How India is breathing easy on corporate debt amid crisis elsewhere

Indian companies are doing better than peers, but business is slowing down

Rising interest rates and a banking crisis in the West have some worried about India's corporate debt profile.

An analysis of data on emerging market (EM) countries shows that Indian companies came out of the pandemic with lower leverage than their peers. Total borrowings by companies in China, Brazil and EM countries increased relative to the size of those economies, shows data from the Bank for International Settlements (BIS), an organisation of global central banks. India was among the few countries that came out of the pandemic with lower debt on company books relative to economic size measured by gross domestic product (GDP). Such debt declined in Russia and South Africa too as seen in chart 1 (click image for interactive chart).

That said, business for listed Indian companies is slowing down. Growth in net sales was slower in the three months ending December 2022 than in September or June. This was true for both the top 100 companies in terms of market capitalisation as well as the bottom 100. The net sales figure for both sets has fallen year-on-year for the last two quarters (chart 2).

As business slows down, interest costs are rising. Central banks aggressively cut interest rates to support the economy during Covid-19. They have since been raising rates to control inflation. The amount of money that companies pay as interest cost is rising. Smaller companies hurt more, though both sets paid more than 25 per cent higher amounts year-on-year for interest costs in the latest quarter (chart 3).

The slowdown and debts have not—yet—resulted in the rise of 'zombie' firms, which do not earn enough to meet their interest payments. Shortly after the nationwide lockdown three years ago to slow down Covid-19, the number of zombie firms increased to nearly a quarter of the companies under consideration in June 2020. The number is now under five per cent.

With global central banks continuing to raise interest rates and business slowing down, more firms may join the ranks of the walking dead. And smaller companies may well be more vulnerable.