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Revealed
India's Third Giant Leap

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India Inc. prefers FDs over factories
Thu, 2 Jan Pre-Open

The Indian economy is struggling with multiple issues. This is well known. Among the most important ones, the lack of employment opportunities would come right at the top of the list. This is especially true for India's large young population. However it would be a mistake to assume that jobs are not being created just because of the economic slowdown. It might come as a surprise to many that Indian corporates have plenty of cash to invest. If they were to invest in factories and machinery, they would certainly create jobs.

Are they investing their surplus cash? The answer is yes but not in job creating assets. The investments are being made in, believe it or not, bank FDs, money market mutual funds, and loans to subsidiaries. Why is this happening? The simple answer would be a lack of investment opportunities in India. Indian corporates see merit in keeping money in the bank. This is despite the fact that India's GDP is still growing and there is a demand for their products.

This sad situation has come to pass solely due to the bad economic policies of the government. As an article in Firstpost points out, India's problem is jobless growth. During the six years of the previous NDA government, 60 million jobs were created. This was possible because nearly 75% of corporate investments went into creating fixed assets like buildings machinery etc. During the eight years of the UPA up to FY12, only 53 million jobs were created. However, many of these jobs were of low productivity in rural areas under MGNREGS. The reason: Corporate investment in fixed assets fell to about 50%.

Indian corporates clearly feel that money in the bank is a better option than making fixed asset investments. This spells serious trouble for India's young population. The demographic dividend was the key selling point of the India growth story. The next government would have to take up this issue on a war footing. Otherwise, without significant job creation, the demographic dividend could turn into a demographic curse because of large scale unemployment.

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