A Message To Indian Capitalist: Sit On Cash
If the government fails to effectively communicate its support for the private sector, it will be very difficult to convince industrialists to make big ticket investments
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As the world was recovering from recession in 2008-09, Economist-Prime Minister Dr. Manmohan Singh called a historic meeting of top industrialists at his official residence at 7RCR. In attendance were the who's who of the business world - Mukesh Ambani, Ratan Tata, Anil Ambani, Sunil Mittal Naveen Jindal, Prashant Ruia, Sanjeev Goenka etc. While sipping on a cuppa of hot Assam tea from his home state of Assam, the PM asked the captains of industry to invest in India's growing need for infrastructure and power. But there were few willing to invest in heavily regulated, capital intensive sectors like steel and power. Foreign investments were difficult to come by given the experience of Posco in Orissa and Enron in Maharashtra. But the PM assured businesses about the government's willingness to pump in $400bn investment into Indian infrastructure, power and steel. The PM said, he will provide all kinds of support from the government's end to ensure that India's growth story remains unaffected from by the global recession as the country progresses to become one of the top economies in the world. Today, trust deficit between the government and India Inc. is so high that it will be difficult for the industry to do it.
Sitting on a cash pile of over Rs 30,000 cr from fresh sale of their Hutch stake to Vodafone were the Ruias who chose to invest it into the India story, into sectors like steel, power, oil, coal etc. There were other cash-rich believers of India's growth story like Naveen Jindal of JSPL which planned investments to the tune of Rs 1,20,000 cr over a period of next 10 years, spreading across India from Angul in Orissa to Raigarh, Chhattisgarh to Vijayanagar in Karnataka. Then there were another set of big industrialists who preferred to keep their cash pile from sell of their companies like Ajay Piramal, Malvinder-Shivinder Singh of Ranbaxy etc, who chose to hold the cash and do small ticket investments in safer sectors, less exposed to government regulations and global macroeconomic situation. On the other hand, those investing in sectors like steel and power needed more capital to set up mega projects to fulfil the dream of India's industrialization.
It all looked good, India looked on the right track, market was bullish and shares climbed on the Sensex. And then the mood of the nation changed. People started suspecting anyone and every deal. Regulators started questioning every transaction. PILs, Supreme court's interventions etc, projects started getting delayed indefinitely and project costs kept rising. Adding to all this, macroeconomic situations globally took a wrong turn. India's celebrated Steel Tycoon, once ranked Globally No. 3 in the Forbes list went down 20 places in the year that followed. Banks who were more than willing to fund mega projects started closing their fists. Debt from the banks started turning into NPAs. So what is the way out of it? Is writing off all NPAs a viable solution? Is taking over control of the management of all the companies with big debt the solution? What is the way out?
No one can deny elements of mismanagement, crony capitalism and corruption in many of the deals but is it all right to paint every company owing money to banks as corrupt? So what is the way out?
Lot of sane voices have emerged in recent past including the very comforting stance taken by RBI governor Raghuram Rajan. But it's an extremely complicated situation we have landed in and there is no black and white solution to it.
For instance, one important factor that has led to this environment is the unwillingness of a person sitting in an important position to take any decision. Because no one is willing to see the thin line between a wrong decision and a corrupt motive. The recent case in point is that of Vijay Mallya. It's a classic case of business going haywire and corporate mismanagement as one of the reasons for it. But once business was in crisis it could have been handled much better without screaming headlines. Vijay Mallya had first proposed to settle with the banks for Rs 4,000 cr way back in 2012. For all practical purposes his aviation business stopped operating in 2012. Now to keep asking for penalty and interest the bank had two choices, they could have negotiated a better deal with Mallya, could have liquidated his assets etc. and raised more than Rs 4,000 crores which could have been subsequently invested across better business propositions. But of course banks opted for other choices where they let interest and penalty accumulate over a defunct business and be left with no choice but to send Mallya to jail. Sending Mallya to jail is definitely very good politics in a country which loves to witness the fall of its heroes but by every possible yardstick it's extremely bad economics. Even from a banker's point of view the concerns are understandable. There was always this fear that a move like this would attract a series of PILs and multiple agencies including the CVC, CBI and ED could have found layers of faults in decision making.
Former Finance Minister P Chidambaram had famously said, "Show me an officer who has never made a mistake and I will show you an officer who has never taken a decision."
People will make mistakes but the government must come forward and support our big ticket investors. They are the ones believing in PM Modi's vision of Make in India. It is this private sector which has created a large number of jobs since liberalisation and has given a much better quality of life to the subsequent generations of professionals. We should also show them some respect for believing in the PM's vision for taking risks. If we start taking down our private sector organizations one by one, we won't be left with much. We must criticize but we should also be careful and objective.
If the government fails to effectively communicate its support to the core sector, it will be very difficult to convince flow of big ticket investments. Our corporate leaders will be happier seeking financial exits and focus on small investments which are easier to monetise. The message going down is: 'Sit on your cash. No point creating huge assets."
(With inputs from Sumit Kashyap)
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