Jun 13, 2014

While Indian economy is in crisis, Indian companies are slush with money.

The top 10 Indian companies which are cash surplus -- Economic Times illustration. 

I fail to understand the economic rationale behind this glaring contradiction. A country, whose industry is sitting over a pile of cash, is desperately looking for foreign investments? Why?

There is hardly a day when you don't hear of the desperate need to build investor confidence. Open a TV channel and you will see the anchors repeating the line ad nauseam. They invite panelists who also speak the same language. All this impacts the politicians who also start parroting what the TV Channels keep on blaring. 

India must bend backwards to bring in foreign investment. But is India really short of money? Don't we have money within the country to invest for our needs? 

In 2012, the Reserve Bank of India had said that Indian Co's were sitting over a pile of cash, over Rs 9.3 lakh crore or $ 166 billion (Read my blog post Are a handful of Corporates holding the global economy to ransom? http://devinder-sharma.blogspot.in/2012/11/are-handful-of-corporates-holding.html). This was at a time when there was so much of hue and cry over the desperate need to allow FDI retail. Even if all goes well, only $ 3 billion was expected to be invested in India by big retail in the next five years. $ 3 billion is peanuts when you compare it with the hoarded cash of $ 166 billion by the top 10 companies in India.

The Economic Times on June 11, 2014 (BSE 500 companies like Sun Pharma, Wipro and others sit on a cash pile..http://bit.ly/1kOkY0t), tells us that at a time when the growth rate refuses to cross the hurdle, 126 Indian companies are sitting over surplus cash, I call it hoarding money, their surplus being more than their debt. This surplus is after all the investments these companies have made abroad. Among the top 10 cash rich companies were Wipro and Sun Pharma. The news report of course leaves some confusion when it says that the cash pile of 414 companies grew at a compound rate of 8.8 per cent over the last five years to Rs 5.2 lakh crores, this can't be correct considering that the surplus cash they carried in 2012 was Rs 9.3 lakh crore. 

Nevertheless, what needs to be also known is that in the month of April 2014, Indian companies  invested $ 5.4 billion abroad. In last April (2013), Indian Companies had invested more than $15 billion. Oh dear ! If this is true than why does India need to accept all the arm-twisting and tweaking of domestic laws to bring the foreign investment into the country? Why can't the Indian companies be made to invest in India? Don't they have some obligations towards the nation? 

To say that the Indian companies have no avenues to invest is all bumkum. If that was true, then how come the foreign companies are exerting so much pressure to invest in India? If foreign companies can come and earn profits I fail to understand how Indian companies are unable to do so. So let us not try to unnecessarily defend the massive profiteering that is taking place among Indian companies. Let us therefore make it mandatory for Indian companies to first invest within the country. These companies make their profits within the country, and then are allowed to take the cash outside. In simple terms it means the Reserve Bank of India allows these companies to park their capital in safe havens. # 


vizeet srivastava said...

Problem is no one wants to invest in India. Saying that we need foreign investment is turning blind eye to the reality that no one wants to invest. India is cought in stagflation -- high inflation and low growth. Coupled with even worrying condition of large cash holding. We are already high on inflation; if investostors confidence improves then this cash will enter economy causing even higher level of inflation. We seems to be in catch-22. Whatever we do our condition will become worse.

Devinder Sharma said...

I don't agree. Foreign companies are keen to invest in India. Just see the pressure being exerted to raise the FDI cap on insurance, multi-brand retail etc. If low growth alone is the problem (along with inflation) than how come industries are running in Europe and US.

vizeet srivastava said...

I think I wasn't clear. I said the same thing. Foreign companies are not keen to invest in India. The reason is investor confidence which has nothing to do with inflation. Infact stagflation is consequence of that. There is a mismatch between investors confidence and consumers confidence. So imports are high but production is low.

So improving investor confidence will be good thing (I don't mean for foreign investment).
But huge stockpile of cash means that improvement in investors confidence will increase liquidity. Large liquidity means high inflation. So get ready for even higher inflation.

US is suffering from same problem but their problem is compounded by QE. Atleast we are in better condition. Look at similar cash balance of US companies. They are also sitting on huge cash pile, not wanting to invest in US. So all the QE goes indirectly to other countries causing inflation. India is not suffering from this because we have different problem which is lack of investor confidence.

Also share market and industrial performance are no more related. It is also because of excess cash. Investment is going into share market, land mafia and property.