Indian business culture never ceases to amaze a researcher. The past three years, have clearly shown the limited vision under which most segments of the corporate sector operate. While their remarkable ignorance of historical facts is flabbergasting, their proclivity to make the same set of mistakes with remarkable frequency needs to be marvelled as it is a path that is, to be polite, equivalent of financial suicide or at best a high stakes gamble.
It has been reported out that Indian companies, especially the leveraged ones, are once again contemplating foreign currency borrowings - in US Dollars. In normal times, this should have been thought of as a smart move that would reduce the cost of capital to the companies. But, these are hardly normal times; instead, every important indicator seems to indicate the eerily similar historical parallels with the deflationary times of the 1930s and Japan after the bursting of its bubble. The fact that the era of debt deleveraging has not even started in earnest on a large scale in the Industrialised world has largely been missed by the Indian business world. Two important events in present Europe provide a preview of what may be in store in large parts of the world. These include the story of Greece where pharmacies are running dry or as in Italy where the Mafia is the biggest business - and expanding at the fastest rate.
Indian companies have nearly US$5.3 billion of convertible debt, most of it assumed in 2007 and early 2008. Apart from this, over the past two years companies assumed nearly US$20 billion of other debt, mostly denominated in foreign currencies (at a time when the Rupee was about 44-46 – seems like a replay of Thailand c.1997). A list of some of the more indebted companies is provided below. Add to this the estimated debt of nearly Rs.100,000 crores of unlisted real estate companies and, a sprinkling of nearly Rs.400,000 crores to the power sector as well as Rs.80,000 crores due from the Airlines sector and we get the magnitude of the problem at hand. RBI Statistics indicate that the total outstanding credit in India is Rs.66 lakh crores.
| Name of Company | Estimated Amount of Debt (in Rs.Crores) |
| RCOM | Rs.33,660 |
| DLF | Rs.23,000 |
| GMR | Rs.22,000 |
| Adani Power | Rs.38,000 ($7.5 bn convertible bonds) |
| Aban Offshore | Rs.16,000 |
| Suzlon | Rs.13,300 |
| Lanco Infratech | Rs.16,000 |
| JSW Energy | Rs.10,000 |
Source: Compiled from various newspaper articles
The above debt spiral comes at a particularly inopportune time. A recent CRISIL report pointed out that the debt servicing ability of the Indian corporate sector was at its lowest point in five years and corporate earnings are expected to post their biggest drop since at least 2008. The smarter cash rich companies like Infosys have issued profit warnings for the next year, though only about 2-3 months back they were claiming that the present problems in Eurozone do not affect them.
The above list itself would not have been scary, but for the fact that even in small towns the borrowing binge has reached new highs. One interesting information that a businessman disclosed is that in a small town like Bhimavarm in Andhra Pradesh (Population: 1,50,000), the IDBI Bank has lent about Rs.2000 crores. This is unverified information, but if this is the volume of money lent by a small bank like IDBI is indicative of a trend, one can imagine the amount of debt issued by other banks. One wonders the end-use of the money.
One wonders how the Indian companies expect to ride out the present debt storm. This time it is more interesting as none of them seem to believe that a long-structural downturn is due. Instead, as during the 2008 crisis, a lot of them have started announcing new plans: invariably all of them seem to be based on assuming new debt. One Hyderabad based highly leveraged real estate and infrastructure company has announced new plans to enter the water business. This may be nothing more than an audacious attempt to play to the stock market investors, but nevertheless indicative of their business culture. I believe, there are three ways by which Indian companies can come out of the debt that they have assumed. Historically these include, (a) default, (b) convince the government to bail them out either through the banks (which are mostly owned by the government), or (c) rig their share prices. The easiest option in the present is the third one (rig their share prices). Interestingly, Chart patterns already seem to indicate signs of steady buying.
Over the last decade, Indian businesses have mastered the art of transferring public resources into private hands – a mistake they will rue in the next few decades. In troubled times such as the present, it is but natural that companies clamour for bailouts. Unlike in the US and Eurozone, Indian bailouts are likely through bank loans – which invariably companies will deny is a form of subsidy. After all, the ability of the Indian companies to convince the government to transfer public wealth for the sake of private entities is probably next only to the Chinese. But, unlike the case of China, where the party officials are rather unsophisticated in siphoning off public wealth to their kith and kin, Indian companies are far more sophisticated. In 2007, a visiting Chinese businessman mentioned that half his family members are in public service and the other are in business. These businesses include water, construction, consumer durables and banking, while his mother-in-law was a big shot in the Communist party.
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