CASH IS KING, HOLD ON TO IT

Honestly, I can’t take personal credit for the pathbreaking guru-speak that you must have witnessed in this editorial’s heading – “Cash is king, hold on to it.” From management writers like Ramcharan to top of the lot financial practitioners like V. Balakrishnan of Infosys, maintaining of what I term ‘superhealthy’ cash reserves has been encouraged to no ends, especially in times of economic slowdown. Of course, there’s a double whammy hidden within this that even the likes of Dinesh Trivedi can easily forecast – and that is that when savings, especially cash holdings, go up, investments and consumption automatically reduce. And this leads to a further spiral down for economic growth, with a lovely backhanded slap of an El Dorado waiting at the end of the rainbow – an economic deflation cycle. And unfortunately, the way events are unfolding in the global financial system, this fear is not without sound logic. With the eurozone crisis worsening by the day with no respite whatsoever in sight, corporate India – like me – could well have started believing that the ongoing meltdown will snowball into a full fledged crisis and will continue till the end of 2012, if not any further.

But honestly again, the current scenario is quite paradoxical. By no means are Indian companies cash strapped to such an extent that they need to hoard up superhealthy cash reserves, more so when we are talking about the top 500 (BSE 500 constituents). But that’s exactly what they have been doing and were doing even during the last financial year. As their balance sheets suggested, by March 2011, the BSE 500 constituent companies had piled up a mammoth cash and bank balance of $96 billion (Rs.4.88 trillion at current conversion rate). This figure has only grown till date. At the same time, India Inc is apparently facing a liquidity crunch, which is severer than the situation in 2008; at least 45% of corporate India believes that way as per a recent FICCI report. Raison d’être: In the wake of the global crisis, trade credits have been curtailed, external commercial borrowings are hard to avail, not much money is present in the primary market, PE investors are either weary to invest under the present economic scenario or are waiting like vultures for the right time, and the last but not the least, the domestic banking sector has become very selective in lending, to safeguard their own asset quality.

If that was not enough, input costs have skyrocketed over the past year and companies have not succeeded in passing on the full burden to consumers at all stages resulting in squeezed margins (negative growth of 14% year-on-year in BSE 500 PAT for the 9-months ended December 2011). As a result, no one wants to part away with their cash balance at present. So much so that 50% of the respondents (82% of which were large corporate entities) interviewed in the FICCI survey said they were planning to hold on to their cash balances at least for another six months.

Without doubt, our economic growth is slowing down due to this double trouble of banks reducing lending to protect themselves, and large corporations postponing investments and consumption to a later date. So should the companies change track? The answer is no, not at all. Why should a profit motive driven company suddenly feel the need to be patriotic and free up its cash reserves? This might sound weirdly un-nationalistic, but a company’s primary responsibility lies towards its shareholders, not towards the nation. It’s the government’s job, and not that of privately run companies, to ensure more liquidity in the market. If the banks have become subdued (lending to industries by scheduled commercial banks have fallen from 25.9% in March 2011 to 22.1% in November 2011), then alternative fronts like NBFCs must open up to ensure that lending to industries is not hampered. And that is the crux of this issue’s cover story, which presents a hypothesis that there is no time better than now to promote NBFCs. So here goes my guruspeak again: “Cash is King, hold on to it... and pray the government gets it right this time.”

AGRICULTURE SHOULD BE THE ONE DRIVING INDIA NOW

While presenting the country’s mid-year report card to the parliament, Finance Minister Pranab Mukherjee slashed the country’s growth forecast in the second week of December, stating, “The sharply deteriorating global economic environment has had a dampening effect on India. Compounded with some domestic factors, the global situation has led to a clear slowdown in the growth rate of the Indian economy...” It was almost like accepting the bitter truth in hindsight, because by then, almost everyone who kept a track of the country’s economy had realised this very fact. For that matter, the FM’s new growth forecast of 7.5% sounded a lot more optimistic; some have even started forecasting that the GDP growth will be limited to 6.5-7%. But can we blame it all on the global economic environment, or is it the effect of the ongoing domestic troubles including inflation, trade deficit and current account crises? Well, certainly not!

As I see it, the current imbroglio is the negative impact of years of imbalanced growth in the economy in which we are living now. Over the past decade and a half, the country’s rapid economic growth has been driven by the services sector, and increasingly by high value added manufacturing. But what about the agriculture sector? It has been left out as an underdeveloped child despite the fact that 58.2% of the country’s population still works in this sector. Horrendously, while the country has been growing at a healthy rate, the sector has recorded growth rates like –0.1% in 2008-09 and 0.4% in 2009-10. Though the advance estimates given in Economic Survey 2010-11 suggest 4.7% growth for the sector, we know that no miracle has happened during the year to suggest the same. In reality, that’s the period when India’s food inflation started to shoot up to record highs. So, it’s just a matter of time as the revised figures to be presented in February 2012 will again confirm a growth of just around 1%.

As a matter of fact, post the green revolution in the 1960s, the country and the policy makers have just taken this sector for granted. And the sector, which employs the lion’s share of the population, barely manages to contribute about 14% of the country’s GDP. As a result, India, which had not imported wheat for decades, was forced to go for it as domestic production had not increased over the past many years. But that is like a crime, because this is one sector where the country was self-sufficient since time immemorial. And at a time when high imports (and thus the trade deficit) are emerging as far more daunting problems, an import bill from a sector that can still be self-sufficient is truly not understandable. But the reason for the same is simple enough. While all other sectors are receiving huge investments, lack of investment in agriculture is frighteningly low. Additionally, lack of appropriate support is seeing farmers leaving their lands for development of real estate, hence reducing India’s total cultivable land. And this will end up dampening the sector’s growth forecasts very soon.

India has always been a land of agriculture and the country’s economy still has it as its base. For that reason, to manage a smooth growth in the economy, the government needs to push this sector and give it its due credit. And if it cannot do so, then it should better be prepared to shift 58.2% of India’s population to an alternative job opportunity, so that they can contribute in a better manner rather than being disguised unemployment for the country.