Sunil Jain: Financing growth

PERSPECTIVES

Apart from the natural slowing of investments due to the collapse in global growth, the biggest impact on India’s growth prospects is going to come from India Inc’s inability to fund its expansion plans — the biggest impetus to GDP growth over the past few years has come from investment growth, the bulk of which has come from the private sector. Though, according to a recent Citi report, corporate India is in a much better position to raise money than ever before (net debt-to-equity has fallen from 43.3 per cent in 1998 to a mere 16.6 right now), there just isn’t enough money around that can be raised. While a total of Rs 454,800 crore was available to India Inc in 2006-07 from all sources including bank credit and this rose to Rs 589,200 crore in 2007-08, thanks largely to External Commercial Borrowings (ECBs) and money raised from the stock markets, both are in short supply today. An interesting comparison of just how bad things are is provided by a comparison of the first half of 2007-08 and the first half of this year. The amount available to India Inc has fallen by more than a third. And this fall hasn’t been restricted to just funds raised from the capital markets (that has almost halved though) but also to funds raised from internal resources like depreciation and profits after tax. If the RBI cuts interest rates further this will obviously help, especially since corporate profits will also increase, but until global (and therefore Indian) stock markets revive, the impact is certain to be limited.
 

Sources of funds for industry
(Rs crore)	2006-07	2007-08	First half

2007-082008-09 Bank Credit141,500174,60044,20060,400 Flow from non-bank
sources154,600239,600119,80052,800 * Capital Issues
(bonds and shares)29,20051,50020,00011,900 * ADR/GDR issues16,20013,00011,2004,700 * ECBs104,000160,20072,70014,700 * Commercial Paper5,10014,90015,90021,600 Depreciation45,60040,70020,70011,400 Profit After Tax113,100134,30067,00035,300  454,800589,200251,700159,900 Source: India Economics, Citibank, Oct 27, 2008