Page 118 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 6: Investment

6.2.4 Business Expectations Notes

Since investment decisions take time to accomplish, they are characterised by a high degree of
uncertainty. Thus business expectations, i.e., what business people expect to happen in future is
very important. If they are pessimistic about the future, even a low rate of interest will not
encourage them to borrow and vice versa if they are pessimistic. A wide range of factors from a
change in government to a change in weather may affect business expectation.
Investment decisions are largely influenced by expectations of future demand conditions
(of output produced) and future cost conditions (of machines, operating cost of machines, etc.)

6.2.5 Profits

Most investments are financed by borrowed funds. But small and medium-sized firms have
little access to the capital market. Thus, a great deal of investment is also financed by firm's
internal resources. Most companies do not distribute their entire profit after tax among the
shareholders in the form of dividends. A certain portion is retained for reinvestment. Such
reinvestment or ploughing back of profit is necessary for expansion and diversification. Thus,
current profit appears to be an important determinant of investment expenditure. In a year of
good business, profits are large. So there is a large flow of funds that can be reinvested by the
firms that made profits. If, on the other hand, there is no profit or even loss, as during recession,
hardly any fund will be available within the firm to finance new investment expenditures.

Caselet NRI Investment in India is on Rise

n increasing number of non-resident Indians are investing in well-established
Small and Medium Enterprises (SMEs) in India, especially those involved in
Abusinesses like telecommunication services and properties, according to a
Singapore-based wealth management advisor.

"We have seen cash-rich Indian SME-owners investing in global assets, especially mineral
resources such as coal and gold mines," the Chief Executive Officer of Taurus Wealth
Advisors Pte Ltd and Taurus Capital Management Pte Ltd, Mandeep Nalwa, said.

"These Indian investments are significant in size, some as much as $100 million per
commitment, though they are often overshadowed by the multi-billion dollar international
deals being done by Indian multi-national corporations," Nalwa said in an interview with
PTI today.

Nalwa said his group has helped carry out due diligence on a large number of properties
and assets in India and globally to support the investment plans of their clients, a large
number of whom are Indians residing in India and abroad.

"These clients want holistic advise on their investments, which covers both traditional
financial asset investing and non-traditional assets. Clients want to diversify their risk
between the volatile financial markets, which are hostage to well-known geo-political
and economic noise, and the relatively long-term investment calls on the economic
development of emerging countries, especially India and China," he said.
"While Taurus focuses on providing investment advice to high net-worth individuals
(HNIs) on their financial assets, discussions with clients often reveal their keenness to
participate in unlisted investments," Nalwa said.
Contd...

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