Commentary/ Yazad Darasha

Another Credit Policy. But Who Wants Credit?

This is the time of year that the Reserve Bank of India goes through the birth pains of what it calls the slack season credit policy. Slack implying that demand for credit will be lower than in the busy season, which lasts from September to April.

Frankly, the season has never been slacker. And I do not see any reason for the RBI to declare any policy at all. What can the RBI do, anyway? Fine tune the Cash Reserve Ratio and the Statutory Liquidity Ratio for banks so as to either squeeze or free up the availability of funds for lending? Fine tune the lending and borrowing rates -- increase or decrease them by one or half a percentage point here and there? Announce more stringent or less restrictive policies for different sectors?

Ultimately, at a time like this, the entire exercise would be, simply, futile. The bottom line is: there are no takers for credit, at the rates that banks and institutions are offering. So the banks and institutions are simply parking all their money in government securities -- earning market rates of interest, mind you, so there is no loss of income, even notional. There is no lack of demand from the government sector, whose appetite for money remains voracious.

Which brings us back to the so-called liquidity crunch in industry. The RBI can offer credit. It can do nothing to ensure offtake of credit. It is simply justifying its existence -- fulfilling its charter, as it were, by going through the motions of giving us a biannual credit policy. (Wait a minute, I am not belittling the RBI in any way here. It is just that there is little a central bank can do by way of credit policy, at a time when there is absolutely no demand for credit!).

This lack of demand for credit from industry and the corporate sector has its genesis -- as do most things connected with money -- in the stock market. In this case, more precisely the market for primary equity issues. The capital market in India is like a sensitive child -- it suffers from every perceived or imagined slight heaped on it. It is not the mature adult that we would like it to be. Its 'sentiments' have to be nursed.

Let's get to the basics. Why does a company need to raise money? Because it wants to set up a project it believes will generate income that will be a certain percentage higher than the money spent in setting it up and running it. In short, it will be profitable.

But no project can be profitable if it has to pay out high interest costs on money borrowed from banks and institutions. So, one, it will not borrow at high interest rates. And two, it will source a good part of the funding from shareholders in the form of equity, where the payout in terms of servicing is virtually nil. Cheap money.

That is the component companies are finding it tough to lay their hands on. Because the market for initial public offerings of equity has collapsed, no longer exists. So a company is not going to set up a heavily geared project where the equity component is less than half the debt component.

This is also the reason a lot of projects have been shelved in the last one to two years. The Centre for Monitoring Indian Economy tells us that in the power sector alone, more than 20 projects worth approximately Rs 200 billion are either being reviewed or have been put aside for future review. What is the loss to the country in terms of megawatts generated per annum? The CMIE does not say, but it would be a huge amount. In these days of mounting power scarcity...

In the petroleum refining sector, in the last two years, six private sector refinery projects with a total capacity of 28.5 million tonnes have been shelved. In these days of mounting petroleum prices and falling production and refining...

Obviously, the cost to the nation is enormous. This is especially so in the infrastructure sector, emphasis on which has been finally getting the attention it deserves. Our road network is inadequate and whatever is there is in a shambles. We do not have enough seat capacity on our internal airlines, C M Ibrahim's alleged fears of overcapacity notwithstanding. We just do not have enough peak time power generation, and our state electricity boards are models of inefficiency that are bleeding enough each day to keep a thousand families in survival rations for a year each.

Our telecommunications have been yanked into the twentyfirst century with no thought of upgrading our nineteenth century infrastructure into at least the twentieth century first. And railways. And airports. The infrastructure lament is endless.

And it is this crucial sector that is going to be hit hardest in the next two years by the political follies of this year.

Political follies? Yes. Political follies. It is not, as all the foreigners seeking to make a quick buck from the emerging Indian market love to tell us, the political uncertainty that makes the negative impact. It is more, I think, the quality of political leadership in the country that counts. And the quality of our political firmament is, quite honestly, abysmal. (Thank you once again, Mr Sitaram Kesri, for reinforcing that view).

It is the low quality leadership that has prompted country rating agencies to keep India low on their investmentworthiness charts, however we would like to fool ourselves about our own worth. And the country ratings do play a large role in the investment decisions of the global majors.

So what? So this. Everyone is united -- the political naysayers included -- on the need for foreign cash to develop our creaking infrastructure. Will we get that money? No way. Not at the rate we are going.

What has emerged is this: Infrastructure development faces one huge hurdle -- the availability of funds. They are elusive for two reasons -- one, the foreigners are shying away, and two, there is no money to be raised from the equity markets. Both reasons are the product of political dithering, scheming, mendacity, and a lack of will.

But more next week on how the development of infrastructure seems to be so low on our successive governments' priorities.

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