Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / The corporate borrowing binge has put India at risk
BackBack

The corporate borrowing binge has put India at risk

India's internal and external debt vulnerabilities are a direct product of the cozy relationship between big business and the ruling establishment

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

A major crisis tends to expose the fault lines of a society, and India’s current economic crisis is no exception. The economic downturn has exposed the underbelly of Indian capitalism by putting the spotlight on the debt-fuelled excesses of Indian firms during the boom years, and their deep political ties that allowed them to get away with such excesses.

Unlike say the economic crisis of 1991, when sovereign debt accounted for a major chunk of India’s external debt, this time it is corporate debt that is the major contributor to India’s indebtedness. While external sovereign debt has shrunk to one-fifth of the total external debt over the past two decades, corporate debt has boomed. External commercial borrowings accounted for nearly 31% of the total external debt at the end of fiscal 2013, according to Reserve Bank of India (RBI) data. Worse, there has been a sharp spike in short-term debt. Short-term debt was only one-tenth of external debt in March 1991, and rose to 16% in 2007. It has risen by nearly 9 percentage points since 2007 to account for nearly one-fourth of India’s external debt now. Including long-term debt that is up for maturity during the current fiscal, the total amount of short-term debt (by residual maturity) is 44% of the total external debt. This lies at the root of India’s external vulnerability and the rupee’s weakness.

Aided by relaxation of foreign borrowing limits, Indian corporations borrowed beyond their means during the boom years taking advantage of the interest differential between domestic and foreign lending costs. Firms were permitted to access up to $500 million of external commercial borrowings under the “automatic approval" route every year, and the limit was raised to $750 million. The chickens have come home to roost now. The move to liberalize external borrowing norms was supposed to end the discretionary power of officials. But it seems to have fuelled corporate profligacy. Many companies did not adhere to proper hedging norms. Lobbying by corporations ensured that borrowing norms remained relaxed despite the alarming rise in short-term debt, exacerbating the crisis. While this newspaper believes in the unfettered flow of goods and services between nations, capital flows deserve to be treated more cautiously.

The worst is yet to come as some of these companies are now trying to cajole their domestic lenders to bail them out. So far, domestic corporate debt still seems manageable in India despite rising stress. But as an August report by Credit Suisse AG points out, even this can change soon with over-leveraged large corporate groups emerging as a threat to bank asset quality. The outstanding borrowings of just 10 large corporate groups have registered a six-fold increase in the last six years to over Rs6.3 trillion or $100 billion even as profitability and interest coverage ratios have fallen. These firms also have large foreign borrowings. It does not appear to be a coincidence that most of these firms are politically connected and operate in sectors such as power and infrastructure, in which links with politicians are often an essential ingredient of growth.

Both India’s internal and external debt vulnerabilities are therefore a direct product of the cozy relationship between big business and the ruling establishment. In one case, policy capture by big businesses led policymakers to throw caution to the winds in liberalizing capital flows. In the case of domestic debt, a cruder kind of cronyism has been at play. The effervescent lending in the boom years owes partly to the pressure from New Delhi to fund certain sectors and firms.

Companies favoured by the finance ministry have funded their debt-fuelled fantasies thanks to the benevolence of state-owned banks, which now face a growing pile of non-performing and restructured assets.

The credibility of Indian capitalism has suffered in the wake of the scandals surrounding the allocation of natural resources such as telecom and spectrum in the past few years. The contribution of the corporate-political nexus to the growing systemic risks facing the Indian economy further undermines its credibility. Despite the stellar role played by firms in competitive or knowledge-intensive industries such as information technology, automobiles, drug discovery and consumer goods, businesses struggle to find open support from politicians today. The unsavoury aspects of Indian capitalism seem to have tainted even legitimate business activities.

To be sure, the ruling UPA government cannot escape blame as it directly oversaw the mess. It is because it succumbed to the pulls and pressures of corporate lobbies that it now seeks redemption behind the façade of populist policies, worsening the economic crisis. Still, it takes two hands to clap, and the corporate establishment had no qualms in playing second fiddle as long as the music played.

A regeneration of the Indian economy is possible only if both corporations and political parties bury their short-term interests to frame a more transparent relationship, and invest in building credible institutions that govern business-state ties.

Are Indian companies paying the price of a debt-fuelled binge? Tell us at views@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 05 Sep 2013, 07:49 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App