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In poor company

RBI’s warning on corporate debt must be heeded. Government must step up efforts to attract foreign direct investment

By: Express News Service |
Updated: June 27, 2015 12:00:03 am
 corporate debt, RBI, RBI corporate debt, foreign direct investment, nda government, economic review, indian express editorial Policymakers are worried because a median debt-equity ratio of 70 per cent of Indian firms is one of the highest in the world

Late last year, the government’s midterm economic review said that India has been afflicted by what might be characterised as a “balance sheet syndrome with Indian characteristics”. What the government’s chief economic advisor tried to flag then were the dangers of overextended balance sheets of Indian corporations, resembling, in some ways, Japan of the past. Over six months later, the RBI this week sounded a warning on rising bad loans and interest coverage ratio, or their ability to make interest payments on outstanding debt.

Policymakers are worried because a median debt-equity ratio of 70 per cent of Indian firms is one of the highest in the world — inflicting collateral damage on domestic banks, whose bad loans and restructured assets are now well over 10 per cent of total assets. That hinders the prospect of further interest rate cuts by banks, despite low inflation and loan demand, as lenders would prefer to set aside capital to provide against bad loans while corporations, with their bloated balance sheets, may not be in a position to take advantage of lower rates.

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This comes at a time when, judged by conventional macroeconomic parameters, there is a measure of stability, unlike in the past, when large government deficits spilled over into current account deficits, stoking inflation. The CAD has narrowed after peaking in mid-2013 and is projected to be at 1.5 per cent in FY16, while the fiscal deficit has been pegged lower at 3.9 per cent. Retail inflation too has been low. But these metrics alone are not an indicator that problems have been sorted out, as it also has to do with underspending by the government. For their part, corporations are in no position to kickstart fresh investment, given that they are also undergoing an austerity programme of sorts, with little growth in toplines over the last couple of years while struggling to maintain margins.

In such a scenario, hopes of a major economic rebound are receding. That’s why it is important for the government to focus more on attracting foreign investment, especially in the manufacturing sector. There are encouraging signs on this front with the Foxconn Technology Group, which has a marquee list of clients such as Apple, announcing plans to set up a manufacturing base in India with a substantial investment commitment. That’s what the government needs to build on, by working closely with states and creating an enabling environment for industry and entrepreneurs. And by walking the talk on stable policies.

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