Thought for the day
”I am not bound to please thee with my answer. "
-
William Shakespeare (English, 1564-1616)
Word for the day
Taciturn (adj)
Habitually silent; not inclined to talk.
(Source:
Dictionary.com)
Teaser for the day
After Uttrakhand last year, it's J&K this year!
On the brass tacks -IV
Historically, a large majority of Indian businesses have grown
on government patronage and/or resource arbitrage opportunities and have been
low on innovation, productivity and scale. The politically advantageous
socialistic façade of the government, especially during 1950-1990 led to
misallocation of resources, trade and capital controls, demand suppression, and
protectionism that promoted low productivity.
The conditions have changed in past 10-15years but not
sufficiently to make a majority of Indian businesses globally competitive.
Consequently, we have a multitude of businesses that are usually
unable to survive a cyclical downturn on their own. Invariably, public sector
financial institutions and the government have to bail out the ailing
businesses. The problem is these businesses are never allowed to fail.
The instant cyclical downturn has also seen severe stress in the
financial system due to failure of patronized entrepreneurs in managing their
affairs adequately.
Unfortunately, most of these businesses happen to be in the
sectors considered critical for revival of economy, viz., infrastructure,
energy, and resources. These are the sectors which could absorb huge
investments, generate large scale employment and enable consumption demand to
grow at a faster rate.
As we discuss it here, a number of large corporate have already
reneged or are on the verge of defaulting on their covenants. The amount of
accommodation loans masqueraded as restructured loan to protract the default
technically are staggering. Their balance sheets are destroyed to an extent
that they can take no further business. Their equity stakeholders are too
distressed to provide them further support. The only way out for them is to
sell their assets.
A few balance sheets which are strong have the option to choose
between acquiring an operating or partially built asset at favorable terms or
undertake a green field project. To me the choice is but obvious. So how the
fresh investment cycle will get started?
Moreover, we are entering a phase when 2-3years down the line
easy credit situation prevalent in western world may cease. The cost of capital
will start rising for already troubled businesses.
The long term solution lies in opening the Indian markets to
open global competition. The government may provide support to businesses which
have demonstrated their capability to compete with global players. The
inefficient and incompetent should be allowed to fail.
In the short term however, the government will have to undertake
the onus of kick starting investment cycle on itself. The best way would be
create social sector infrastructure, e.g., education, skill development, water,
sanitation and healthcare. The government has rightly initiated some programs
in this direction. The faster and efficient implementation is the key.
No comments:
Post a Comment