Calling for 'fundamental restructuring' to put India back on its growth trajectory, McKinsey said on Wednesday that the country will run out of capital to support economic expansion.
"India is in a relatively strong shape but will run out of capital to support growth-significant decline in growth rate could have severe economic consequences," management consulting firm McKinsey and Company said in a presentation to the Planning Commission.
The firm said the global financial crisis has started showing its impact in the country and sectors like textiles, metals and mining, automotive, cement, real estate, media, IT need working capital to fund projects underway.
"Viability of several large companies and small and medium enterprises (SMEs) threatened due to potential losses and cash/credit crunch," the presentation said.
The firm said operating margins in almost all sector have reduced and will fall further over the next two years. Also, increased cost of debt will erode the profitability more and interest coverage, it added.
"Pressure on the real sector likely over next two years will have negative consequences for the broader economy," it said.
The economy is under stress with growing bank non-performing loans and job losses in sectors like textiles.
Due to the increased vulnerability of SMEs, the NPAs of banks are likely to move up, which will put pressure on their profitability, the firm said.
Due to the various stimulus packages being given, the fiscal deficit of the country is expected to balloon to 7.5 per cent of the GDP compared to 2.5 per cent set by the government.
To boost the sagging growth, the government came out with a stimulus package of over Rs 30,000 crore (Rs 300 billion), including 4 per cent excise duty cut across the board. This is expected to translate into lower cost of products.
According to McKinsey projection, even in steady state, infrastructure financing would face a deficit of $150 billion and it can increase sharply in current scenario.
Along with a deficit in the infrastructure sector, fall in corporate savings and foreign inflows can also result in a potential shortfall of $200 billion of the total savings and investment, it added.
On the capital requirement over the next three years, the firm said banks will need to finance $475-500 billion of credit and debt and equity market will have to provide $340 billion in 2009-11 of which both public and private equity and domestic and foreign debt are uncertain flows.
However, following few imperatives, the country will be able to tide over the crisis. Apart from a more efficient supply of capital, the firm said, the Reserve Bank needs to cut Statutory Liquidity ratio (SLR) to 15 per cent from the current 24 per cent.
Also, the firm has recommended relaxing the limit of foreign investment in corporate bonds and reduction in trading costs, issuance and disclosure requirements.
The government should also liberalise foreign direct investment and foreign institutional investors policy and divest assets to attract $125 billion of foreign capital. It should also form alliances to attract $100-120 billion from sovereign wealth funds, the firm said.