What is the likely impact of the global liquidity squeeze on Indian companies? Indian companies do not rely too much on equity markets or even on banks. They have relied largely on internal accruals and on sundry creditors for financing their working capital and capital expenditure.
The problem is that internal accruals have been falling because of high costs. Excellent growth in sales this year is not matched by growth in profits. In the first half of 2008-09, listed companies saw their sales grow by 33 per cent. But, they saw their profits plummet by 44 per cent. A large part of the fall is because of the fall in profits of petroleum refining companies. But, even the non-refining manufacturing companies saw their profits suffer. The fall in overall profits has contributed to the strain on the Indian banking system. Companies that relied largely upon internal accruals now do not have such levels of accruals to fall back upon. They are thus forced to turn to banks. With good balance sheets banks should be happy to lend to them. But, banks themselves have been drained out because of an unusual spike in demand for credit.
The global liquidity crisis has hit enterprises that are engaged in international trade. Perceptions of counter-party risks in international trade have worsened, because of the global financial turmoil. As a result, an importer in India faces a difficult business environment since international suppliers refuse to provide credit like they did till just a few weeks ago. This apparently, has led to companies drawing upon resources from the Indian banking system.
Banks were already facing a spike in demand for credit as the internal accruals of companies were falling and as their debtor days were rising—the working capital cycle was getting stretched. Now, they faced a fresh source of demand—one that is the direct outcome of the global financial crisis. Indian companies with global transactions required to be financed for their trade as international trade finance had failed to provide adequate funds. It is commendable that the Indian banking system did meet this demand. In the process we did face a domestic liquidity crisis that was swiftly quelled by RBI by infusing in large doses of liquidity. But, the pain continues as global uncertainties are still high. The availability and the cost of finance is still a challenge that corporates, banks and regulators continue to worry about. The picture presented above is based on my interactions with industry, regulators, economists and on a careful gleaning of the media. It is not based on data. There is no measure of the problems in the story presented above. We can guess what the internal accruals could be as of September 2008 but we cannot even guess what the debtor days are or what has happened to the working capital cycle.
We do not know what is the extent of the problem that companies faced with creditors as of September 2008. Surely, things must have gotten worse since then. While we may commend our banking system for its sound regulatory mechanism that has ensured that banks did not gamble with depositors monies, the same cannot be said of the statistical system that supports the decision making process. The Central Statistical Organisation is the country’s apex statistical body. And, the government engages the services of an entire cadre of professional statisticians under the Indian Statistical Services. But, somehow, this large professional body is not expected to meet the statistical requirements of dealing with a modern economy. It would be appropriate for the CSO and the ISS to grab this opportunity presented by the global financial problem and seek a larger role in providing appropriate statistical support to the new economy where the financial markets often play a role that eclipses the real economy. The apex body’s role need not be centred around measuring GDP and poverty.
But, this is a larger problem than I can deal with in this column. Here, I can make one recommendation.
Like listed companies are required to present data on the income and expenditure performance on a quarterly basis, they should be required to present data relating to their assets and liabilities also on a quarterly basis. India has made tremendous progress in disclosures—from half yearly to quarterly and then to segmentaldisclosures. The time has come to take the next big step in disclosures so that we ensure that regulators do not have to gamble when they take decisions.
Government and regulators usually meet industry in times of a crisis to ascertain the situation. This is a good practice, but it is inadequate. Selective information from a select few people that the government/regulators meet ensures that the information provided under exceptional conditions will be over-hyped. A professional statistical system that is nimble-footed enough to quickly react to new requirements would ensure that such meetings are held in better light.
Sebi can help by mandating disclosures of balance sheets along with the profit- and-loss statements on a quarterly basis.
The author heads the Centre for Monitoring Indian Economy