India’s economy slowed down after the 2008 financial crisis because of a fall in corporate investments. This makes it a key indicator of economic growth.
“Actual capital expenditure during 2016-17 by private companies fell for the sixth successive year,” according to a recent report by the Reserve Bank of India. As a result, India Inc’s investments grew 5.8% in FY2016-17—the lowest in 25 years, according to a Business Standard report. This is despite the increase in the total cost of projects assisted by banks and financial institutions in 2016-17, as per the RBI report.
Indian companies are opting to borrow money from non-banking sources. Companies raised Rs 3,600 crore by issuing stocks in FY17, the RBI report said. This is a 177% jump from the amount of Equity finance in FY16. In comparison, there was only a 2% growth in the amount of money borrowed from banks and financial institutions. However, companies did not prefer to raise money from abroad. “Capex planned to be incurred from resources raised from abroad declined by 48.6% from its level a year ago,” the RBI report said.
There could be two reasons for the increasing reliance on Equity funding—banks are hesitant to lend while the stock markets have been bullish. After all, Indian banks are busy dealing with bad loans or non-performing assets (NPA). Bad loans—as a percentage of total loans—are expected to touch 9.9-10% in FY18, according to an Economic Times report. The greater the bad loans, the lesser the cash that banks will have for lending. In fact, a Fitch report suggests that Indian banks will need a fresh capital of $65 billion by March 2019 to make up for the bad loans.
Another reason for avoiding bank borrowing could be high interest rates. Since January 2015, the Reserve Bank of India (RBI) reduced interest rates by 2% (200 basis points). But, Indian banks have cut lending rates by only 1.2%. Reports suggest that companies are not happy with the transmission of the rate cut as it affects their ability to repay debt. This then prevents them from planning new projects.
The credit rating of Indian companies improved in FY17, says a CRISIL report. This means Indian companies have a healthy credit rating as well as the ability to borrow. Yet, they are reluctant to do so. This could be because they are waiting for consumer demand to improve, according to the ET report. Only then will the companies be using all their capacity to produce goods and services. And companies tend to invest only when they need to expand their capacities to service new projects or expansions.
Currently, the government is leading any investments in the country. As a result, most of the capital expenditure has been in infrastructure sectors like power, construction, road, bridges, ports, and airports. The power sector attracted the most investment within the infrastructure space in FY16 and FY17, the RBI report said. This is expected to continue in FY18, the report added. “FDI and private placement of debt has gained momentum and should boost financing of capex in the year,” the RBI report said.
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