Financialisa(on and Corporate investments - The Indian Case. Sunanda Sen Zico Dasgupta

Transcription

1 Financialisa(on and Corporate investments - The Indian Case Sunanda Sen Zico Dasgupta

2 The Background Financializa(on, by crea(ng mul(ple channels of financial investments, helps to raise the share of financial assets in the pordolios held by market par(cipants. Driven by deregula(on, it works to make financial assets rela(vely agrac(ve. Also provides incen(ves to corporate managers to invest larger sums in financial assets, which, how ever, oien fail to generate asset growth for the corporates. Obtaining resources by borrowing in order to meet current liabili(es, in absence of other sources like equi(es reflects a pagern of Ponzi finance,as in the current scene in the Indian economy. 2

3 Corporate Investments In Advanced Economies Investment decisions of large corporates in advanced economies reveal a pagern of an owner- manager conflict in the pordolio decisions of corpora(ons. Conflict characterized by shareholders typically preferring short- term profitability and low investment in capital stock a strategy opposed to long- term investments and growth over (me, which is ul(mately in interest of owners in long run.. Responsible for a growth- profit trade- off in the firms business decisions Decision by corpora(ons depends on the rela(ve weight of the three major interests within firms. : 1. shareholders (interested in high profits and rising share prices), 2. workers (who want output growth with employment), and 3. managers (who receive fixed salaries plus performance- related payments which are linked to share prices and profits). 3

4 Alignments: Corporate managers and shareholders shareholder revolu(on, has lent greater power to shareholders who are oien less interested in long run growth.. Managers, aligned to interests of shareholders, adopt a business strategy less focused on long- term investment and more on short- termism which boosts share prices and profits. Managers also respond to market- oriented remunera(on schemes for bonuses and/or salaries paid in employee stock op(ons (ESOPs) based on balance sheet performance of their firms. As a consequence the tradi(onal managerial policy of retain and invest is replaced by the shareholder- oriented strategy of downsize and distribute (Hein, 2009). Verified with sta(s(cal evidence on advanced economies, financialisa(on has caused a slowdown in accumula(on (See Stockhammer 2004; van Treeck 2008; Organhazi 2006). Consequences include rising share of interest and dividends in profits of non- financial business, confirming the emergence of ren(ers who live on past rather than on current ac(vi(es (Power et al. 2003). Simultaneous drop in investment and accumula(on by firms. Paradoxically higher profitability for firms favouring financial investments 4

5 Prowess data ( Source: Centre for Monitoring Indian Economy, Mumbai) The prowess has broadly categorized total assets of corporates into 5 parts : a) net fixed asset, b) capital work in progress c) financial investment, d) Loans and Advances and e) Cash and Bank Balances. Component (b), which is the capital work- in progress, is the fund used for the forma(on of fixed assets which are yet to be completed. Components (a) and (b) can be clubbed to define physical assets. Total Asset - Physical Asset (a+b)= (c)financial Investment + (d) Loans and Advances + (e) Cash and Bank Balances Thus leaving out physical assets, rest are generally financial. 5

6 120,0 Chart 1 Investments by non- government public limited companies in India( Source: Reserve Bank of India) 100,0 percentages 80,0 60,0 40,0 20,0 Total investments in India Total financial securi(es Industrial securi(es 0,

7 7

8 Indian Corporates Corporate investments in India less than 100%. Rest invested abroad. Financial investments larger than industrial investments. 8

9 Chart 2 Sources of Funds for Corporates(RBI) Sources of Funds 90,0 80,0 70,0 60,0 percentages 50,0 40,0 30,0 External Sources of Funds to Total Sources of Funds Bank Borrowing to Total Sources of Funds 20,0 10,0 0,0 9

10 Chart 3 Use of Funds by Corporates(RBI) Use of Funds 70,0 60,0 50,0 percentages 40,0 30,0 Gross Fixed Asset Forma(on to Total Uses of Funds Gross Capital Forma(on to Total Uses of Funds 20,0 10,0 0,0 10

11 Chart 4 Share of Various Components in Total Assets ( Prowess)) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentages Cash and Bank Balances Loans & Advances Financial Investment Physical Assets 11

12 percentages 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001 Chart 5 Share of Various Components in Financial Investment by corporates Provision for diminu(on in value of investments Investment in others Investment in assisted companies Investment in approved securi(es Investment in mutual funds Investment in debt instruments 12

13 Share of Various Components in Financial Investment by corporates Approved securi(es and mutual funds major components of financial investments by corporates. Both are short term. 13

14 Chart 6 Growth Rate of Gross Assets and Profit rates on Assets (Prowess) 40,0 6,0 35,0 30,0 5,0 percentages 25,0 20,0 15,0 10,0 5,0 4,0 3,0 2,0 Profit Rate in % 0,0-5, ,0-10,0 0,0 Asset Growth Rate Profit Rate 14

15 Growth Rate of Gross Assets and Profit rates on Assets (contd) Growth rates of both assets and profit rates fell sharply between 2007 and Recovery of profit growth rate in 2010 followed by declines in next few years. Why growth rates of both assets and profits decline despite large shares of investments in financial assets? Do those not perform due to the short run pagern? Contrast advanced countries with profit rates on assets rising while growth rate of assets falling. 15

16 Chart 7 Investments in derivaoves ( SEBI) Rs crores Total Turnover in Deriva(ve Market

17 Turnover of deriva(ves ( currency and equi(es) Source: SEBI Turnover of derivaoves: currency and equioes (Rs crores) Currency Equity Total

18 Average daily turnover for deriva(ve trading of equi(es 2,5 Average Daily Turnover EquiOes (Rs trillion) 2,0 Rs trillion 1,5 1,0 Average Daily Turnover Equi(es (Rs trillion) 0,5 0,0 18

19 Averaqge daily turnover for derivaoves 3,5 3,0 2,5 Rs Trillions 2,0 1,5 Average Daily Turnover Currency Average Daily Turnover Equi(es 1,0 0,5 0, * 19

20 Deriva(ve turnover: growth rates 100,0 Growth rates of derivaove turnovers 80,0 60,0 percentages 40,0 20,0 Growth Rate of Total Turnover Currency (%) Growth Rate of Total Turnover Equity (%) 0, ,0-40,0 20

21 Growth rates of deriva(ve turnovers (GLOBAL): source- BIS Quarterly Review March 2015 Turnovers of derivaoves 80,0 60,0 40,0 growth rates 20,0 0, All markets North America Europe Asia and Pacific - 20,0-40,0-60,0 21

22 Growth rates of deriva(ve turnovers (GLOBAL) Asia and Pacific displays consistent tendencies for greater degree of vola(lity as well as amplitude of turnovers,especially since , as measured by yoy growth rates. All three regions hit by the 2008 crisis when deriva(ve trading was at the lowest growth rate. Recovery by followed by further fluctua(ons. 22

23 Chart 10 Shares of Various Components in Total LiabiliOes 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Reserves and Funds Borrowing Equity and Conver(ble Warrants PL Balance Current Liabili(es 23

24 14,0 Chart 11 Percentage of Foreign Currency Borrowing in Total Borrowing 12,0 10,0 8,0 6,0 4,0 2,0 0,

25 Shares of Various Components in Total Liabili(es Borrowing used to meet other liabili(es a case of ponzi finance. Foreign currency provide a major part of borrowing crea(ng poten(al mis- match problems 25

26 Conclusion Corporates under financialisa(on prefer short- term financial assets (as opposed to long- term physical investments ). Above core of an explana(on for industrial stagna(on in terms of the trade- off between growth and profitability under financialisa(on, as men(oned in the literature for the advanced economies. For India corporates seem to follow a path of short- termism in the face of uncertainty in de- regulated financial markets with a search for quick returns in the high- risk short- term assets a deterrent to physical investments. Above matched by low growth rates in gross assets as well as profits on them. Does this not mean that the short- term financial assets had less capacity to ins(ll further growth in 26

27 Conclusion(contd) Borrowings, domes(c and external, along with use of the company- level reserves and funds major source of their funds. Failure of the primary stock market to provide resources via IPO offers. Borrowings, as above used to provide resources to meet the current liabili(es which include dividends, interest payments etc to be met in each period. Tendencies as above to lean on the financial sector, with borrowings to meet other liabili(es generates a Minsky type of Ponzi finance mode which is inherently unstable. The problem is further compounded by external borrowings which adds to the related liabili(es in foreign exchange. It thus is a problem not only with the con(nuing of borrowings to meet charges on past borrowings but also one of a mis- match of currencies in mee(ng debt obliga(ons. 27

28 Conclusion (cont) Indian economy is thus gevng exposed to problems which, in addi(on to the on- - going stagna(on in the real economy, has been condi(oned by the on- going pagern of corporate finance under financialisa(on, with extensive borrowings to meet the current dues genera(ng seeds of poten(al instability in the economy as under Ponzi finance. Discoun(ng the rela(vely high levels of financial ac(vity with specula(on in stock markets, currency trading, commodity markets and real estates, one no(ces the sources of instability. Clubbed with a stagna(ng real sector and the visible disinclina(on on part of corporates to invest in physical assets therein, Indian economy can not expect a turnaround in absence of an overhaul of policies in the interest of the real economy. 28