Indian companies are currently sitting on a huge pile of cash, estimated to be ₹5 trillion, as they are hesitant to invest in new projects due to prevailing economic uncertainties. This cautious approach comes despite rising profits and strong balance sheets, indicating a broader trend of risk aversion among India Inc.

Reasons for Cash Hoarding

Several factors contribute to this reluctance to invest.

• Global Economic Uncertainty: The uncertain geopolitical landscape and trade tensions are significant deterrents. Companies are hesitant to commit to large-scale projects without a clear understanding of evolving global dynamics.
• Domestic Demand Slowdown: A slowdown in domestic demand adds to the uncertainty. Without a substantial increase in demand for manufactured goods, capacity utilization rates are unlikely to reach levels that justify additional private-sector capacity.
• Structural Challenges: Inadequate land and labor reforms continue to impede growth. A scarcity of skilled labor is also evident, with high demand pushing up wage expectations.
• Increased Risk Awareness: High-profile bankruptcies have heightened awareness of financial risks. The ability of banks to seize assets of defaulting companies has instilled a sense of prudence, prompting corporates to prioritize financial stability over expansion.
• Cost Optimization: Continued drive to optimize costs and reluctance to spend on capacity expansion has helped corporate India increase their cash reserves over the last few years.
• Maintaining Liquidity: Companies have also started maintaining a war chest of liquidity post Covid to meet any exigencies.

Trends in Cash Reserves

A recent analysis reveals a significant increase in the cash and cash equivalent balances of Nifty500 companies.

• Growth in Cash Balances: The aggregate cash and cash equivalent balances of Nifty500 companies grew by 35% from ₹10.6 lakh crore in September 2022 to ₹14.3 lakh crore in September 2024.
• Sectoral Analysis: A sectoral analysis of the Nifty500 enterprises with over 20% growth in cash and cash equivalents reveals that a majority are from the pharma, IT-software, and capital goods (non-electrical) industries. Chemicals, power, healthcare, realty, auto & auto ancillaries and FMCG round out the top 10 sectors with maximum incremental cash.
• Top Companies: Reliance Industries tops the list of companies with large cash balances. As of September 2024, Reliance Industries alone holds 15% of the total cash and cash equivalents pool of Nifty 500 companies at around ₹2.15 lakh crore. L&T, Tata Motors, TCS, and Wipro are other companies with the highest cash reserves as of September 2024.

Impact on Capital Expenditure (Capex)

The increasing cash reserves and the reluctance to invest have resulted in a slowdown in capital expenditure.

• Decline in New Project Announcements: New project announcements in India declined significantly in the December 2024 quarter, indicating a slowdown in investment activity.
• Drop in Completed Projects: Compounding this trend was a staggering 52% year-on-year plunge in the value of completed projects.
• Shift in Investment Focus: Increased investment in manufacturing is expected, but investment in core infrastructure sectors, apart from electricity and metals & mining, may not see meaningful private sector participation, limiting the overall growth potential of private capex.

Alternative Funding Sources

Indian corporates are also tapping capital markets to raise funds, bypassing traditional bank loans. Money raised from equity through IPOs, follow-on public offers, and qualified institutional placements (QIPs) more than doubled in FY25. Companies are also relying more on commercial papers (CPs) and external commercial borrowings (ECBs).

Government Initiatives and RBI Actions

The government and the Reserve Bank of India (RBI) have been taking measures to address the slowing credit growth and stimulate lending.

• RBI Rate Cuts: The RBI has slashed the repo rate and reduced the Cash Reserve Ratio (CRR) to inject liquidity into the banking system.
• Government Spending: Government spending on infrastructure development is crucial for encouraging labor engagement and expanding the economy.

Expert Opinions

Experts suggest that a revival in the private investment cycle is improbable in the coming year. Rising cash balances reflect companies not putting them to use for investment purposes. Companies are making profits but not deploying them in projects.

Outlook

The Indian economy has demonstrated resilience amid global uncertainties. However, the reluctance of India Inc to invest despite strong financial health poses risks to future earnings and overall economic growth. Addressing structural challenges, increasing demand, and creating a stable policy environment are crucial for unlocking private investment and sustaining India's growth trajectory.