Column : Bharat buying

: In a previous column in this paper, I had suggested that companies failing due to bankers’ reluctance to lend were more likely to upset our economy than evaporating consumer demand. I had, perhaps naively, suggested that instead of the government spending good money to bail out consumer demand, they should spend it to incentivise banks to lend to those companies which are otherwise fundamentally healthy, but suffering from a severe hangover, due to excessive expansion in boom time. This has elicited a sharp response from bankers who say they are not in the ‘bailing out’ business, and must evaluate lending risk even more stringently now than they did in the past.

That is a fair point; however the risk assessment has to be sophisticated enough and at the firm level so that the baby is not thrown out with the bathwater and long term winners having a temporary but severe bad time are not treated the same way as loser companies who deserve to die. The problem with even the fundamentally sound companies in these days is that they need to borrow a lot more at this juncture than they normally would—or should—because equity funding has dried up for now, and they have already borrowed to the hilt and depleted reserves for aggressive expansion on several fronts simultaneously. Their assumption that top line growth will soon come in and justify this expansion still remains valid, though the time frame needs to be extended in some cases.

An often repeated point that perhaps bears repetition is that the top 10% of India by income accounts for about 34% of the consumption expenditure and yes, they are hurting badly, with savings diminished by the stock market, jobs at risk, heavy borrowings, and all that has put a serious check on their high-end expenditure. The top 20% of India which would be top and middle class India , accounts for about 45%—less than half—of total consumption expenditure, and are slowing down their consumption. India has about 50% of its consumption expenditure coming from the not rich, not middle class people, but from lower income people who do not borrow money from banks or invest in the stock market, and are not employed in the formal sector. This is borne out by any data source you look at.

So, in deciding whether an individual firm is worth a temporary lifeline, it is necessary to...