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Growth feedback effect and productivity gains emanating from a steady capex in the industrial sector provides a sustainable base for GDP growth trajectory. However, a comparative analysis of the Reserve Bank of India's annual study of financials of non-government, non-financial public limited companies during the decade of 2000s over the decade of 1990s, reveal a disturbing trend.
Declining trend
The annual average share of production catalysts such as gross and net fixed assets, plant and machinery, inventories, sundry debtors in total assets have declined appreciably during the second decade (2001-10) as compared to the first decade (1991-00).
Gross capital formation to total uses of funds declined from 67 per cent to 52 per cent over the same period. Corporates' gross savings to gross capital formation ratio, which increased to 1:1 during 2000s from 1:0.58, shows that corporate savings can meet their overall capex.
Uptrend
On the other hand, annual average share of investment, cash and bank balances, loans and advances over the same period increased (Table 1A). Increase in fixed deposits by 269 per cent, investment by 91 per cent and loans and advances by 17 per cent show that corporates have become significant lenders/investors.
Analysis
Analysis of Sources & Uses of these companies corroborate the trend.
Annual average share of gross fixed assets, plant and machinery in total uses of funds have declined from 57 per cent and 42 per cent in 1990s to 39 per cent and 28 per cent respectively in 2000s.
Funds flow to cash and bank balances (196 per cent) and investment (104 per cent) have spurted over the same period [Table 1B].
With good economic fundamentals, high-level of consumption demand and superior year-on-year profit for high-end corporate; an emerging Indian economy's industrial growth is expected to be on higher trajectory.
However, growth-volatility and under-performance of the industrial sector during 2000s signal to structural problems facing the sector.
Iip growth
During 19-year period FY 1981-98, the IIP growth was higher than GDP growth in 13 years and it was lower in 6 years only. But during the 12-year period of FY 2001-12, in seven years, the IIP growth is lower than GDP.
Even today with recession-impacted Euro countries, Japan and slowdown in the US, the export-driven China's manufacturing sector has achieved a double-digit growth, whereas it is a muted industrial growth during FY 2012 in India.
Net fixed assets
Mr Mahesh Vyas of CMIE has indicated that almost in each of the last 10 years, half of the non-finance companies were shrinking their net fixed assets. Only about 20 per cent of the companies have above average growth in their assets. It is reported that 41 per cent of money raised by 47 companies through IPOs during 2008-10 period has been placed in liquid assets and about 35 per cent of it was used for capex.
Reasons
Reasons for growing financialisation of corporate activities include:
i) High cash discount (CD) rates, liberal import regime and risk-return matrix favour trading/marketing activities in corporate over investment in manufacturing. This is facilitated by outsourcing/imports. These are well reflected in rush for retail chains which are quite import-intensive and very high level of trade deficit.
ii) Interest arbitrage opportunities arising from low ECB and sub-BPLR rates for high-end corporate vis-à-vis high cost of credit/liquidity premium for vast majority of credit/liquidity constrained businesses.
When creditors/investors' confidence is low they become more short-term/cash focused and safety/security-oriented. Result is higher liquidity-holdback, accelerated investment and lesser capex. High CD rates incentivise cash transactions which increases need for higher cash holding. Cash constrained firms in exchange for accelerated payment offer high discounts that give significantly better returns on cash than fixed investment.
Liquidity/credit unconstrained large corporates enjoy unequal bargaining power vis-à-vis their SME vendors.
Growing trust gap in trade credit or B2B credit sales have led to tighter trade credit regime. It also results in higher liquidity needs which impact capex. All these may require further discussion and research.
(The author is DGM, SIDBI, Lucknow. Views are personal.)
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