Relevant challenges and analysis of the situation facing TATA Company
Relevant challenges and analysis of the situation facing TATA Company
Amid the slowing economy in India, TATA motors have been going through challenges in seeing the company’s operation match their mission and vision statements. Even as TATA sons were infusing $914 million in equity as a positive credit effect for the company, the country’s biggest automobile company still faces the following challenges; economic growth sluggishness, weak liquidity, and tight financing norms.
Economic growth sluggishness
The following factor has primarily contributed to economic sluggishness in India;
- Tight fiscal and monetary policies
Between the years 2016 – 2017, India’s monetary policies directed its energy mostly in controlling inflation, which aimed to ensure that the rate of interest remained hard. With the heightened deficit in the fiscal state of the country, the government was committed to lowering its budgetary deficit, but still, there was no room for the government to raise its spending as a mechanism of pumping prime into its economy (Wen et al., 2019)
- Headwinds Globally
Trade wars between china and US left the global economy in a poor position. This largely contributed to the slowing down of exports, which subsequently led to the economy slugging. The pending Brexit that was pioneered by Boris Johnson, UK’s prime minister, contributed to the breaking appearance of the economic outlook in India since they are among their primary markets and sources of manufacturing overheads (Kohnert, 2021). With this global headwind taking center stage for most economies to slow down worldwide, crude prices favored India. Still, they only lasted for three years, after which it mounted inflationary pressure as a result of firmed-up prices.
- Jolt reforms
A severe blow was dealt on consumption, leading to the vicious cycle of lowered income and job losses resulting from demonization that happened in India in the year 2016. There is a further drop in demand or multiplier effects with these events. After the roll of GST in 2017 July as economic reforms, it affected the growth of exports during the implementation year since refunds to exporters were significantly delayed.
Just as the effects of DeMo & GST were petering out, the IL&FS crisis triggered the Non-Banking Financial Companies (NBFC) credit crunch in 2018. By 2018-end, weakening global trade and GDP growth, led by US-China tariff wars, had caught up, amplifying the impact.
- The financial sector is still in a mess.
Through the term of UPA-II, the ratio of NPA became worse and is still high. But even after the NPA ratio started to improve in 2019, there was a new stress build on NBFC. This stress steered up faster than public banks due to the absolute interconnectedness of mutual funds, banks, and corporate sectors.
Weak Liquidity problems
Liquidity problems arise when a company does not have sufficient liquid assets or other highly marketable securities that can be converted into cash in the short term. That weak liquidity problem heightened due to JLR acquisition and subsequent Brexit event (Pathak, 2016). Before Brexit, the EU contributed 21% of the total sales to JLR since it was a UK-based company. On the other hand, 50% of the components were imported from the union’s countries. The friction between the block and UK elicited material problems for JLR and TATA. After the Brexit voting happened for the first time, there was a 10% fall in the pound’s value against the Euro. As this was happening, a lot of money was owed to JLR by many companies in the European Union, which money was meant to settle for supplies and raw material. If the pound started to lose value, JLR, which was now acquired by TATA motors limited (TML), has to incur a premium, more pounds than anticipated. To be precise, the premium pound charged to the company on pending bills was about Crores 2300 concerning the accounts of currency fluctuation.
Secondly, weak liquidity problems were attributed to eco-friendly alternative cars. JLR produced and sold diesel cars and composed about 90% of the total sales in the European Union. With the genesis of the Volkswagen emission scandal that rocked the EU, the government started to discourage its populations against high pollutants used in cars, diesel included. JLR had to work on its switch program very fast as this unfolded. The company started destocking their diesel cars by introducing sales discounts to make a substantial investment of engaging in the production of more eco-friendly variants. As much as this move was seen as a turning point, the company did not catch up with control measures. It further sank into a financial crisis due to the company experiencing recalls in 2017, with significant concerns being defects such as engines, batteries, airbags, and instrumental panels (Kumari & Nagarajan, 2015). The memory rose to as high as 106000 vehicles which affected the company’s sales by 70%; this shows that their only sources of efficiently convertible assets as inventories was not in a position further to be converted into cash and at the same time refund the customers to recover the amount in discount and premium lost in events of Brexit, burn of pollutants diesel cars and drop in currency value (press trust of India, 2019).
Tight financing norms
Capital financing is one vital resuscitation tools that sinking companies can dwell on. Without lenient financial arrangement terms of borrowing, the company might face substantial challenges. Recently, the reserve bank of India introduced a new regulation directed to non-banking financing companies, which was aimed at tightening norms on capital and bad loans recognition. The new standards provide that there will be a hike by RBI on the net owned fund requirement for all non-bank financial corporations to Rs10 crores. The provision as well builds another framework that seeks to allow the recognition of pending loans as non-performing assets for over 90days. This stringent measure set by the central bank proposes that the failure of housing finance corporation or any big NBFC may lead to this organization being contagion among other lenders (Rajakumar, 2008). Therefore, with the market crisis that was already being faced by TATA motors limited after the acquisition JLR mean that the company may run into a capital sourcing crisis since the company already has pending accrued debt owed to suppliers besides premiums related to pending accruals as a result of the drop in the exchange currency and may be categorized as non-performing loans assets with reduced or tightened debt due date and other potential lenders may not be in a position to advance capital to this firm since the new provision of lending framework rolled by reserve bank of china will prohibit them going against the framework stipulated
References
Kumari, S. M., & Nagarajan, I. (2015). Performance Appraisal of Automobile Industry–A Comparative Case Study Of Ashok Leyland Ltd And Tata Motors Ltd. Shanlax International Journal of Commerce, 3(1), 92-104.
Kohnert, D. (2021). The socio-economic impact of Brexit on India, Pakistan, and Sri Lanka in times of Corona. Pakistan and Sri Lanka in Times of Corona (July 16, 2021).
Lea, R. (2019). The UK’s slowing economy: facing headwinds. Arbuthnot Banking Group, 18.
Pathak, A. A. (2016). Tata Motors’ successful cross-border acquisition of Jaguar Land Rover: key take-aways. Strategic Direction.
Rajakumar, J. D. (2008). Studies of corporate financing and investment behavior in India: A survey. The ICFAI University Journal of Applied Finance, 14(12), 5-29.
Wen, F., Min, F., Zhang, Y. J., & Yang, C. (2019). Crude oil price shocks, monetary policy, and China’s economy. International Journal of Finance & Economics, 24(2), 812-827.
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