Private corporate investment dips
Private corporate business has traditionally been a
deficit sector with its investment requirements significantly exceeding
resources generated internally, notes Dr. M.S. Kapadia.
Private corporate investment in fixed assets and inventory
accumulation (GCF) was up by 26 per cent to Rs 6.03 trillion during 2006-07 at
current prices. The increase, however, was on the downward path, from over a
decade high of 83 per cent in 2004-05 and 44 per cent in 2005-06. Prior to this,
in the current millennium, corporate investment had plummeted 24 per cent in
2000-01, one of the leanest years for the economy in recent times, and recovered
to 13 per cent average rise in the following two years and 24 per cent in
Gaining prominence of the corporate sector in the economy is one of the most
noticeable developments of the ongoing liberalisation in current years. Thus,
the share of corporate investment in the total investment was at single digit in
the first eight years of 1980s; the share shot up in the boom years of mid-90s
and scaled to 40 per cent by 1996-97. The subsequent four years of sagging
corporate finance saw the share plummet to 21.5 per cent by 2000-01. Around 40
per cent of the country's investment in gross fixed asset and three-fifth of
that in plant and machinery takes place in private corporate sector.
Gross savings (retained profits plus depreciation write-offs) of private
corporate sector increased by 20 per cent to Rs 3.22 trillion in 2006-07,
sliding from 30 per cent in 2005-06 and a peak of 70 per cent in 2004-05, the
year of thriving profits. Looking back, gross savings have generally maintained
an uptrend, though 1992-93 and 2000-01 and 2001-02, the two early years of the
present century, showed declines, when compared with respective preceding years.
Private corporate business has traditionally been a deficit sector, with its
investment requirements exceeding internally generated resources by a
significant margin. External sources of funds comprise a plethora of routes
including domestic and equity/debt floatations, loans, external commercial
borrowings, trade credit etc. Internal finance accounted for 53 per cent of
total capital finance during 2006-07. The share has tended to sag since 2003-04,
when it had scaled to 68 per cent.
The share of gross savings in investment reached a peak of 74 per cent in
2000-01 when corporate profits fell 7 per cent and investment plummeted 24 per
cent. The 83 per cent shoot-up in investment in 2004-05 was on the strength of
71 per cent buoyancy in profits. Also, it is observed that the impact of
volatility in profits on investment is found in the same year or in the
following year. Incidentally, running companies can access internal finance, but
under-erection companies have to depend on external sources only for funds
Historically, the share of internal resources in corporate GCF has a tendency to
move inversely with investment. Thus, the share of internal sources falls in
years of spurt in investment and rises in lean years of investment This is
because gross savings grow organically and any fluctuation in expectation-driven
investment gets reflected in volatility (in the opposite direction) in the share
of gross savings to GCF. In savings, while profits are volatile, depreciation
maintains a more or less steady up-trend.
The investment and resource availability cycle in the economy has mirrored that
in the corporate sector and the correlation, particularly in investment, has
gone stronger in the present century (till 2006-07). Thus, total investment had
reached a low in 2000-01, when corporate investment had declined 24 per cent and
shot up 35 per cent in 2004-05 when the corporate investment boomed 83 per cent.
In addition to private corporates, non-departmental public sector units are also
generating massive internal resources, with their gross savings accounting for
around 11 per cent of total domestic savings in the economy and a little over
half of private corporate savings in 2006-07. Their investment in gross fixed
assets and inventory accumulation was around one-tenth of that in the economy,
or around one-fifth in private corporate sector. We could not delve more into
this segment for want of coherent data.
The total gross domestic saving (GDS) of Rs 14.41 trillion in the country in
2006-07 fell short of Rs 14.87 trillion gross domestic capital formation (GDCF).
The gap was filled by foreign capital inflow, which was estimated at Rs 463.62
billion. The country has generally drawn on foreign capital (measured broadly as
current account deficit in balance of payment) to supplement domestic savings to
meet its investment requirement, barring some years like 2001-02 and 2002-03
when the current account was in surplus).
[May 19-25, 2008]