V Kumaraswamy: Not enough equity

Indian business has adjusted to globalisation in many ways, but the process has also increased the risk profile of industry drastically. Tariff protections and licensing together with the lead times it imposed ensured that once a business successfully commenced production, neither domestic nor international competition could play spoil sport and there was a fair degree of stability in the sales, operating margins and consequently cashflows. This led to high debt levels; but both the lenders and borrowers were comfortable, given the stability.

However the old paradigm has died a slow death. And many businesses started in the euphoria of the early years of liberalisation, but with old assumptions on debt servicing, faced a massive problem in the late 1990s, when the operating margins started gyrating a bit too uncontrollably.

The increasing risk profile needed to be supported by two essential changes in our system "" businesses had to change the funding pattern to match the increased riskiness of business and operating margins and the uncertainties in investments had to be transmitted to the savings side as well. The second has lagged far too behind while the first has happened in some sectors but not in others.

Sectors like the software and biotech have managed to grow with equity that can absorb cashflow shocks. The same degree of adjustment has to quickly take place in the "old economy" sectors' as well. Merely replacing local debts with FCCBs and ECBs may not be the answer to the issue "" these will only the change the venue of litigation should there be default. Should the operating margins wobble, a far better equity orientation would have absorbed the shocks in the form of diminished stock valuations.

Second, the increased risk profile in the economy has to be absorbed ultimately with increased risk profile of savings even while they partake the higher returns that accompany such enhanced risks. This is hardly evident. The net incremental annual private savings going into the equity market is less than one per cent of private savings. This when the stock markets have been booming.

At this period of transition the role of the regulator "" Sebi "" should have been to expand the stock markets at an explosive pace so that the fruits of growth are available for the local population. Instead, it is concentrating more on PINs, PANs and MAPINs and relentless dose of regulations on the issuers and the listed and their internal functioning (such as Clause 49) which can only scare away individual investors.

The sooner both these adjustments take place the better for the economy; for to rely excessively on external oxygen would be to risk life itself. One never knows when the fickle minded FII moneys will find a more attractive destination.

The author can be contacted at swaksha_ad1@bol.net.in