The finance industry is in turmoil. Tax collections have hit stall speed. India’s credit and fiscal crises are joined at the hip.
Consider the $13 billion in past fees that the government is asking from telecom operators. It’s a desperate attempt to squeeze money from an industry in which most players have already vanished or gone bankrupt. The two old firms that are still standing amid intense price competition from newcomer Reliance Jio Infocomm Ltd. will bear the brunt of the recently court-approved demand.
Among them, Vodafone Idea Ltd. has a one-year default probability of 7.5%, according to a Bloomberg risk model. That puts its $14 billion debt within shouting distance of distressed. If Vodafone Idea goes to banks asking to recast its borrowings, something that the company has so far denied doing, lenders will receive a fresh blow.
India’s banks are miserable, and not just because they’ve already piled up $200 billion in bad debt. In at least five ways, New Delhi’s tax kitty, which has grown by just 1.5% so far this fiscal year, the slowest in a decade, is exacerbating lenders’ unease:
The GST came a few months after Modi’s November 2016 ban on 86% of the currency then in circulation. The complicated levy has been an additional source of pain at a time of demand funk in nearly every industry. No surprise that the ratio of nonperforming loans for midsize Indian firms has shot up from 13% at the end of 2015 to 17.5%, compounding the misery for lenders.
Given the linkages between India’s credit and fiscal woes, partial solutions — such as making telecom firms cough up a lot of money suddenly — will only backfire. The twin challenges will have to be faced together.
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