An analysis of Indian corporate data over a 39 year period from 1980-81 to 2018-19, found that financial variables are assuming a greater role in determining the investment dynamics of the Indian corporate sector along with business expectations and policy uncertainties.
The decline in investments post the global financial crisis cannot be solely attributed to weak economic conditions. Leverage has a greater role in determining the investment pattern of the corporates with there being a negative relation between the two.
” In the Indian context, leverage measured as debt to equity ratio gives 60 per cent as the threshold level beyond which debt is found to be negatively affecting investment” says the research paper titled “Reassessing Investment Dynamics – Newer Insights into Leverage and Investment of the Indian Corporate Sector” one of RBI’s working paper series authored by Deba Prasad Rath and Sujeesh Kumar, the views are not that of the central bank. ” The current level of leverage of around 48 per cent, as per latest available data, suggests that there exists a further space for corporate borrowing which will lead to higher investment in a scenario where macro-economy is conducive and better financial conditions prevail.
Similarly, the estimated threshold for the debt to asset of Indian corporate sector is about 28 per cent, which gives more space to reach the debt threshold from the current debt to asset ratio of 19 per cent, according to the findings of the paper.
Interestingly, despite some studies suggesting that firms with high cash holdings have a significant role in investment activities, the research by the RBI economists suggest that cash holdings of the companies have a statistically significant negative relation with the fixed investment. ” This implies cash holdings are not realising into fixed assets as Indian companies might be investing in other financial assets rather than fixed assets for corporates with higher cash holdings” the authors say.