The Tyranny Of Debt
Prosenjit Datta September 2, 2019
India has a debt problem - at every level. The government's official debt to GDP ratio has been rising. If you add the debt it has taken but kept off the balance sheet, the picture gets much worse. A big chunk of the debt now goes into servicing interest payments of the old debt. In a nutshell, the government is in a debt trap. What is worse, its borrowings are crowding out private sector borrowings, pushing up their cost of funds. The finance minister tried to fix this through a proposal that envisaged borrowing in foreign currency denominated bonds. The government has had a rethink after many eminent economists pointed out the dangers, which included exposing itself to foreign currency risk. After some weak attempts at defending the proposal, the finance ministry has quietly put the whole thing on the backburner.
If the Union government has been profligate in its borrowing, the state governments are also not much better. Except for a few, most states borrow to meet the promises made by the party in power. The combined fiscal deficit of the Centre and states is well over 6 per cent. Beyond that are the government-owned arms - most of which are heavily leveraged. So you have state electricity boards, Central and state public sector enterprises and others which are overleveraged.
Corporate India is in an equally bad shape. Except for a few honourable exceptions, company balance sheets show the strains of overleverage and rising interest costs. Small and medium companies are the worst-hit - and many of them are folding under the burden of this leverage. What's more, no one knows exactly how bad the level of actual debt is even with highly respected groups. What shows up in the listed company's balance sheet is only a small part of the debt tale. Quite often, there is promoter-level debt taken through multiple subsidiaries that escape scrutiny. It is only when a promoter or company fails to honour its debt or defaults that the real picture starts coming out. Whole sectors are in deep trouble because of excessive debt - power, roads, telecom and real estate, among others. Even the strongest balance sheets show rising debt. Even a company like Reliance Industries has been piling up debt as it aims for complete domination of the telecom space, though it is now trying to monetise assets to reduce its net debt. Some of the biggest names in the steel sector that thought they were picking up great assets cheaply in the bankruptcy courts are now finding that the decision was probably a tad rash, given the slowdown in steel.
Statistics also show that the Indian households are saving less and borrowing more to fuel their spending spree. During an economic boom, this is not a problem. It becomes one when the economic growth starts sputtering.
Debt is not a bad thing when used judiciously to build assets and grow a business. But if the cost of funds become higher than the value it is creating, it becomes a problem. Our cover story looks at the alarming debt trends in detail.
Meanwhile, the government has been trying its best to revive the sentiments of businessmen and kick-start the sagging economic growth. After a Budget that was praised in public and panned in private, the mandarins in North Block have put together a package to revive sentiment. Will it do the trick? We examine it in detail in the story Fixing the Slowdown.