Beyond corporate deleveraging

India's growth drivers are under pressure

Indian companies are reducing debt on their books and increasing their cash balance. Firms are selling assets and avoiding investment at this stage to be in a more stable position. According to the numbers compiled by this newspaper, Reliance Industries reduced debt by about Rs 85,000 crore last financial year. In percentage terms, Steel Authority of India Ltd led the way and lowered debt by over 30 per cent during the same period. The deleveraging process, however, is not limited to large companies. The Reserve Bank of India’s latest Financial Stability Report, for instance, showed that the debt-to-equity ratio for 1,360 listed private non-financial companies came down from over 22 per cent in the second half of 2019-20 to 19.6 per cent during the comparable period in 2020-21. Meanwhile, the share of cash in assets during the same period went up from 4.4 per cent to 5.3 per cent.

A reduction in overall corporate debt, which is happening for quite some time, and an increase in the cash balance suggest that firms are not willing to invest and are perhaps preparing for a prolonged period of uncertainty. Since capacity utilisation remains low, the need for investment is also fairly limited. Thus, private investment is likely to remain subdued in the foreseeable future, which will affect India’s growth prospects. This also suggests that firms would be distributing more dividends and banks will be lending more to the government. In this context, it is important to recognise that the Indian economy was slowing even before the pandemic. While the headline growth number would be higher in the current year because of a lower base, sustaining it at a higher level would be a big policy challenge. Private consumption is likely to remain weak as most households suffered income loss because of the pandemic and would be looking to repair their balance sheets. The indebtedness in the household sector has also increased in recent years. In the absence of a strong revival in private consumption, capacity utilisation in the industrial sector would remain subdued and affect investment demand.
 

Normally, under such circumstances, higher government expenditure is used to revive demand. The government has been supporting growth for quite some time. As economists Sajjid Chinoy and Toshi Jain of JP Morgan showed in a recent paper, strong government expenditure was a key driver of economic growth in the years before Covid. Government consumption went up by an annual rate of 9 per cent between 2014 and 2019, and increased to 11 per cent since 2017. This resulted in a significant expansion in borrowing and the pandemic further pushed up the fiscal deficit. Since the public debt has increased to about 90 per cent of gross domestic product, the government’s ability to support growth with higher expenditure would remain limited. It could push capital expenditure by raising resources through aggressive disinvestment.

However, at a broader level, since private consumption and investment, and government expenditure are likely to remain constrained, only higher exports could drive growth. They would also boost consumption and investment like they did in the first decade of the century. Global trade is recovering well and has helped Indian exports in recent months. But sustainability could become an issue as higher exports are largely being driven by higher global commodities prices. The government must focus on increasing exports in a sustainable manner, which would require a serious re-evaluation of trade policy. Without higher exports, India would not be able to attain higher sustainable growth in the coming years.