That interest rates at the long end could rise in the second half of the year is disconcerting.
The government will need to borrow more to fund its various initiatives and so will float long bonds – Goldman Sachs estimate that the governments net borrowing could be in the region of $55 billion in 2009-10. Given the state of the financial markets overseas, it’s unlikely that companies are going to be able to mop up too much money abroad. Therefore, should companies want to borrow to fund their projects, they may have to shell out higher rates.
After several years of access to relatively cheap money, high interest rates have already been hurting corporate profits this year. For a sample of 2,408 companies, interest costs in the first nine months of 2008-09 were up 70 per cent at just over Rs 50,000 crore, compared with the same period of the previous year.
This is the sharpest spike seen in many years and a part of the reason, though not the main one, for companies not going ahead with expansion plans. What’s holding them back currently, is of course, the lack of visibility on demand. Should the outlook change and should they sense the economy is turning, companies may want to take a relook at new projects—greenfield or brownfield.
They would then need to reassess at that stage whether their projects are viable at the prevailing interest rates. However, it would be a pity if they didn’t go ahead with their plans because money was too expensive.
Already, GDP estimates for 2009-10 are now coming in at just above 5 per cent. Although government spending is sure to give the economy a boost, that alone would not be enough, the private sector too needs to spend. For that to happen, companies need to be provided with adequate liquidity at affordable rates.