India Inc hoarding cash + resilient consumer spending = Inflation

Ten Indian companies hold as much as Rs 2.34 lakh crore in cash, according to a report in Business Standard.About one-third of that amount, or Rs 70,252 crore, is held by just one company - Reliance Industries, it notes.

So, why are companies holding so much cash? Primarily because they don’t see any great investing opportunities on the horizon. In addition, meddling bureaucracy, delays in regulatory and environmental approvals, and high interest rates have curbed appetite for investing by companies. A listless government, mired in a string of corruption scandals, has also lost its appetite for implementing bold economic reforms, which has further dampened business sentiment.

Contrast that to how consumers are feeling and you can see there’s a vast difference.

A recent Nielsen survey showed that India, once again, emerged as the most optimistic market in terms of consumer confidence, although there is some amount of cautiousness when it comes to spending spare cash. It’s the ninth straight quarter that India has retained the title of the world’s most optimistic market, with an increase of one point in the consumer confidence index to 123.

That optimistic consumer sentiment was confirmed byHindustan Unilever, India’s largest consumer goods company, when it reported fairly robust sales growth across product categories for the quarter ending March.“Through the period of last year, when the Indian economy has been through a difficult ride, consumer demand had remained resilient,” Hindustan Unilever chief executive Nitin Paranjpe said.

The quarterly results of Godrej Consumer Products and Dabur also confirmed that consumers are still in spending mode.

It sounds heartening, but there’s a problem. Continuing consumer demand in the face of sluggish investments, leading to little or no increase in supply, will only push up prices.The wholesale price index is hovering near 7 percent and a whole host of factors are set to take it higher, even without the help of consumer demand.

Thirteen interest rate hikes since March 2010 have done little to quell demand, but they have dampened demand for business investments. Of course, the Reserve Bank of India (RBI) is not entirely to blame for that.A report by the RBI in April warned that foreign direct investment would have been 35 percent higher in 2011 if it weren’t for so much “policy uncertainty”.

As a_Reuters BreakingViews_ column notes , “bullish consumers give the economy strong foundations. But the government needs to do its bit to get investors to match.”