The Debt Trap

The Debt Trap

Debt- based leveraged growth is what defeated the West once the bubble burst and demand evaporated. And now with our anti-growth policies since 2008, when the West collapsed, there is no denying that both PSU India and India Inc. is being driven to its knees. Institutional India is also funds- starved and marking time. Subsidies, particularly on fuel, are becoming totally unsustainable.

All of this is coming out of the woodwork, and has become apparent also because the GDP growth rate has halved, and is heading lower to sub 5% per annum levels.

Similar things are happening in China too where the growth has fallen to 7%. This is unsustainable in their populous and totalitarian economy which on the face of it does not tolerate criticism and dissent. But it is widely expected, unless there is an economic upturn brought about soon via massive Government spending. Otherwise social unrest and revolt is likely, particularly in rural areas and amongst traditionally restive sections of their population.

There is, at a minimum, a looming bad- debt driven banking crisis coming up in both of the Asian economies.  And because India and China were expected to help revive the West, it is also bad news internationally.

Not only that, in China the military is putting pressure on the civilian authorities, as it is unwilling to countenance austerity measures. Incursions into Indian territory are part of the PLA’s defiance to newly elevated Messrs Li and Xi who have weighty economic matters on their mind, and may not be in a position to crack down on the insubordination.

But in purely economic terms, what happens to businesses that are no longer able to grow at a healthy pace? They start feeling the pressure of the debt on their books assumed at a time and with the belief that it could be amortised from the future dynamism of the enterprise. This is true of small business of course, and the logic is that they are not in a position to sustain a prolonged period of low or nil growth, and their comparatively high expenses and debt pushes them under.

But today it is the big boys in India in the same predicament. Vijay Mallya’s flagship United Spirits is gone from his control. His airline Kingfisher Airlines is grounded under a mountain of debt. Other entities in the group too are under threat. And this in a cash rich liquor-sells-itself business, where we can regard every other diversification as essentially funded by the core competence

Once mighty Bharti, Vodafone, Reliance Communications, the one, two and three in the telecom space, are all reeling under thousands of crores of debt. The debt was taken on to build spectrum, subscribers and markets, but the yield per customer is down, and the expenses to maintain bandwidth and market share are relentless. The debt is eating away at what little profit there is.

The story is repeated in other major industries such as steel, automobiles, construction, all very worried about their debt burdens in the absence of growth. Unloading equity too is not easy when one is not doing well. Witness the Jet-Etihad deal that is still under pressure till the Government of India agrees to all the fine print.   

With the rupee falling and inflation climbing at an alarming pace mainly on the back of fuel imports and transportation costs, even tomatoes have risen to Rs. 100 a kilogram in retail markets.

People are operating with their backs to the wall, and the only remedy is to kick- start the economic growth afresh.

The lead in this should be the Government’s, but it is busy trying to garner investments on the strength of its words in the West. In the Great Depression of the 1930s in the US, and the floods and famines that periodically overtook Princely India, it was public works that helped people through their hardships. But there is no massive infrastructure projects being undertaken by the Government of India today. There is no Hoover Dam. Instead, there is a vote-seeking Welfare.

There is no one telling us that all we need to fear is fear itself. We are on our own because our Government is thinking only about how to be re-elected. And how to get so many judicially tainted but useful candidates to pass muster with the Election Commission given recent Supreme Court strictures.

Worse may follow unless something is done to stimulate the economy. Companies may have to change hands under distressed conditions. There may be spectacular bankruptcies. Insurance companies may fail to pay out. Managements may run away with company money. Commitments may be broken.

An economy cannot run itself without the Government that oversees it taking responsibility for its well-being, particularly when it has so many controls in place. The economy can find its path for itself according to market principles quite well in laisser- faire conditions.

But India is one of the most regulated business environments in the world, with bureaucracy, corruption, red-tape, restrictions and Government oversight on most aspects.  One or the other must change; either, as Mr. Narendra Modi says, Government must get out of the business area and let it fend for itself, or it must do everything in its power to help business grow.

(877 words)

July 14^th, 2013

Gautam Mukherjee