A common mistake that almost all of us make is, we mistake a bull market for our own brilliance. India's decade old boom is one such typical story. Over the past two years, we had deluded ourselves to think that we have made a dramatic and radical departure from the past. We even for a term for the low growth period: Hindu rate of growth. It is difficult to understand the term. We have convinced ourselves that we are in a completely different boat from more indebted countries and consumers in USA and Europe. Indeed, we are in a completely different from our US and European counterparts. Our boat leaks more than the others.
India is probably as highly indebted as any of the other countries that are presently in deep trouble. It is just that we selectively disclose our debts. We are pure lucky that the world is more concerned with the US and European Debt crisis for the simple reason that they are more important to the world economy than India. The chart below - Debt to GDP ratio of different indebted countries (courtesy: tradingeconomics.com) indicates that it is time that we grow more concerned about our own debt. One crucial difference between all the countries mentioned in the list have a current account surplus and also have large foreign exchange reserves that are their own. Unlike the case of India, they may not melt at the sign of slightest trouble.
Figure: Debt to GDP Ratio of major indebted Economies
One should not be positively inclined or complacent on viewing the above chart. While the debt is likely to remain constant or even increase and rarely decrease, GDP is bound to vary substantially and will depend on economic conditions within India and Outside. A decline in GDP, as we can expect in the next few years, will make the chart worse.
We often believe that the rise in GDP is due the India's ability to decipher to secrets for economic growth all at once. Unfortunately that is not the case. The reasons for the rise in GDP are due to (a) Global boom, (b) Massive increase in debt induced growth along with other factors such as large increase in prices, asset inflation, etc. The jump in salaries due to the Central Pay commission induced increase in salaries should not be forgotten. The jump in commodities substantially benefited India. Nearly 35 percent of Indian companies that form part of the BSE Sensex are commodity companies, rising prices invariably helps them. Add to this their ability to fix prices and we easily understand the dynamics of rising prices.
An important reason for the illusion of the boom and delusions of India's economic might arise due to the exponentially large borrowings by our companies and individuals. It needed a drought to forcefully attention to that. As a nation, we seem to have convinced ourselves that we can borrow our way to prosperity.
An interesting chart clearly highlights the borrowing binge that the largest groups have indulged over a short span of five years. It would be interesting to see the pile up in debt by all the listed companies. Since that is difficult,we draw attention to one of our previous post in which we had mentioned about the increase in bank credit.
Figure 2: Rise in debt of 10 heavily indebted business groups
Interestingly, the above statistics seem to indicate that the law of diminishing returns may be catching up. If diminishing returns are not having their effect then it is likely that money is being carted out of the country on a very large scale.
The consequences of this borrowing binge seems to be playing out in the present. A large component of this money seems to have flown into speculation in land, followed by construction - again with a speculative underpinning rather than anything else. The best evidence can be garnered from the 'new' almost ghost townships that have come up in many cities - Kolkata's almost empty new city is evidence of the consequences of speculating on somebody's speculative tendencies. And, we never fail to poke fun at the Chinese who have 20 times more number of ghost towns.
As a nation we seem to have gained cutting-edge knowledge about the mechanics of recycling debt without actually infuriating the global bond markets. We will never infuriate the local bond markets because the largest player in Indian economy is the government. Historically, it does not pay to anger the biggest gorilla in the market. Moreover, the most profitable business are those that have mastered transfer of public resources. Incidentally, they are also the most indebted business. Ever wondered why our companies prefer to over-leverage themselves? The answer to that question is that banks are mostly publicly owned. CRISIL, the not so accurate rating agency (just like its owner, S&P) estimates that bad debts will reach about Rs.2,00,000 crores by the end of this financial year (ending March 2013) . However, if the banks were less economic with the truth, that figure could easily be 2-4 times higher. This excludes the thousands of crores that have already been restructured.
This is not to claim that our banks will collapse. They will be bailed out by the government. But, we have to thank the RBI for that as their experience from 1947 to 1969 taught that. Unfortunately, in the post-liberalisation era, RBI cannot force the banks to reduce lending. So in order to hide their non-performing assets, the banks are increasing up lending. In the process they have end up increasing systemic risks as they 13% of their loans are to the largest 10 industrial groups. The banks seem to forget that their ability to raise money was their ability to attract money from overseas bond markets. That may be coming to an end as the bull market in US Treasuries means that the largest banks will find it more profitable to invest their money in US government bonds and ride the rising in prices than take risks. This is already happening.
Ironically, our consumers from top to bottom, are no different from our over-leveraged corporate entities. For decades, the richest have been able to borrow. Since, 2005 we have added the poorest as the new consumers of ever larger quantum of debt. At last they have deciphered the key to recycling ever larger quantities of debt. SKS Micro proudly claims that they lent more than Rs.5000 crores of debt to the poor in AP (before the government cracked the whip on their 'lend-beat-or-kill-and-collect-insurance business model collapsed'). Add the lending by rest of the MFIs and we have the larger picture.
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