ArcelorMittal lists India's high public debt as risk factor for investments

India's public debt at 89.3% of GDP is one of the highest among EMs

India’s rising public debt has begun to cause some discomfort to some big foreign investors. ArcelorMittal — the world’s top steelmaker — has listed India’s high public debt as a risk factor in its latest annual report.

“Other countries at risk of further economic crises inc­lude, for example, South Africa (in relation to its public debt), Ukraine (in relation to its external debt), and to a lesser extent India (in relation to its public debt),” wrote Arcelor­Mittal in its annual report for Calendar Year 2020 (CY20), while listing out potential economic risks to its global operations. The steel multinational acquired Hazira-based Essar Steel under bankruptcy code in 2019 for a total consideration of around $5.6 billion in 2019 in a 60:40 joint venture with Nippon Steel.

ArcelorMittal revealed in its annual report that its equity contribution to the joint venture (JV) now stands at $2 billion. The acquisition is the single-biggest investment by the steel major in India and one of its biggest acquisitions globally. The JV partners are currently working on turning around the unit and raising its sales and production.

India’s public debt at around 89.3 per cent of gross domestic product (GDP) at the end of March this year is one of the highest among the major emerging economies, with the exception of Brazil and Arg­entina, according to the Inter­national Monetary Fund data.

The public debt-to-GDP is much lower in other emerging markets (EMs), such as South Africa, Mexico, Turkey, China, Indonesia, and Malaysia, among others. India’s public debt is also on the higher side, when adjusted for the government tax revenue that indicates debt-servicing capability.

Economists say the high public debt-to-GDP has an adverse impact on a country’s credit rating. 

It can lead to currency depreciation and debt servicing cost, lowering the overall growth potential of the economy.

According to ArcelorMittal, the currency depreciation poses the biggest financial risk to its operation in EMs. A potential decline in the value of EM currencies depresses the company’s revenue in US dollar — its reporting currency.

“In emerging economies, where ArcelorMittal has operations and/or generates substantial revenue, such as Arge­ntina, Brazil, India, South Africa, Venezuela, Kazak­hstan, and Ukraine, the risk of significant currency devaluation is high,” said the company in its 2020 annual report. The Luxembourg-headquartered company is the world’s largest steelmaker with a revenue of $53.3 billion in CY20. In comparison, India’s top steelmaker, Tata Steel, reported a revenue of $19.7 billion in the financial year ended March 31, 2020.

Consumer goods major Unilever Plc also took a hit from currency depreciation in EMs in 2020. “The turnover declined 2.4 per cent. This included an unfavourable currency impact of 5.4 per cent, driven by weakening of currencies in our key markets, such as Brazil, Argentina, and India,” wrote Unilever Plc in its 2020 annual report. The Anglo-Dutch multinational is the owner-promoter of Hindu­stan Unilever — India’s top fast-moving consumer goods company. While economists agree that India’s public debt-to-GDP ratio is above the comfort zone, they also say the country cannot be clubbed with other highly indebted EM economies. 

“Unlike other emerging economies with large foreign currency debt, India’s public debt is in local currency that ring-fences it from a foreign exchange crisis or external shocks,” said Madan Sabnavis, chief economist at CARE Ratings.