Despite the exhortations of a new government, there has been little sign of the animal spirits that went missing in the latter part of UPA-II
India Inc.’s report card for 2014 has a sorry look about it. Despite the exhortations of a new government, there has been little sign of the animal spirits that went missing in the latter part of the second administration of the United Progressive Alliance (UPA-II) government.
With good reason perhaps.
Having gone and binge invested in the global easy money regime of 2007-08 aided by the loose money policies of 2009 at home, very few companies have the appetite for mega investments. As a Mint opinion piece in September this year warned, “Both India’s domestic and external debt vulnerabilities are concentrated in a handful of large conglomerates in the power, materials, and infra sectors which expanded at breakneck speed during the boom years."
The excesses of the past caught up with erstwhile heavyweights like Vijay Mallya and Subrata Roy. As they saw their shaky empires crumble before their very eyes, the law enforcement agencies, as well as institutional watchdogs, finally summoned up the courage to probe their dealings, aided by an increasingly nosey judiciary.
If Mallya’s airline misadventure, aptly named Kingfisher Airlines, stayed grounded and Roy’s powers came a cropper against an intransigent judge, it was also a year when one of the most promising sectors in India crash-landed.
India’s pharma companies that had once threatened to become world beaters found the little corners they had been cutting on the way to growth and bumper profits, leading up to disaster.
If pharma was a tale of promises belied, another sunrise sector, airlines, continued to defy the laws of gravity.
The rash of new airlines eager to jump into business at a time when just one firm, Indigo, is making any money was a reminder of Warren Buffett’s oft-quoted statement that airlines and films are two businesses where fresh capital is immune to past failures.
Even as news came in of SpiceJet Ltd’s travails that threaten to ground the airline, Indigo’s pay-as-you-go model of asset acquisition, fuelled by smart operating leases, ensured it had little balance sheet debt. Indigo’s success mantra, where it sweated its assets far better than the rest of the industry, could hold out a lesson for newer and existing players far too obsessed with frills.
The leitmotif of the year could well be debt reduction as companies scrambled to cut their massive burdens. Some like Balrampur Chini Mills Ltd and Tata Steel Ltd painfully reduced debt and looked set to reap the effects of the bottoming out.
The others in core sectors such as power, the prime victim of poorly thought through regulation and governance, could find themselves saddled with unviable debt for years. From Tata Power Co. Ltd to Reliance Power Ltd, all the firms in the ambitious ultra-mega power projects conceived by the government over the last seven years, have a question mark hanging over them.
Theirs is a cautionary tale even as a new government is planning to invite bids for natural resources; accepting ridiculous conditions merely to bag a project, isn’t the wisest of business decisions. Output prices in most businesses have to be linked to input prices, despite whatever Arvind Kejriwal has to say on the methodology for allocating the country’s natural resources (http://bit.ly/1BHGWbn).
On the evidence of the past year, the debt-fuelled hyper-investment of 2007-08 is unlikely to happen again, in India as in China and in the US.
A credit crisis has a way of sobering most excesses. Which is why the investment cycle stayed stubbornly stuck with the velocity of money suggesting corporate animal spirits are likely to be quiescent for some more time.
There are a few exceptions but enterprising chieftains such as Gautam Adani willing to go out on a limb, have the benefit of a perceived proximity to the government.
But even here, the focus has been on investments abroad.
According to an Assocham study, Indian companies invested $17.6 billion overseas between April and September this year. This at a time, when a Confederation of Indian Industry (CII) study says India needs $4.7 trillion of investment over the next five years to achieve a 7% growth rate. That’s 60% more than the $2.9 trillion that was invested in the last five years.
As 2014 closes out with Reserve Bank of India (RBI) governor Raghuram Rajan suggesting that “Made for India" may well be a better motto than Prime Minister Narendra Modi’s original exhortation to “Make in India", India watchers will do well to track this key number.