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Capital churn

India Inc is in a phase of restructuring and consolidation. Only public investment and FDI could drive capex.

By: Express News Service | Published: June 17, 2015 12:25 am

Three recent corporate announcements reveal the state of India Inc and its implications for overall economic recovery. First was the announcement by metals and mining major, Vedanta, of oil and gas producer Cairn India’s merger with it. The second was of Reliance Communication being in talks with Russian conglomerate Sistema to merge with the latter’s Indian telecom business. And the third was that the Ruias are planning to offer a 49 per cent stake in Essar oil to Russian company Rosneft. The common factor is the sizeable debt of the corporations involved, which is what is really driving these deals. Vedanta is battling Rs 77,000 crore of debt and the fact that it is a commodity producer at an unfavourable moment in the global cycle. The merger of the group company, Cairn, which has Rs 17,000 crore of cash, is intended mainly at addressing Vedanta’s own debt burden. For RComm, currently saddled with Rs 36,727 crore of debt, the takeover of Sistema’s Indian operations through a stock swap deal is a means to remain relevant, given the competition both from the existing big operators (Airtel, Vodafone and Idea) and a new entrant in the form of Reliance Jio. The Essar Group is likewise struggling with high debt

These instances reflect the churn within Indian industry. A corollary of the ongoing consolidation and restructuring of businesses is their inability to undertake capital expenditure. Indeed, the macro statistics shore up this narrative. Gross fixed capital formation, for instance, was down to 30 per cent of the GDP in 2014-15, from 30.7 per cent in 2013-14. Non-food credit growth was a paltry 8.6 per cent, a multi-year low. And the level of stressed assets in the system, including restructured accounts, is well over the 10 per cent mark. Heavily indebted, with worryingly high unhedged foreign debt exposure, India Inc is unlikely to lead the charge for an investment recovery. For the foreseeable future, the drivers of capital expenditure would have to be largely “external” — public investment and FDI — while India Inc hopefully cleans up its balance sheets.

The government needs to take charge of the investment recovery. Budgetary elbow room could easily be carved out by aggressive disinvestment. But importantly, the government needs to seriously revisit its position on multi-brand FDI. Also, it should woo big-ticket overseas investment, whether in railways or, say, smartphone manufacturing.

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