A leveraged gilded age

Business Standard deserves to be applauded for putting out this story on corporate leverage in India. This is a story on the debt of India’s private non-financial corporate sector. Here are some key points from the report:

Since 2003-04, Indian companies’ outstanding debt has increased at a compound annual growth rate (CAGR) of 24.8 per cent, more than double the 11.4 per cent rate for India’s public debt during the period.

The outstanding corporate debt is now equivalent to over a third of India’s GDP (34 per cent in 2013-14), up from 14.8 per cent in 2003-04. As a ratio of revenues, India Inc’s combined debt was equivalent to 57 per cent of revenues last financial year, up from 37.3 per cent in 2003-04.

Based on the combined figures of India’s top 1,000 listed non-financial companies by revenues in each of the past 11 years since 2003-04 — these companies accounted for an average 95 per cent of revenues and assets of all listed non-financial ones — shows the combined debt of these firms jumped nearly 10 times in the past decade. It stood at Rs 35.6 lakh crore at the end of 2013-14, compared with Rs 3.9 lakh crore at the end of 2003-04.

Towards the end of the article, there is a conclusion attributed to Dhananjay Sinha, Head of Institutional Research, Emkay Global Financial Services. He says the following:

“Not all corporate debt is due to growth or for funding PPP projects. In the past few years, many companies have borrowed only to make up for losses in their operations or to fund working capital,” says Dhananjay Sinha, head of institutional research, Emkay Global Financial Services.

This has made corporate indebtedness crucial to growth revival. In most sectors, companies now hold the key to capex revival but their hands are tied by stretched balance sheets. “Unless there is a meaningful deleveraging by India Inc, it will be tough for the government to revive growth cycle,” says Sinha. [Emphasis mine]

While much attention has focused on the shenanigans of the previous UPA government – they were huge, no doubt about it – a free-pass has been given to the Indian corporate sector. I do recall commenting about the extent of India’s external borrowings in my presentations in 2013. That is when the rupee plunged as Indians’ external debt financing requirements balooned. They had borrowed close to USD50.0bn in barely 4.5 years up to 2013 first half, if my memory serves me correct.

For all the borrowing, India’s capital formation – in the private sector too – has been rather poor. In fact, it looks like there has been a good correlation between the rise in the corporate leverage and the rise in the wealth of India’s corporate promoters. I am not saying there is a causation. But, there is a prima facie case for some good research into the application of all this debt. Where did it go?

From a policy-making perspective, it only shows the importance of the Government stepping up to the plate on spending. In that sense, the Indian government got it correct in the budget. Also, it bolsters the case for fiscal spending that my friend made in his email. See my previous post here.

India needs public investment, since the private corporate sector had gorged on debt and does not seem to have much to show for it.


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