“Have you heard of any large projects being announced in the last three years?” The question was a challenge. In response, one could mention Maruti’s new project in Gujarat, but not many others, not in manufacturing, which is what the fellow asking the question was talking about.
This fine fellow is a key manager in one of the country’s largest conglomerates, but he won’t be named in spite of many of his businesses doing well of late, despite being told that he looks much younger than his years.
Forget large projects, there are very few voices these days taking about new investments, even fewer about investment through debt. “If anyone said he has taken a debt of Rs. 10,000 crore on the front page of a newspaper, the banks will take out their shot gun,” said the fellow.
Such is the nature of the beast. Of late much of the discourse in the economy and finance circles has been dominated by debt. Justifiably so. When the times were good, companies expanded and acquired – through substantial loans. Then the cycle turned. Those who had expanded found the going tough. As usual, the lenders started to worry. Non-performing assets, jargon for loans gone bad, became policy enemy number one. Every quarterly result, of borrowers as well as of lending banks, started to be examined with the debt lens.
Nothing wrong with that, except that we also need investment. And no investment anywhere in the world is or should be done only by using the cash a company has. A good investment is through a healthy mix of debt and equity.
In theory, a debt equity ratio of 2:1 – two rupees of debt for every one rupee of equity – is perfect. But debt should not be judged in isolation. It must be seen against the cash being generated. For instance, Rs. 75,000 crore of debt is very high. But if there is cash flow – or EBITDA (earning before interest, tax, depreciation and amortisation) – of Rs. 40,000 crore to Rs. 50,000 crore a year, there may not be much to worry about.
But few are willing to hear that argument these days. That is the reason why two big attempts at reviving corporate investments may not produce the intended results.
The first was Prime Minister Narendra Modi’s exhortation to the group of top industrialists who met him at his residence in New Delhi that they should be more open to risk.
Businessmen should be, and are, open to risk. That is how they expand, diversify, acquire, and go outside the country. But some risks are more grave than the others. Some bets can go wrong because of extraneous circumstances.
So a liquor baron starting an airline can fall with a thud. But a para banking company can start an airline and sell it for a wad of cash. And a travel company can become a model of efficiency and innovation in aviation.
The fact that some bets fail should not translate into a ban on bets. Of course rising bad debts with banks is awful. But banking is a business like any other business. It involves risk. Banks should therefore give loans wisely and after due diligence, without being influenced by greed or the reputation of the promoter. That’s elementary, but may not have been done in certain cases.
The second attempt to spur investments is Reserve Bank Governor Raghuram Rajan’s lowering of lending rates. This time, at least, the banks have lowered lending rates. But who is borrowing? Maybe consumers will. Maybe they will buy houses and cars. But the housing sector is believed to have enough unsold units – inventory, in industry jargon -- to last a longish period of brisk sales. Many car companies have unused capacity. So, big projects in either sector look unlikely.
More to the point, consumer borrowing leads to expenditure, which is crucial for reviving the economy. But businesses borrowing leads to investment, projects, jobs, production, and the like.
The fellow speaking at the top of this column, the one who looks younger than his years, says he is only looking to consolidate and reduce his debt for the next two to three years. What about new projects, expansion, acquisition?
“I am not even thinking about it at the moment.” Certainly not at a time when enough projects are stuck to scare away new ones. Getting them going could be the strongest possible exhortation to industry to invest.