Beyond corporate deleveraging

Synopsis: Without higher exports, India would not be able to attain higher sustainable growth in the coming years.

Deleveraging process in India

• 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.
• 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 was reduced.

What does this imply?

• A reduction in overall corporate debt 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.
• 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.

Government resources are constrained

• Private consumption will remain weak, as most households suffered income loss because of the pandemic. Normally, under such circumstances, higher government expenditure is used to revive demand.
• 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 percent between 2014 and 2019 and increased to 11 percent 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 percent 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.

Exports are Key to Sustain Growth

• 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 sustainably, which would require a serious re-evaluation of trade policy.