It was households in the US, it is corporates in India
If the growth collapse in the US was caused by the high leverage of households, in the case of India, it is the high leverage of the corporate sector which is being made worse by the collapsing rupee. The problem is that while, over a period of 5 years, the process of balance sheet repair for US households is all but done, that for the Indian corporate sector has not even begun. And with India Inc in trouble, overall investment levels in the country have collapsed, from a high of 38.1% of GDP in FY08, gross capital formation was down to 35.6% in FY13—the collapse in GDP growth is a direct result of the investment famine. While the government is hopeful that investment levels will pick up once the Cabinet Committee on Investments (CCI) clears the backlog of stuck projects, RBI’s latest Bulletin points to investment levels for the companies it tracks falling by around 21% in FY13 versus that in FY12—and the R2,92,000 crore investment RBI is talking of in FY13 is likely to be dramatically lower in FY14. Based on the likely plans so far, the companies RBI is tracking—based on loans made by banks and ECBs raised—are going to invest R1,62,000 crore. In other words, another R1,30,000 crore of investments need to be made to even match the FY13 number, something RBI says appears non-achievable.
A State-of-the-Nation report by credit rating firm Crisil on Wednesday puts this in perspective. While lowering GDP forecast for FY14 from 5.5% just two months ago to 4.8% now, Crisil has raised its agriculture GDP projection from 3.5% to 4.5% while lowering industrial GDP from 3.5% to a mere 1%—talk about firing on one cylinder. Even more worrying is what Crisil says about the corporate stress of the 2,481 companies it tracks, companies that account for a third of bank credit to the corporate sector. While Crisil’s number crunching suggests the forex stress is far lower than imagined by most, it points to 36% of the companies being vulnerable to two or more stresses—forex, liquidity or demand-stress. If that number doesn’t look so disturbing, Crisil issues a caveat: its sample does not include very stressed big corporate houses like Essar, GMR, and GVK among others.
For that, you have to read Credit Suisse’s House-of-Debt-Revisited that deals with 10 corporate groups whose share of banking loans has doubled to 13% over the past 5 years. These groups not only have a low interest cover, even this is falling—for the 10 groups, the ebit-to-interest ratio fell from 1.6 in FY12 to 1.4 in FY13, the number being as low as 0.6 in the case of the Lanco Group. Since most of these groups have large projects being constructed right now, once they are complete—next year—this will bring a lot of capitalised interest costs on to their balance sheets. In the case of Reliance Power, Credit Suisse projects the interest cover worsening from 2.4x to 0.7x at current profit levels. Given that these firms have around half their debt in forex, the collapsing rupee makes things a lot worse. While higher GDP growth will fix much of this, GDP can’t rise till either consumer/government expenditure or investment rises. Since there is a natural ceiling to that, India Inc’s balance sheet repair can’t take place till companies start selling stressed assets at big discounts. And that won’t happen till banks really squeeze them, something RBI Governor Raghuram Rajan hinted at in his first speech and now needs to deliver on.