{"id":253264,"date":"2023-07-24T20:16:03","date_gmt":"2023-07-24T14:46:03","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=253264"},"modified":"2023-08-31T10:43:37","modified_gmt":"2023-08-31T05:13:37","slug":"many-indian-firms-need-more-leverage","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/many-indian-firms-need-more-leverage\/","title":{"rendered":"Many Indian firms need more leverage"},"content":{"rendered":"\n<p><strong>Source<\/strong>: The post is based on an article\u00a0<strong>\u201cMany Indian firms\u00a0need more leverage\u201d <\/strong>published in<strong> Business Standard <\/strong>on\u00a0<strong>24<sup>th<\/sup> July 2023<\/strong>.<\/p>\n<p><strong>Syllabus:<\/strong> GS 3 \u2013 Indian Economy \u2013 Growth &amp; Development<\/p>\n<p><strong>Relevance: <\/strong><strong>concerns associated with low debt scenario in India.<\/strong><\/p>\n<p><strong>News:<\/strong> There has been a decrease in borrowing by India firms. This presents concerns for the Indian economy.<\/p>\n<h2><strong>Why is less borrowing by firms not healthy for the Indian economy?<\/strong><\/h2>\n<ul>\n<li>Debt drives management to work hard, which eventually benefits shareholders and society.<\/li>\n<li>Borrowing improves return on equity, which is good for shareholders.<\/li>\n<li>Debt-ridden businesses fail, as part of Schumpeterian creative destruction, fostering a dynamic economy.<\/li>\n<\/ul>\n<h2><strong>What has been the trend in borrowing by the Indian non-financial corporate sector?<\/strong><\/h2>\n<p>Since the early stages of economic reform, <strong>the Indian non-financial corporate sector has reduced its borrowing.<\/strong>\u00a0The debt-equity ratio, which was at its highest of 1.85 in 1991-92, has steadily declined, reaching 0.89 in 2021-22.<\/p>\n<h2><strong>Why do Indian corporations follow this trend of low borrowing?<\/strong><\/h2>\n<p>This has been low demand of loans due to \u2013 <strong>1)<\/strong> the prevailing macroeconomic environment with low investment, <strong>2)<\/strong> fears of bankruptcy, and <strong>3)<\/strong> low supply of loans due to fear amongst bank employees because of a Supreme Court decision in 2016 over the application of the Prevention of Corruption Act.<\/p>\n<p>Moreover, some see India&#8217;s low or nearly zero debt level as a sound basis for long-term growth. However, there are various concerns associated with very low corporate debt.<\/p>\n<h2><strong>What are the concerns associated with low levels of debt?<\/strong><\/h2>\n<p><strong>Debt as a disciplining device:<\/strong> There are usually conflicts between the interests of shareholders and the interests of managers. While managers want more money and less effort, shareholders want the firm to do well.<\/p>\n<p>Therefore, in such a scenario, debt acts as a disciplining device for managers to work hard, regardless of whether they have shares in the company or not.<\/p>\n<p>However, when there will be low debt or zero debt, managers will be less motivated to put in the required effort.<\/p>\n<p><strong>Creative destruction:<\/strong> Debt also plays an important role in the failure of the firms, which is essential for a healthy economy.<\/p>\n<p>However, when debt is removed, many low-quality firms can survive indefinitely, leading to governance problems. This lack of a steady pace of firm failure is harmful for economic dynamism.<\/p>\n<p><strong>Return on equity:<\/strong> A successful business achieves a high return on equity by utilizing debt. However, many businesses in India have low debts, leading to poor returns for shareholders.<\/p>\n<p>Therefore, a low rate of firm failures affects the economic dynamism, which ultimately impacts society at large.<\/p>\n<p>Hence, while excessive debt is very harmful, so is zero debt. Therefore, <strong>a balance needs to be maintained.\u00a0<\/strong><\/p>\n<h2><strong>What can be the way ahead?<\/strong><\/h2>\n<p>Implementing a strategy of moderate debt may encounter constraints due to the ineffective bankruptcy process and its associated costs.<\/p>\n<p>Therefore, <strong>in order to reach moderate debt levels<\/strong>, enterprises and group-holding companies&#8217; finance departments will need to have specialized skills in strategizing and implementing borrowing programs.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Source: The post is based on an article\u00a0\u201cMany Indian firms\u00a0need more leverage\u201d published in Business Standard on\u00a024th July 2023. Syllabus: GS 3 \u2013 Indian Economy \u2013 Growth &amp; Development Relevance: concerns associated with low debt scenario in India. News: There has been a decrease in borrowing by India firms. This presents concerns for the Indian&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/many-indian-firms-need-more-leverage\/\">Continue reading <span class=\"screen-reader-text\">Many Indian firms need more leverage<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[10503,216,8184],"class_list":["post-253264","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-business-standard","tag-gs-paper-3","tag-indian-economy","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/253264","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=253264"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/253264\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=253264"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=253264"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=253264"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}