroding margins and adding to the woes of SME exporters, the survey said.