India Inc close to beating sovereign in debt

India Inc is gradually displacing the sovereign as the country’s top borrower. In the last 10 years, India Inc’s outstanding debt has grown at a compounded annual rate (CAGR) of 24.8%, at more than double the pace of growth in the country’s public debt that grew at a CAGR of 11.4% during the period. And on three occasions in the last seven years, India Inc’s incremental borrowings were higher than that of the Union government.

The result is that corporate India is now more indebted than all the state governments combined. While the Union government remains the single biggest borrower, its lead over corporates is shrinking rapidly. Ten years ago, Government of India’s outstanding liabilities were five times that of all corporate debt (including non-debt liabilities but excluding net worth). Now the former’s balance outstanding liabilities are just 1.6 times of corporate debt. (See chart)

In all public debt grew much slower than the gross domestic product at current prices in the last decade, resulting in a steady decline in the public debt-to GDP ratio. At 71.6%, public debt is close to its lowest level since late 1990s, while the Union government’s debt to GDP ratio declined to a three-decade low of 55.2% of GDP in FY14. It was as high as 71.5% of GDP in FY05. (See chart)

In comparison, corporate debt grew much faster resulting in a virtual explosion in corporate debt to GDP ratio. The outstanding corporate debt is now equivalent to over a third of India’s GDP (34% in FY14) up from 14.8% in FY04. As a ratio of their revenues, India Inc’s combined debt was equivalent to 57% of their revenues last fiscal up from 37.3% in FY04.

In a sense, India Inc displaced the sovereign from the capital market as the combined public and corporate debt hovered between 99-105% of GDP during the period. Experts attribute it to withdrawal of state from increasing number of infrastructure sectors in favour of private sector participation through public-private partnership projects.

The analysis is based on the combined figures of the country’s top 1,000 listed non-financial companies ranked according to their revenues in each of the last 11 years beginning FY04. The companies in the sample on average accounted for 95% of the revenues and assets of all listed non-financial companies during the period.

The combined debt of India’s top 1,000 companies ranked by revenues jumped nearly 10 times in the last decade to Rs 35.6 lakh crore at the end of FY14 from Rs 3.9 lakh crore at the end of FY04. The Union government’s outstanding liabilities during the period just tripled to Rs 57.8 lakh crore in FY14 from Rs 18.7 lakh crore in FY04. During the same period, combined liabilities of the state government jumped 2.7 times to Rs 24.7 lakh crore at the end of FY14 from Rs 9.2 lakh crore in FY04.The combined public debt is lower as the Union government lends to state governments which gets cancelled out in the aggregate figure.

Experts attribute it to corporate sector’s entry into capital intensive sectors such as highways, power, airports, ports & urban infrastructure besides faster growth by India Inc. “This is to be expected when corporates are participating in infrastructure in a big way through PPP projects. Debt is a large component of the capital cost of these projects leading to growth in corporate debt,” says Devendra Pant, economist and head public finance at India Ratings.

Besides, corporates went in for large scale expansion in traditional capital intensive sectors such as metals & mining, construction, textile and automobiles among others which were generously funded through debt. “A higher debt is an inevitable part of faster growth and capex and that’s what the numbers shows,” adds Pant.

Others talk about the supply side. “Globally there is a glut of liquidity thanks to quantitative easing by the world’s top central banks. This has made its easy and cheaper for corporates to access foreign capital and companies have raised large capital through external commercial borrowings (ECB) route in the last decade,” says N R Bhanumurthy, Professor at National Institute of Public Finance and Policy.

Others also point fingers at the India Inc’s poor financial performance post the 2008 global financial crisis. “Not all corporate debt is due to growth or to fund PPP projects. In the last few years, many companies borrowed just to make- p for losses in their operations or fund working capital,” says Dhananjay Sinha, head institutional research at Emkay Global Financial Services.

This has made corporate indebtedness crucial to growth revival. In most sectors, corporates now hold the key to capex revival but their hands are tied by a stretched balance sheet. “Unless there is a meaningful deleveraging by India Inc it would be tough for the government to revive growth cycle,” says Sinha.