India Inc ups borrowing, but not for capex

by Mahesh Vyas

The official GDP estimates show a handsome 10.4 per cent year-on-year real growth in gross fixed capital formation in the quarter ended September 2022. This suggests a fairly robust investments climate in India. It, however, is not supported by the financial statements published by thousands of enterprises for the same period.

The saga of corporates remaining reticent of investing into new capacities has apparently continued into 2022-23. Financial statements of 3,110 listed companies show that their net fixed assets grew by a meagre 3.5 per cent year-on-year in nominal terms as of September 2022. It seems likely that 2022-23 would be the third fiscal year in which corporates will have stayed away from expanding their productive capacities. Net fixed assets of companies grew by 2.2 per cent in 2020-21 and then by 2.1 per cent in 2021-22. Fiscal 2022-23 may not be very different.

This nominal growth in net fixed assets of 3.5 per cent must be compared with the nominal growth in fixed capital formation, which is 17 per cent. The difference is evidently very big.

If the largest companies of India are collectively not investing into new capacities in any meaningful measure then claims of a revival cycle remain vacuous. It is important to understand what are the companies upto if they are not investing into new capacities even after two years of superlative profits.

While companies have not expanded their asset base in any significant quantum during the current year, they borrowed more than they did in the preceding few years. Outstanding borrowing by the corporate sector had declined by 2.7 per cent in 2020-21 and had grown by a measly 0.5 per cent in 2021-22. In comparison, borrowing by listed companies as of September 2022 was up by a much higher 11.4 per cent. This increase in borrowing is also seen in the RBI’s data on commercial bank’s outstanding loans data. Outstanding loans of scheduled commercial banks to industry as of September 2022 were 12.6 per cent higher than a year ago. This is the highest growth recorded in recent times.

So, while corporates raised borrowing, they seem to have not used this to grow their fixed assets.

Statements by several bankers have indicated that there is a pick-up in the demand for credit. But, none of them mention that the growth in credit demand is from capex projects. They mention a pick-up in demand for working capital requirements.

Financial statements of companies also suggest that the borrowing is largely used to fund the increased need of working capital funds of corporates. This increase in working capital requirements is largely because of the recent increase in commodity prices.

We make an assessment of the broad sources and uses of funds by the 3,110 listed companies during the year ended September 2022. We do this using the change in the major heads of the balance sheet of these companies between September 2021 and September 2022.

Companies generated about Rs.3.1 trillion of internal funds through retained profits (this is essentially the increase in reserves and surplus) and they raised another Rs.0.5 trillion through fresh capital. Therefore, the total funds provided by shareholders was about Rs.3.6 trillion. These companies raised another Rs.3 trillion though borrowing. The total long-term resources raised by corporates was therefore of the order of Rs.6.6 trillion.

Growth in net fixed assets consumed only Rs.1.2 trillion and another Rs.0.8 trillion was consumed as capital work in progress. In contrast, investments into financial instruments absorbed a larger Rs.1.5 trillion. This pattern of deployment of resources is in continuation of the recent trend seen in corporates where they prefer to park their profits into the equity of other companies rather than deploy them to build their own fixed assets.

The biggest guzzler of financial resources was current assets such as inventories, receivables and other current assets. These claimed a massive Rs.5.2 trillion. And this was the major reason for the increase in borrowing by the corporate sector in the year ended in September 2022.

An industry-wise break-up of borrowing shows that the largest increases are in industries that could have needed substantial additional resources to fund their regular operations in the face of high commodity prices.

Borrowing by petroleum products companies shot up by nearly 27 per cent. Manufacturers of polymers and synthetic rubber saw their borrowing rise by 55 per cent and 291 per cent, respectively. High crude oil prices is the possible reason for such large increases. These companies did not grow their fixed assets at all. Similarly, the borrowing of fertiliser companies increased by 80 per cent. These companies also import fertilisers whose prices have soared sharply in recent times.

Companies in the consumer goods industries have also had to borrow aggressively because of an increase in the prices of raw materials. Borrowing grew 18 per cent. Ferrous metals companies saw a 17 per cent increase in borrowing although their net fixed assets grew by less than five per cent. The increase in prices of coal and iron ore explains this increase in borrowing.

Companies are quite busy managing their working capital cycles in the face of high commodity prices. Adverse working capital cycle is eating into their profits and their borrowing power is currently consumed largely into financing their operations. At the same time capacity utilisation remains low. Order books are not afire. And, interest rates are rising. Investments into new capacities may have to wait under the circumstances.