Gathering storm clouds2 min read . Updated: 30 Sep 2008, 12:14 AM IST
Gathering storm clouds
Gathering storm clouds
Dark clouds seem to have rolled in from nowhere to cast a shadow on India’s investment landscape. Higher interest rates and a slowing economy were bound to harm sentiment. But high-profile cases such as the land imbroglio at Singur and the murder of a CEO at Noida have unsettled many investors as well.
That means the continuing collapse in equity prices — which on Monday touched their lowest level this year — has to be understood not only in terms of evaporating investors wealth but also the potential impact this will have on the capital expenditure plans of companies.
The steep decline in stock prices this year has virtually shut the market for new equity issues. Two large and well-regarded companies — Tata Motors and Hindalco — are expected to struggle to successfully close their respective rights issues that are meant to finance global acquisitions. Foreign currency convertible bonds that brought in billions of dollars at the peak of the credit cycle in 2006 and 2007 can no longer attract the investment hordes. True, many companies are still sitting on large piles of cash that they built up in the first five years of this decade; but that pile is dwindling fast.
India has been through an earlier boom-and-bust investment cycle in the 1990s. There are several reasons to believe it will not be that bad this time around. Companies are more competitive today and are hence better placed to weather a global slowdown. Debt levels are largely under control, ensuring that balance sheets are not torn to tatters in case of a financial crunch.
India has to keep investment activity going despite the worsening situation. The five-year expansion that saw the growth rate soar to more than 8% was partially due to the synchronized global boom fuelled by cheap money. But the secular rise in savings and investment rates, too, played a large part in the growth acceleration after 2003.
This is where the government needs to step in — fast. The natural temptation will be to offer tax sops and investment subsidies that will add to an already large fiscal deficit. What India needs are more reforms on the ground that will make it easier for entrepreneurs and large firms to do business. That means everything from less paperwork while starting a new company to easier procedures for customs clearance to better land markets.
Ideally, more should have been done on these fronts when the going was good. But it’s never too late.
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