Necessary, not quite sufficient – The Economic Times

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The ratio of stalled projects to under-implementation ones consistently rose from 2006-07, and fell only marginally in 2018-19.

A recent RBI working paper suggests that Indian corporates have plenty of headroom to raise their borrowings to invest and grow. This is reassuring for India Inc. Financial leverage refers to the amount of debt used by a company to fund its assets. The study estimates that corporate leverage drags growth beyond debt-to-equity ratio levels of around 60%, and debt-to-assets ratio of 28%. However, the current reading for India, at 48% and 19%, respectively, leaves lots of room for further corporate borrowing. It will lead to higher investment in a scenario where macroeconomic and financial conditions are conducive, says the paper, titled Reassessing Investment Dynamics: Newer Insights into Leverage and Investment of the Indian Corporate Sector.

But this only represents a necessary condition, not a sufficient one. Companies will invest only when there is demand for their produce. For demand to pick up and sustain, the government must spend more and crowd in private investment. The research also suggests that Indian companies with cash holdings could be investing in financial assets rather than fixed assets. Just as in most other economies, investment in fixed assets in India declined after the global financial crisis. An analysis of Indian corporate data from 1980-81 to 2018-19 found that leverage (and solely not weak economic conditions) had a greater role in determining the investment pattern of corporates with there being a negative relationship between the two. Leverage will work in favour of companies only when their profitability improves and enables them to service their debt and pay interest on their loans. This, in turn, calls for the government to step up public spending in mega infrastructure projects to crowd in private investment and revive sustainable growth.

The ratio of stalled projects to under-implementation ones consistently rose from 2006-07, and fell only marginally in 2018-19. The easiest way to kickstart investment is to designate and fund special vehicles to take over and complete stalled projects.

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