Only Govt can revive economy

From the way the Government is holding itself up in the face of a series of setbacks --- the assembly elections, the run-up to the general elections, and disappointing growth indicators --- it is possible to imagine three public personas operating within its corridors.

One prefers the prudence of silence, either because it has nothing to say and prefers not to mention it or because it awaits orders from the central command on what not to say: this constitutes the predominant type.

Then there are hardy and hyperventilating spin doctors sent to the battlefields of television studios to face at times moderators who play judge, jury and hangman, addressing a stupefied public eager for a quick and decisive verdict rather than nuanced arguments.

The last is the lonely type on a craggy hill addressing a small gathering representing the modern economy and the world beyond. This persona is embodied primarily by Finance Minister P. Chidambaram. Not only is he the most articulate with forceful views, he also has that quality missing in most others: a consistent optimism founded on a solid bed of obduracy, a refusal not just to be cowed down by depressing reality (in his case not politics but the economy) but a determination to reverse it. The economy, he insists, has nowhere else to go but up.

The Finance Minister exhorts banks to lend more, then to watch out for NPAs. He recently spoke of implementing the Financial Sector Legislative Reforms Commission’s nostrums on financial regulation which includes a review of the RBI’s powers. Out in Mumbai, the youthful-looking RBI Governor Raghuram Rajan also lets his forceful personality exude the confidence of change round the corner; of a “yes-we-can” feeling that captivates even when he stays in the mould of previous Governors, with eyes firmly on prices.

But what have they got to say on reckless borrowings by India Inc during the good times? That, perhaps, is central to the mess we find ourselves in.

India’s modern economy is in a peculiar bind; it is gripped by inflation and falling investment, and low employment. To expect consumer spending to revive the economy is to add to inflationary expectations. Investments have to pick up but the private sector is not keen. And here lies the catch.

The corporate sector is burdened with high debt and such enterprises are often in no mood to plan ahead for investments.

In its report, House of Debt (August 2012), Credit Suisse studied the debt profile of 10 major corporate groups involved in infrastructure such as power and found alarming levels of debt. In the five years to 2012, borrowings had increased five times from Rs 99,300 crore to Rs 5,33,500 crore.

If that was not bad enough, in FY2013, that level of debt increased. When it revisited the issue, Credit Suisse found borrowing levels of the concerned groups up 15 per cent from the 2012 levels.

House of Debt — Revisited suggested that augmented debt levels put profitability and, more alarmingly, debt servicing ratios, under pressure. Higher debt levels also outpaced capital expenditure which indicates lower levels of fresh assets.

So what will the high-flyers in India Inc saddled with such debt burdens do in a situation of high inflation and low investment confidence that is compounded by depressing output indicators?

Highly indebted firms will want to reduce their debt, their leveraged positions. In a conversation with Business Line , Suneet K. Maheshwari, MD and CEO, L&T Infrastructure Finance, offered some insights into how highly leveraged firms got to be what they were and what they intended doing about it.

Till the slowdown began, firms were over-confident. “People planned on the premise of rapid growth. So they borrowed on projections of good cash flows at 7.5 per cent GDP. When that did not materialise, “cash flows tripped and came down”. High debt followed.

Maheswari thinks, “Industrial firms are now unwinding their excessively leveraged positions.” In its 2012 report, Credit Suisse also found groups under its review trying to reduce their debt burden by asset sales. But it was uncertain of the outcome: since most “domestic infra developers are already over-geared demand for these assets (cement, power plants) may be limited”.

If firms are not keen or are unable to increase their capex, can’t banks come to their rescue? After all, both the RBI and the Finance Minister want them to lend more. Banks did have a five-year run of an annual CAGR growth in loans of 20 per cent. But that came with a heavy price. As Credit Suisse’s study of 2012 showed, growth was in large part driven by “select few corporate groups”. The scorching CAGR of 40 per cent in borrowings between 2007 and 2012 of these select corporates equated 13 per cent of total bank loans.

What we are talking of here is not just a rise in NPAs that some would say is on account of priority sector lending and the like. Credit Suisse points to a “concentration risk” in terms of which “Indian banks rank higher than most of their Asian or BRIC counterparts”.

While firms are busy figuring out how to de-leverage — that is, minimise their debt — banks must figure out how to recover those loans now washed down a manhole. Neither the producer — the driver of growth — nor the banker will have the time to think about productive investments.

Under the circumstances, which other sector can help lift investments out of the trough? None other than the Government itself. The issue now is not controlling government spending per se, but making sure that it spends productively. The spark has to be lit by the Government while the private sector atones, as it were, for the sins of excess optimism in its salad days.