Saturday, April 11, 2020

Holding their breath: Indian firms in an interruption of revenue

In this article,  Anjali Sharma and I ask, How many days of liquidity cover is there, in the large non-financial firms, to be able to meet a certain threshold of minimum expenses in the absence of any revenue? 

We make four assumptions
  1. A 100% sales shock for all non-financial firms. 
  2. Liquid assets only include cash and marketable securities.  
  3. A 50% realisation of the value of marketable securities in the book.
  4. Basic core expenses required to stay alive
Our calculation is admittedly based on extreme assumptions: Zero decline in wage expenditure, zero access to fresh credit, and zero revenues for a certain number of days. More than half of the Indian corporate non-financial balance sheet is unable to hold its breath for 90 days, under these assumptions. About a quarter of the firms will not be able to handle a 30 day interruption of revenues. This highlights the incompatibility of a zero decline in wage expenditure with a sustained period of zero revenue and no fresh borrowing.

(The article was first published on the Leap Blog, 3 April, 2020)

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