What will 2012 be like for the Indian economy? Will it be better? Will it be worse? As it goes in Doris Day’s famous song Que Sera Sera, whatever will be, will be.
Indeed, the future’s not ours to see: Who would think, for example, that India’s sovereign debt rating might actually be promoted to investment grade at a time when voracious government borrowings threaten macroeconomic instability?
Still, destiny never prevented an economist from drawing future scenarios. So it seems, amongst other things, that several parts of the economy will devote 2012 to deleveraging as they digest the debt accumulated in better times.
It isn’t just the government that is hugely pressured as tax revenues fall, markets remain unsupportive of divestment, rising oil and fertilizer prices plus a much-depreciated currency escalate the subsidy bill, raised borrowing costs enlarge the mountain of public debt some more and foreign investors are yet to signal substantial interest in rupee-denominated debt that an anxious government is trying to make more and more attractive by the day.
Bad debts are flagged as the biggest challenge to the banking system too, according to the just-released Financial Stability Report of the Reserve Bank of India; it reports that nonperforming assets (NPAs) of banks have risen sharply. A Mint analysis showed NPAs rose 33% year-on-year for 36 listed banks, with the pace accelerating in the last quarter. Take that as gaining momentum ahead as economic growth, with which bad loans are closely correlated, slows further in the forthcoming quarter or two. So even as stress tests show banks resilient to severe NPA shocks, restructuring assets and providing further cushion against worsening assets will be a priority for banks in 2012.
Debt- stress is building up in the corporate sector as well. Many firms are highly leveraged; debt-equity ratios are over 2 for nearly a third of the top 100 borrower firms, which account for 70 percent of outstanding corporate debt, according to a Barclays’ report. Troubled loans aggregating Rs473 billion were referred to the corporate debt restructuring mechanism since April 2011, a five-fold increase over the corresponding period in 2010-11. Rupee depreciation - nearly 17 percent – has compounded the problem. Nearly $11.4 billion of dollar-denominated debt becomes due for repayment by domestic firms according to Bloomberg, while foreign loans, including debt-rollovers, are costlier with shrinking availability from liquidity-squeezed foreign banks; this hurts domestic firms, which source at least a third of their financing from abroad. Overall external debt obligations aggregate $23 billion in 2012-13; in particular, redemption of FCCBs or foreign-currency denominated bonds - estimated at $5.3 billion with redemption value of $7.2 billion – will impact issuing firms hard due to depressed stock prices, weaker currency and low refinancing possibilities.
Ironically, it is more debt that appears to be coming to the rescue. The New Year might well begin with government borrowing from public banks by pledging shares and land to reduce excess bond supplies. So even as past debt is worked out from the system, higher bond subscriptions by foreign investors and more foreign currency deposits by nonresident Indians will further increase external liabilities in 2012.
Renu Kohli is a New Delhi-based macroeconomist; she is a former staff member of the International Monetary Fund and Reserve Bank of India.