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Budget 2015 - will it provide pragmatic solutions?

Labourers waiting for their turn to get employment as a daily wager. (PTI photo)

A Credit Suisse Report on top ten Indian corporate groups (Adani, Essar, GMR, GVK, JSW, JPA, Lanco, Reliance ADA, Vedanta and Videocon) revealed the extent of damage to the Indian Banking System, andby extension to Indian economy, caused by the UPA Government. That was in 2012.

  • According to this Report of the global bank:
  • Aggregate debt of these 10 select corporate groups has jumped 5 times in the past five years
  • This equated to 13 per cent of total bank loans in India in 2012
  • This approximated to 98 per cent of our banking system's net worth
  • Thanks to the economic slowdown four out of this 10 did not earn enough even as early as in 2012 to pay their interest.

A repeat exercise conducted in 2013 by the same Bank revealed that the financial position of these 10 corporate groups had in fact worsened as compared to 2012 - overall debt of these groups increased in 2013; the debt increase was far higher than the concomitant asset increase and finally earnings of a majority of these 10 groups was not adequate to even pay interest costs.

Importantly, 40-70 per cent of their collective debt was denominated in foreign currency. Naturally, Rupee depreciation since then increased their liabilities in Rupee terms. This in turn has made their already precarious state of affairs, grave.

The second Credit Suisse Report of 2013 had estimated that the aggregate debt of these groups to be approximately Rs 6.31 lakh crore as on March 31, 2013. And if you thought that only these groups are the victims of economic mismanagement of UPA, hang on. At best, the financial position of these 10 groups is akin to the trailer of a horror movie; the main picture is yet to come.

It may be noted that the gross bank credit as at 30th September 2014 by schedule bank aggregates to approximately Rs 60 lakh crore. [Source: RBI Monthly Bulletin, November 2014]. Of this, it is estimated that approximately a staggering amount of Rs 12-15 lakh crore are stressed, non-performing, restructured or have slipped back even after being restructured.

And I could be conservative in my estimates.

The Mess left behind by UPA
Meanwhile, another Credit Suisse Report of November 2012 had brought about the overall state of affairs of Indian corporates. According to a sample survey of about 3700 companies [with an aggregate debt of approximately Rs 21 Lac Crores], earning of 28 per cent of the companies surveyed was insufficient to cover their interest payment.

Interestingly, 54 per cent of the companies surveyed did not earn enough to cover their interest costs in four past quarters of the previous eight. The report further estimates that 12-25 per cent of the small and medium enterprises were under enormous financial stress. Alarmingly, the report concludes that the banks have been behind the curve on declaring such delinquent loans as non-performing and providing for the same in their accounts. Remember all this was in 2012.

This was the legacy inherited by the incumbent Government from the UPA. But is there a debate on the issue within our media? And all of us want the Finance Minister to come out with a magic pill in his Budget that instantly revives our economy. It is this superfluous nature of economic debate - where hype substitutes logic – that has prevented solutions to our economic recovery.

If this was the position in 2011-2012 then let us examine the current position. The RBI has in September 2014 brought out a fairly comprehensive analysis of the performance of 2,854 listed non-government non-finance companies for the year 2013-2014.

Accordingly, aggregate sales growth of these corporates declined in 2013-2014 as did the net profit margins when compared to 2012-2013.

What is galling is that the net profit growth of these 2,854 companies was -16.8 per cent for 2011-2012, -2 per cent for 2012-2013 and -5.1 per cent for 2013-2014. Resultantly, as compared to 2007-2008 when the net profit margins of our corporates were 11 per cent, the corresponding figure for 2013-2014 is a mere 5.8 per cent – a near 50 per cent drop in a span of six years.

What must be worrying the mandarins in North Block is that the financial performance of small companies has significantly deteriorated as seen from the contraction of sales and net profit in 2013-2014. Quarterly results of some 2,291 companies shockingly demonstrated an overall declining trend in sales growth during the previous eight quarters.

In short, the top line of our corporates are stagnating or at best moderating, costs are disproportionately increasing while the bottom line is on a consequential definite downward spiral. That in turn has dynamited the Balance Sheet of our corporates. No wonder corporates find it difficult to pay interest not to speak of repayments.

Interestingly, our stock markets are at an all-time high even as our corporate financial performance is dismal.

All these raise some disturbing questions. Are Indian stock markets and corporate performance inversely related? Is investment into our stock markets solely dependent on future performance? If so, have investors discounted the past? Or are investors betting on NDA to deliver something spectacular?

Whatever be it the mess behind by the UPA Government is indeed frightening.

Needed a pragmatic Solution
Mess or no mess, Budget 2015 has to provide solutions to this conundrum. What is at stake is not merely fortunes of our corporates sector, but our banks and economy. Importantly, when we are yet to identify the problem where is the question of a solution? Seen in this context, the clamour for interest cuts is akin to applying pain balm when chemotherapy is the need of the hour.

Hence, first the diagnosis. At the height of the global economic boom, Indian economy too witnessed a spectacular surge. Foolishly those at the helm of affairs then mistook it for their economic policy, which as we all realise now was non-existent. That nevertheless gave a false sense of security to our corporates to borrow heavily from banks.

Remember a liberalised economy since 1991 was awaiting this global boom for over a decade. This in turn triggered an investment boom in India. Suddenly corporates borrowed for setting ports, airports, roads, power plants water treatments and others projects. And they borrowed gargantuan sums on a simple hypothesis – the global boom of 2003-2008 will indefinitely continue.

But as we all know linearity is a concept alien to life, much less to economics. As the economic crisis struck the US, economic activity shrunk across the globe. And that had a debilitating impact on the Indian economy too. Exports stalled even as imports moderated significantly.

However, global economic crisis was merely one of the several reasons. Several corporates did not have the necessary managerial bandwidth to ensure timely execution of these projects. A lax judiciary and an incompetent bureaucracy ensured project delays and consequent cost overruns.

But there is another dimension to this issue – Corruption. Most of these projects are mired in corruption. I had dealt with the effect of corruption on infrastructure projects in my column titled Indian Economy Comes to a fullstop [Niti Central July 2013]. Corruption – read extortion in many cases – results in costs overruns and thereby overturning the basic economics of the project.

While global economic recovery is beyond the scope of Budget 2015, providing a rehabilitation programme to our corporates – especially those associated with infrastructure projects – is an absolute necessity. Failure of a power company, whatever be the reason, trips the economics of the port nearby as much as a steel company set up on the basis of power generated from such power plants.

In turn, the toll road set on the basis of steel production is bound to be hit as much as a downstream manufacturing company dependent on the steel manufactured. In effect, in macroeconomics everyone is interlinked to everyone else. Failure of every large infrastructure project negatively impacts the fortunes of the lender and economy, one way or the other.

Of late panicky bankers have begun to classify all such borrowers as “wilful defaulters.”

Ostensibly, this is done to save their back. And by labelling a large section of our corporates criminals we are doing no good to our India growth story.

But this is not to say that the guilty should go unpunished. Banks that played ball with most [and continue to play ball with some even today] should not be allowed to claim to have funded a “wilful defaulter” and pass their responsibility. They too must be made accountable.

Naturally Budget 2015 has to come with a programme that differentiates the chalk from cheese; the bad from the ugly. Projects that have failed purely on economic reasons and judicial interventions must be differentiated from those where promoters have been party to the loot [and that includes corruption]. If Budget 2015 remains silent, things will drift further down, possibly to the point of no return. If it takes action on every defaulter and treats them as criminals it would create mayhem and a systemic collapse. Surely, it needs to tread on a new, balanced and pragmatic path.The billion dollar question is, will it?


Last modified on Tuesday, 02 December 2014 12:08