INSIGHT: India Economy In Vicious Cycle or Near Collapse

SoDATA (South Data) — Share of loans to cash-poor companies in India more than doubled in five years, as level of bad debt and nearly-bad debt rose, leading to credit crunch. According to an expert, a near-economic collapse, Hindu Extremism and political Fascism are making wealthy Indians the largest group immigrating to Canada — last year 86,000 Indians sought greener pasture there, topping the list.

The expert says a quarter of India’s Corporate debt is bad debt, citing Japanese firm Nikkei’s latest estimates. “Japanese Investors are exiting India”, he says. According to him, there are reasons why the situation is not so good in one of the largest consumer communities in the world:

  1. There has been decline of 50 per cent in commercial lending.
  2. Total Revenue has fallen by 60 per cent in 9MY 2020.
  3. Unemployment is at 45 year high.
  4. Consumer demand has fallen by 20 percent.
  5. Exports, FDI , Industrial Production are all declining.
  6. Indians seeking Political Asylum in OECD countries increase 40 percent.
  7. 12,000 Indians have been deported from Mexico in efforts to reach Texas.

Some analysts say India’s budgeted expenditure has reportedly declined by 60 percent and revenue by 40 percent in 9 months of Fiscal year 2019 2020, an indication of a worsening situation.

“Indian currency is overvalued by at least 40 percent and interest rate and inflation is undervalued by 50 percent,” the expert says. “The only option left to Indian government is massive devaluation, interest rate hike, which will more than double the Debt to GDP ratio which could potentially send the economy in a tailspin”.

In such a situation, “no IMF Package even of Greece scale may be enough to rescue India’s economy”.

His views he says are based on interpolation of cited data, which makes the situation alarming, given that the country’s economy along with those of US and China play significant role in moving the wheels of world economy.

A Nikkei Asian Review report this week said: “With India’s economic growth rate languishing at the 4% level, a slowing economy threatens to tip more at-risk debt over the brink into nonperforming loans. That could fuel a vicious cycle like the one that ravaged Japan in the 1990s after its asset-price bubble burst.”

Last November, the prestigious paper reported the country’s financial sector was stuck in real estate quicksand: “Over 500,000 stalled housing units deepen economic mess for Modi”, it wrote.

India’s former Finance Minister Chidambaram rang an alarm bell in the parliament.

Last week, he tore into Narendra Modi government’s handling of the economy, saying it was “perilously close to a collapse”.

“We are living in denial and we are ignoring two big elephants in the room — one is rising unemployment and the other is fall in consumption. Unemployment rises, consumption falls, the Indian economy becomes poorer and not richer”.

On “November 2, 2013, a very distinguished political leader said and I quote: “Economy is in trouble. The youth wants jobs. Devote more time to the economy, not on petty politics. Please focus on the job at hand. Very wise advice. I can’t do anything better than reading this piece of advice to the Finance Minister”, he noted.

According to the former finance minister, the economy was facing structural problems but Modi government continues to believe they were cyclical in nature. May be not.

THIS WEEK, Nikkei staff writers reported that India’s Auto Expo 2020 this month saw two notable absences, but not because of the new coronavirus. Toyota Motor and Honda Motor skipped the event amid a steep decline in auto sales in what had seemed a promising market.

The industry’s struggles are a symptom of a credit crunch induced by rising levels of bad and nearly bad debt. The amount of debt at listed companies struggling to make interest payments has doubled over the past decade to more than a fifth of the total, a Nikkei analysis finds, pointing to a large mass of potential new nonperforming loans lurking just below the surface.
In turn, public-sector banks’ debt problems — the result of years of careless lending — and a crisis in the shadow-banking sector have narrowed the flow of loans to consumers and businesses, putting downward pressure on a slowing economy.

Nearly 300 auto dealerships have closed in India since 2018, according to the Federation of Automobile Dealers Associations. “Customers are demanding big discounts, but we can’t give them,” said a salesperson at a Honda dealership in Delhi.

Nonperforming loans accounted for 8.9% of overall bank lending in India last year. The ratio has risen more than 5 percentage points in five years — the largest increase among the Group of 20 major economies, according to the International Monetary Fund (IMF).

Banks and the authorities that oversee them have a great deal of discretion to decide whether a given loan is to be considered nonperforming. To attempt a clearer-cut definition, Nikkei looked for loans on the verge of becoming nonperforming based on one factor: companies that cannot cover interest payments on debt with operating profit.

These businesses account for 21% of all debt at listed Indian companies for which data is available, compared with a global average of 4.3%. The share is particularly high in telecommunications, the scene of a brutal price war, and sectors such as steel and infrastructure.

When defaults by Infrastructure Leasing & Financial Services shook India’s bond market in 2018, regulators tightened oversight on such shadow lenders. Individual borrowers in places like rural villages, where less scrupulous nonbank finance companies did little due diligence, suddenly found themselves without easy access to loans.

But India’s credit crunch has had bigger consequences that simply not affording a car. Jet Airways filed for bankruptcy in June 2019, two months after suspending all flights when it failed to secure working capital from state-run lenders worried about adding to their bad-debt piles.

“Since no emergency funding from the lenders or any other source is forthcoming, the airline will not be able to pay for fuel or other critical services to keep the operations going,” the company, then India’s No. 2 airline, said in April.

India’s 2016 ban on high-value bank notes, a move by Prime Minister Narendra Modi’s to flush out untaxed “black money,” played a role in the excessive lending that preceded the credit crunch. The demonetization policy sent cash held in households pouring into the banking system before the money became worthless. Flush with liquidity, banks increased lending to shadow players like IL&FS.

But the infrastructure lender’s default abruptly stopped these flows. Growth in loans to the nonbank sector has fallen to half of its 2018 peak, according to data from the central bank.

Srei Infrastructure Finance, a listed nonbank lender, plans to stop lending for infrastructure projects, Bloomberg has reported.