The $35 billion challenge

The $35 billion challenge

It was an aircraft flying on just one engine. That’s how these columns described the Indian economy a year ago, when it was just government demand that kept the plane—the Indian economy—in the air. It’s now clear that the private sector engines are revving up again.

With the 2010-11 fiscal year starting, how and to what extent the private sector’s demand, especially investment, revives is the question. It’s a big one: Corporate investment was one of the biggest factors behind India’s boom last decade. This week, JPMorgan India CEO Kalpana Morparia told a TV channel that equity capital issuances in the next 12 months could be around $35 billion, or Rs1.5 trillion.

That’s a rosy estimate, considering Rs54,000 crore in 2007-08 is the most companies have raised from the stock market in a year. If there is indeed this much capital in the pipeline, it could ensure a decisive turn in the private sector’s cycle of capital expenditure. This factor adds to all the others that divine such a positive capex turn: Capital is available today, it’s still cheap, and corporate balance sheets and profits look healthy. Firms are also slowly utilizing more capacity—as a March Morgan Stanley report suggested—meaning that, with demand rising, companies are again picking up slack.

That sounds like smooth flying for India’s economy. More than that, it signals a return to an earlier flight path where the private sector, and not the public, drives economic growth.

In fact, in that earlier path, it was the country’s savings that created the underlying impetus for corporate investment: Household savings were channelled to firms through banks, stock markets and other financial intermediaries. Right on cue, savings are expected to keep going up. Edelweiss, a Mumbai financial services firm, estimates that whatever extra households save in 2010 alone will equal the total amount of savings in 1990-99.

But a chunk of gross savings comes from the public sector, making it all the more important for governments to pare down deficits. That’s one factor that could create turbulence: Government borrowings of Rs4.57 trillion this year not only deprive the private sector of that much cash, but also risk raising interest rates. In that case, last year’s saviour engine could end up draining too much power from the others.

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