Financialisation and Industry
Diverse Regional Responses to the Global
Crisis: Implications for Finance and the Real
Economy Muttukadu Chennai Jan 2015
Sushil Khanna
Indian Institute of Management Calcutta
Finance & Global Economy:
Some Issues That Have Vexed Us
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What has fueled the expansion of financial
sector in the Western World ?
What are the key characteristics of the
contemporary financial sector?
What is the mode of surplus appropriation?
How does this financialisation of economy
change our understanding of contemporary
capitalism?
What does it mean for developing economies?
Making of a New Regime of Financial
Accumulation 1973-1989
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End of fixed exchange rates and expansion
of trading / speculation in foreign exchange
markets
Globalization of finance (initially limited to
TRIAD and later to few developing countries)
Erosion of Glass – Steagall restrictions and
rise of “self-regulation”
Mergers & rise of financial conglomerates
Universal banking
Financialisation
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Monetarist policies that used interest rates to
control inflation destroyed funding ability of
banks and “thrift” industry
Key role of Securitisation ( “financial paper
suitable for global structure” - Minsky)
Enhanced the funding capability of financial
market -- as opposed to banks
Conformity of Institutions across nations“ability of creditors to capture assets that
underlie securities”(L. American Debt Crisis)
Financialisation
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This was accompanied by capital account
liberalisation and globalisation of production
and trade
Western oligopolies increasingly under
pressure from Third World producers
Financial sector begins to grow at rates twice
as fast as real economy – sometimes
unconnected to real economy
Financialisation of US / UK
Economies
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Rising share of Financial Sector in GDP,
Employment, but most important in Profit
share in economy
Financialisation of Non-Financial Firms
Increasingly Non Financial Firms
(Manufacturing / services) invest in finanial
markets
Rising share of FIRE in USA GDP
Share of Employemt
Increasing share of financial profits
(Index 100=1970)
Finance Today -- Speculative ?
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We now know that Financial System no longer
serves need of production /real economy
Only 3 per cent of the UK’s £ 6 trillion (= £200
bn) financial sector’s assets constitute lending
to business (manufacturing, retail, transport
etc)
Consumer loans & mortgages = £ 1000 bn
Rest ( 82 per cent) are all financial assets
Changing share of corporate profits-US
Financial Liberalisation in India
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Capital account convertibility to prop-up a
growing financial sector held back by
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Narasimham – I 1997-98
Narasimham – 2 2006
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Restricted use of derivatives
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Still India has incipient financial liberalisation and
entry of private equity and hedge funds with rising
conflict with promoters.
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Indian Financial Sector
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Yet Capital Market and Banking Deregulation
Core policy of all governments
Expansion of capital markets and destruction
of industrial development banks.
Privatisation and shift in favour of corporate
power
Indian Accumulation Regime
Year
Household
Sector
Savings GCF
Private Corp
Sector
Savings GCF
Public Sector
Savings GCF
70-71
66,52
41,60
10,23
15,35
23,25
43,05
80-81
69,66
37,51
8,70
14,30
21,64
48,19
90-91
80,60
40,08
11,66
18,59
7,74
41,33
95-96
69,08
30,07
20,33
39,09
10,60
30,84
08-09
69,63
34,27
25,96
35,70
4,42
26,42
Changing Nature of Corporate
Finance in India
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Last 25 years have seen significant changes
in financing of Indian private corporate sector
Firstly, there has been destruction of three
large Industrial development banks that
supported private industrial projects
Secondly, the Private Corporate Profits have
become significant and about 25 % of total
national savings (still rising)
Changing Nature of Corporate
Finance in India
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Thirdly, the State has deliberately pushed
corporate sector towards capital markets for
long term funds, -- both equity and later bond
market, as well encouraged banks to enter
securitized debt market – commercial paper,
securitized corporate bond market etc.
Corporate Profits and accumulation
1990-91
2010-11
Househol
d Savings
Corporate
Savings
Public
Savings
Our Investigation

We look at Non – Financial Corporate Sector
to understand changing nature of corporate
finance
Data set
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All the ratios are based on data set extracted
from Prowess data base maintained by
Centre for Monitoring Indian Economy Pvt.
Ltd. (CMIE)
Data is extracted between years 1992-93
and 2012-13.
It includes 1138 companies which are
common across all years.
Debt Equity ratio of Private Corporate
sector
D/E ratio
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Source: Based on RBI data on public limited companies
D/E ratio
Ratio of
income from
Revenue from financial
Income from
Slaes
financial
activities to financial
revenue
services growth revenue from activity to firm
Year growth rate rate
sales
cash flow
1994
15.84%
6.86%
2.69%
23.87%
1995
28.62%
44.15%
3.02%
22.10%
1996
21.47%
13.27%
2.81%
20.62%
1997
15.07%
20.59%
2.95%
24.39%
1998
8.34%
8.80%
2.96%
23.44%
1999
9.43%
6.33%
2.88%
24.54%
2000
21.92%
-1.29%
2.33%
21.97%
2001
8.30%
1.20%
2.18%
19.45%
2002
3.25%
4.36%
2.20%
20.16%
2003
16.10%
0.92%
1.91%
15.38%
2004
19.82%
47.12%
2.35%
17.72%
2005
20.23%
8.82%
2.12%
15.11%
2006
21.00%
19.02%
2.09%
16.25%
2007
23.28%
48.04%
2.51%
18.65%
2008
13.99%
41.46%
3.11%
23.05%
2009
15.34%
3.47%
2.79%
25.35%
2010
2.13%
10.17%
3.01%
23.11%
2011
21.35%
-5.15%
2.36%
18.69%
2012
21.89%
29.98%
2.51%
24.86%
2013
7.04%
11.18%
2.61%
27.48%
Ratio of change in internal and external
funds to change in gross fixed assets
2.50
2.00
1.50
1.00
0.50
-0.50
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0.00
Change in internal funds
Change in external funds
Ratio of change in internal and external
funds to Total Investment (change in
GFA + financial investments)
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
-0.20
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0.00
Change in internal funds
Change in external funds
0.90
Financial investments Non Financial Corporate
Sector (% NFA)
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0.00
Ratio of financial investments with net fixed assets
Ratio of Financial investments with total assets
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Ratio of
financial
investments
with net fixed
assets
0.22
0.24
0.27
0.26
0.22
0.28
0.26
0.27
0.31
0.33
0.37
0.48
0.55
0.50
0.60
0.71
0.78
0.77
0.72
0.69
0.67
Ratio of
Financial
investments
with total
assets
0.07
0.07
0.10
0.10
0.08
0.11
0.10
0.11
0.13
0.13
0.14
0.17
0.18
0.17
0.19
0.20
0.22
0.22
0.20
0.18
0.18
Ratio of
Investment in
group companies
to Other than
group companies
0.85
0.74
0.72
1.06
1.24
0.83
1.40
1.51
2.26
1.91
2.17
1.75
1.82
1.48
1.65
1.66
2.82
2.14
2.34
2.73
2.35
Tata Cross Investment: 1991-2007
(Rs. Crore)
No. of Cos.
Inc_revenue_total
Total_assets
Investments
Invest_equity_shares
Invest_group_equity
Invest_prefence_shares
Invest_group_preference
Invest_all_debt_instru
Invest_group_debt_instru
Invest_mutual_fund
Invest_group_mutual
Total_quoted_investment
Quoted_group_cos
Mkt_value_quoted_invest
Investment_abroad
Invest_abroad_group
Total Cross Investment
Cross Investment/ Total Asset
* This is by adding all the group companies
1991
1995
57.00
10367.77
11694.44
1462.42
391.65
289.00
0.00
0.00
204.69
0.00
860.57
0.00
242.90
0.00
807.33
0.00
0.00
289.00
0.025
68.00
24349.51
30085.65
2985.47
1922.40
1633.42
4.70
0.00
293.33
0.00
743.07
0.00
1355.20
161.86
5048.25
0.00
0.00
1633.42
0.054
2000
2005
2007
103.00
108.00
82.00
42770.60
83360.73
114538.17
64291.05
103907.32
152477.41
11279.66
31113.62
44886.11
7985.45
21819.55
33099.06
5516.54
21133.46
32628.25
252.93
898.37
1296.39
99.76
858.96
1268.74
270.17
2228.52
2825.01
2.68
170.17
428.63
1344.73
6399.45
7671.00
120.46
1156.69
2320.22
5068.28
10756.46
13477.28
2897.57
8500.24
12002.12
3984.27
82643.31
133861.19
215.66
1835.46
7191.13
90.61
1821.95
7187.57
5739.44
23319.28
36645.84
0.089
0.224
0.240
Source: Our dataset compiled from CMIE
Sushil Khanna - Professor , Indian Institute of Management, Calcutta
Aditya Birla Cross Investment: 1991-2007
(Rs. Crore)
No. of Cos.
Inc_revenue_total
Total_assets
Investments
Invest_equity_shares
Invest_group_equity
Invest_prefence_shares
Invest_group_preference
Invest_all_debt_instru
Invest_group_debt_instru
Invest_mutual_fund
Invest_group_mutual
Total_quoted_investment
Quoted_group_cos
Mkt_value_quoted_invest
Investment_abroad
Invest_abroad_group
Total Cross Investment
Cross Investment/ Total Asset
* This is by adding all the group companies
1991
18
3883.67
4452.82
747.86
91.58
7.14
0.00
0.00
208.32
0.00
443.65
0.00
4.32
0.00
5.76
0.00
0.00
7.14
0.002
1995
23
7108.39
11561.10
2828.96
531.54
438.07
0.00
0.00
370.91
0.00
1868.79
0.00
2159.48
0.00
3079.29
0.00
0.00
438.07
0.038
2000
32
13623.78
22303.89
2642.51
1723.48
1051.81
55.35
54.95
333.96
9.70
499.08
86.52
1298.29
469.84
1059.94
26.62
0.00
1202.98
0.054
2005
46
28642.76
38460.33
9261.31
5266.38
5046.27
272.75
17.04
82.67
44.53
3753.22
3753.22
2826.34
2617.94
4142.64
480.09
462.02
8861.06
0.230
Source: Our dataset compiled from CMIE
Sushil Khanna - Professor , Indian Institute of Management, Calcutta
2007
40
48377.41
64081.66
18976.79
8450.61
8283.27
368.17
23.66
200.86
65.70
9490.74
112.02
13696.02
6044.57
28438.46
705.78
686.03
8484.65
0.132
Other Business Groups (Selected):
Mafatlal, Murugappa & Thapar
(Rs. Crore)
ARVIND MAFATLAL GROUP
Total Assets
Total Investments
Total Cross Investment
Cross Investment/ Total Assets
MURUGAPPA GROUP
Total Assets
Total Investments
Total Cross Investment
Cross Investment/ Total Assets
THAPAR GROUP
Total Assets
Total Investments
Total Cross Investment
Cross Investment/ Total Assets
* This is by adding all the group companies
1991
1995
2000
2005
2007
1589.02
97.05
8.69
0.005
3351.73
680.94
380.33
0.113
3588.5
646.02
485.47
0.135
1867.74
381.08
373.44
0.199
1901.01
377.9
354.72
0.186
1178.33
85.58
8.16
0.006
2494.75
284.59
104.61
0.0419
4580.44
415.1
110.83
0.0242
6641.65
785.79
686.97
0.103
10668.38
825.71
683.09
0.064
2576.2
88.69
44.39
0.017
5807.62
523.6
283.85
0.049
9557.95
869.38
699.34
0.073
9125.2
1465.22
1117.88
0.123
10046.29
1588.83
1263.55
0.126
Source: Our dataset compiled from CMIE
Sushil Khanna - Professor , Indian Institute of Management, Calcutta
In Conclusion
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Can developing countries play a role in
redefining the role of finance?
State owned banks and financial entities?