Monday, January 30, 2012

Is India Heading Toward Debt Crisis?

India’s total external public debt has risen to $326 billion while foreign exchange reserves have dropped to $293 billion, according to the RBI data reported by the Indian Express newspaper.

The Reserve Bank of India is concerned over the increasing shift from equity to debt to fill India's widening current account gap. The latest available data indicates that foreign debt inflows in January so far have amounted to $3.21 billion versus $1.7 billion through equity inflows.

Recent $1.1 billion bail-out of Reliance Communications by state-owned Chinese banks is the clearest indication yet that the situation is also becoming dire in India's private sector with its mounting foreign debt.

This is not the first instance of Chinese banks coming to the aid of an Indian company. Last November, Sasan Power, the project company for the Sasan ultra mega power plant and a subsidiary of RComm affiliate Reliance Power, completed a $2.2 billion refinancing, including a $1.114 billion 13-year tranche. Bank of China, CDB and Chexim took $1.06 billion of that tranche, for which Chinese export credit agency Sinosure provided insurance.

Reliance Com is not alone in facing cash crunch in their ability to service debt. More than two dozen Indian companies included in the BSE-500 index face redemptions on foreign currency convertible bonds worth a combined Rs330 billion ($6.5 billion) by March 2013, according to brokerage Edelweiss. These include RComm’s US$925m outstanding CB, which the loan will repay.

Unless other Indian borrowers can somehow find lenders, they will be facing deteriorating debt market conditions that have led to shrinking liquidity in the loan markets and a rise in pricing.

“Top-tier Indian firms will have to pay between 250 basis points (2.5%) and 300 basis points (3.0%) over LIBOR (London Inter-bank Borrowing Rate) to borrow five-year money offshore. Even at that kind of pricing, there isn’t a lot of liquidity available,” said a Hong Kong-based lender quoted by International Financing Review. Over $20 billion worth of Indian debt is set to mature in 2012 and, of that, about $6 billion each of convertible bonds and rupee loans are up for redemption, with the balance in offshore loans.

India continues to run huge twin deficits of current account and budget. It depends heavily on foreign inflows. United Nations data shows that India received less than $20 billion in FDI in the first six months of 2011, compared to more than $60 billion in China while Brazil and Russia took in $23 billion and $33 billion respectively. Stocks in all four countries have underperformed relative to the broader emerging markets equity index, as well as the markets in the developed nations. Pakistan's KSE-100 has significantly outperformed all BRIC stock markets over the ten years since BRIC was coined.

Noting India's significant dependence on foreign capital inflows, Jim O'Neill recently raised concern about the potential for current account crisis. "India has the risk of ... if they're not careful, a balance of payments crisis. They shouldn't raise people's hopes of FDI and then in a week say, 'we're only joking'". "India's inability to raise its share of global FDI is very disappointing," he said.

In addition to Jim O'Neill, a range of investment bankers are turning bearish on India. UBS sent out an email headlined "India explodes" to its clients. Deutsche Bank published a report on November 24 entitled, "India's time of reckoning."

"Suddenly everything seems to be coming to a head in India," UBS wrote. "Growth is disappearing, the rupee is in disarray, and inflation is stuck at near-record levels. Investor sentiment has gone from cautious to outright scared."

India's current account deficit swelled to $14.1 billion in its fiscal first quarter, nearly triple the previous quarter's tally. The full-year gap is expected to be around $54 billion.

Its fiscal deficit hit $58.7 billion in the April-to-October period. The government in February projected a deficit equal to 4.6 percent of gross domestic product for the fiscal year ending in March 2012, although the finance minister said on Friday that it would be difficult to hit that target.

As explained in a series of earlier posts here on this blog, India has been relying heavily on portfolio inflows -- foreign purchases of shares and bonds -- as a means of covering its rising current account gap. Those flows are called "hot money" and considered highly unreliable.

Indian policy makers face a significant dilemma. If they do nothing to defend the Indian currency, the downward spiral could make domestic inflation a lot worse than it already is, and spark massive civil unrest. If they intervene in the currency market aggressively by buying up Indian rupee, the RBI's dollar reserves could decline rapidly and trigger the balance of payment crisis Goldman Sachs' O'Neill hinted at.

Related Links:

Haq's Musings

India Disappoints Goldman Sachs

India's Twin Deficits

Karachi Tops Mumbai in Stock Performance

India Returning to Hindu Growth Rate

Soft or Hard Landing For Indian Economy?

Karachi Stocks Outperform Mumbai, BRICs


Anonymous said...

riaz jee the INR has been rising this year (Its above 50..49.8 and rising)

Inflation is at a 2 year low

growth holding up at 7%.

FDI and remittances at an all time high.

But yes thanks for your concern!

CAD -remittances-FDI is less than 1% of GDP (this is covered by FX reserves of 300 bn ie 20% of GDP)and the situation is improving.

FII inflow is again on the upswing this month.

Not many major economies these days growing at 7%+.

Riaz Haq said...

Anon: "the INR has been rising this year (Its above 50..49.8 and rising)"

Indian Rupees can't buy any imports. The Arabs won't sell oil for any currency other than US $.

The Americans can and do simply print more dollars to buy stuff, and the ECB prints Euros to deal with the European debt crisis.

Indian govt and Indian companies still need US dollars. And Indians can't just print them. They have to rely on the inflows of dollars and Euros.

That's where the problem is.

Unlike China, India does not have trillions of dollars in reserves from China-like huge trade surpluses....India runs huge and growing trade deficits.

Mayraj said...

India-China trade hits a record high

China’s New Best Partner

Ashmit (India) said...

Let me begin by saying that to save you some embarrassment, I’m going to TRY to not talk about pak on the parameters that you have highlighted – foreign inflows, debt, bail out loans, deficits and of course the usual indices such as growth, inflation, unemployment, currency in free fall, investment, etc.

You have appear to have identified a key that unlocks the answers india’s problem with debt and deficits – Foreign Capital. But the picture is not as bleak as you wish it to be. Hard data reveals that despite the loud rhetoric, with arm-chair analysts quoting Jim o Neill and the likes – Foreign Investors are simply not buying your version of the india story.

“India Explodes” may have caught your imagination, but here’s some raw data to help you gain perspective. Despite the sudden gloom and doom forecasts and sell calls flooding the markets – FII’s were net sellers only to the extent of INR 3642 cr or USD 730 million in equities. (Exchange rate – 1 USD = INR 50). Meanwhile, given the high returns, Indian debt markets have found favour with FIIs pumping in nearly INR 42,600 cr or USD 8.5 billion.

In fact, the new year has cheered the Indian markets– with over USD 2 billion being pumped into equities in Jan, alone, by FIIs.

As for the more stable FDI, despite the loud cries and macro economic headwinds – investors have shown faith with India registering the second highest growth rate in terms of FDI inflows. The latest Ernst and Young report titled “India Attractiveness Survey 2012” highlights how India registered second fastest growth in terms of FDI inflows. A growth rate of 25%, second only to Brazil. It also records how between Jan-Nov 2011, over USD 50 billion was funneled into India.

Also, it would be naïve to blindly associate the “hot money” theory with FIIs in India, without understanding the dynamics of the Indian markets.

The Indian markets lack depth. The result being that the slightest of negative moves by FIIs trip the market, which has dual consequences. The cost of exit increases manifold for the FII. Secondly, the buyers in such markets are hard to find. It’s a default mechanism which keeps “hot” money in check. Renowned journalist, economist, entrepreneur and investor Swaminathan S. Anklesaria Aiyar, explains this using the term “cool money.

Meanwhile, through RBI’s minimalist measures and investors hunting for bargains, the INR has rallied by over 7.4% since hitting lows of 53.75 in Dec. (1USD=INR 49.77on Jan 31 closing). And guess what? Despite your well intended fears – “the RBI's dollar reserves could decline rapidly and trigger the balance of payment crisis”, the reserves are still in pretty good shape.

And India is still on course to achieve 7% growth.

Indian said...

I do think that the Chinese will invest even more money in India than they already have, since India has now become the second largest market for Chinese goods after the USA. This also corresponds with the increasingly lukewarm relations that China has with Pakistan these days - a close friend of mine in India, B Mohanakrishnan, who is a stockbroker and who follows the financial sector, alerted me to this new direction that China has been taking about two or so years ago. At the time, this was only a beginning phenomenon, but what Mohan hinted at has come very true in recent months. I think the Indian government is also making a conscious effort to give lucrative business concessions to the Veto Powers at the UN - the nuclear reactor business to the USA, the commercial goods business to China, the purchase of an aircraft carrier and a nuclear submarine from Russia, the ever growing trade with Britain and yesterday's confirmation of the purchase of 126 fighter aircraft from France are a hint of the future direction of Indian foreign policy.

My only hope is that all of this means that India's increasing dependence on the most powerful nations on earth tames some of the winder thinkers in New Delhi and pushes India and Pakistan into a long lasting peace.

Riaz Haq said...

India's budget deficit threatens to explode, according to Bloomberg:

Mumbai: India's budget deficit reached 92.3 per cent of the fiscal-year target in the nine months through December, imperilling the government's aim of reining in the gap.

The deficit was Rs3.8 trillion (Dh282 billion) in the period, the Controller General of Accounts said on its website yesterday. The shortfall was 44.9 per cent of the annual objective in the same period a year earlier.

Finance Minister Pranab Mukherjee has said cutting the deficit is a "serious challenge" and Standard Chartered Plc has predicted India will miss its target of lowering the gap to 4.6 per cent of gross domestic product by March. Slowing growth threatens to hurt tax receipts even as subsidies spur spending and the government struggles to sell stakes in companies it owns.

"The fiscal slippage this year will be substantial," Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd, said before the release. "As the economy slows, revenue collections are also getting hit."

The yield on the 8.79 per cent bonds due in Nov-ember 2021 fell two basis points, or 0.02 percentage point, to 8.26 per cent in Mumbai yesterday. The rupee strengthened 0.6 per cent to 49.3675 per dollar, while the BSE India Sensitive Index of stocks, which lost about a quarter of its value in 2011, climbed 1.2 per cent.

Bonds rose after Subir Gokarn, deputy governor of the Reserve Bank of India, said in New Delhi that the central bank may consider more government debt purchases if a cash squeeze fails to ease.

Reserve ratio

The Reserve Bank on January 24 lowered the amount of deposits lenders need to set aside as reserves for the first time since 2009 and signalled future interest-rate cuts, moving to shield growth from the impact of Eur-ope's debt crisis. The reserve-ratio reduction was effective January 28.

Overnight interest rates remain elevated even after the reduction in the cash reserve ratio, indicating liquidity pressures are persisting, Gokarn said.

"Based on that, obviously, we will consider" open-market operations, he said, referring to bond purchases. The possibility of another reserve-ratio cut at the mid-quarter monetary policy review also remains on the table, he said. The Reserve Bank also said last week that inflationary threats make it "premature" to start lowering its repurchase rate, adding that without "credible fiscal consolidation" its scope to cut rates will be constrained.

It left the benchmark at 8.5 per cent for a second month at the January review. Indian inflation was 7.47 per cent in December, a two-year low, while remaining the fastest among the Bric (Brazil, Russia, India and China) nations.

Riaz Haq said...

Here's a Business Line story on India's bills coming due:

A rapidly depreciating rupee, dipping foreign exchange reserves and strong financial links with the Euro Zone are pushing India against the wall. The over 20 per cent depreciation of the rupee against the dollar in the last one year has hugely increased the repayment burden of Indian companies.

According to the Bank for International Settlements' (BIS) preliminary data for December 2011, international claims on India, payable within the next one year, are $137 billion.. This is 60 per cent of the total claims of overseas banks on India in non-rupee currencies. This can eat up one half of the $293-billion foreign exchange reserves that India now has. European banks account for over 40 per cent of India's total foreign dues. At $132 billion, this is twice India's liabilities towards the US.

But leaving out the UK, India's Euro Zone exposure is about $60 billion. That is close to 3.4 per cent of India's GDP. Any full-blown crisis in Greece could spill over to the other European nations, posing a risk of capital flight from India.

The immediate impact of capital flight and the depreciating rupee would be more pressure on domestic liquidity, says Ms Sonal Varma, Executive Director and India Economist at Nomura. That also means a higher risk of interest rates moving upwards.

International claims, other than rupee-denominated ones, include trade credit and other borrowings. The data on international claims from the BIS, roughly tally with the RBI's data on non-rupee external debt.

Riaz Haq said...

Here's a Business Line story on India's bills coming due:

A rapidly depreciating rupee, dipping foreign exchange reserves and strong financial links with the Euro Zone are pushing India against the wall. The over 20 per cent depreciation of the rupee against the dollar in the last one year has hugely increased the repayment burden of Indian companies.

According to the Bank for International Settlements' (BIS) preliminary data for December 2011, international claims on India, payable within the next one year, are $137 billion.. This is 60 per cent of the total claims of overseas banks on India in non-rupee currencies. This can eat up one half of the $293-billion foreign exchange reserves that India now has. European banks account for over 40 per cent of India's total foreign dues. At $132 billion, this is twice India's liabilities towards the US.

But leaving out the UK, India's Euro Zone exposure is about $60 billion. That is close to 3.4 per cent of India's GDP. Any full-blown crisis in Greece could spill over to the other European nations, posing a risk of capital flight from India.

The immediate impact of capital flight and the depreciating rupee would be more pressure on domestic liquidity, says Ms Sonal Varma, Executive Director and India Economist at Nomura. That also means a higher risk of interest rates moving upwards.

International claims, other than rupee-denominated ones, include trade credit and other borrowings. The data on international claims from the BIS, roughly tally with the RBI's data on non-rupee external debt.

Riaz Haq said...

Here's Bloomberg on worsening imbalances in India:

Indian Finance Minister Pranab Mukherjee missed his budget-deficit target by the most in three years and announced a 12 percent increase in debt sales, sending bond yields to a two-month high.

The shortfall in finances in the year ending March will be 5.9 percent of gross domestic product, 1.3 percentage points more than the goal, Mukherjee said in a March 16 speech in parliament. That was the biggest margin of failure since falling short of the aim by 3.5 percentage points in the 12 months through March 2009, the height of the global financial crisis.

Goldman Sachs Asset Management Ltd. and FIM Asset Management Ltd. said the budget didn’t do enough to restore the credibility of Mukherjee, who pledged to cut the deficit to 5.1 percent of GDP in the 12 months starting April. The yield on 10- year bonds had the biggest weekly increase since January to 8.43 percent last week, compared with 3.55 percent in China, where the 2012 deficit was 1.5 percent of GDP.
The finance ministry plans to sell a record 5.69 trillion rupees of debt the next fiscal year, compared with 5.1 trillion rupees in the 12 months ending March 31. Underwriters had to buy unsold bonds at nine auctions this fiscal year, central bank data show, signaling demand didn’t match supply of notes. The government will set the first-half borrowing target on March 23, Shaktikanta Das, additional secretary in the ministry, said on March 16.

Yields on 10-year (GIND10YR) sovereign debt jumped 14 basis points, 0.14 percentage point, last week after data on the website of the Controller General of Accounts showed India’s budget gap widened to 4.35 trillion rupees in the 10 months through January, exceeding the full-year target of 4.13 trillion rupees. A year earlier, the shortfall was 58.3 percent of the annual goal.
The shortfall will reach 5.8 percent of GDP in the year starting April, he predicts. The finance ministry has exceeded its budgeted spending target in eight of the last 10 years, according to government data.

The yield on the 8.79 percent note due November 2021 fell one basis point today after climbing seven basis points on March 16. The extra yield investors seek to hold the notes instead of U.S. Treasuries has rebounded 11 basis points from an eight- month low of 601 reached on March 14, data compiled by Bloomberg show.
Spectrum Sale

Rupee-denominated bonds handed investors a loss of 0.3 percent in March, compared with a 0.2 percent return on yuan notes, according to indexes compiled by HSBC Holdings Plc. India’s revenue collection was 69.5 percent of the full-year target in the 10 months through January, compared with 92.2 percent a year earlier, official data showed this month. The rupee advanced 0.2 percent today to 50.0885 per dollar after declining 0.7 percent last week, according to data compiled by Bloomberg.
Still, global investors have cut holdings of Indian debt by $634 million since Feb. 29, pulling money out of the local market for the first time in six months, exchange data show.

The cost of protecting the debt of State Bank of India, seen as a proxy for the sovereign, against non-payment climbed this month. Five-year credit-default swaps on the lender now cost 305 basis points, compared with 300 at the end of February, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value in exchange for the underlying debt should a company fail to adhere to its agreements.

Riaz Haq said...

Here's a Reuters' report raining the specter of Greek style debt crisis in India:

India's mounting economic and political woes are prompting market players to raise the specter of a Greek-style crisis in Asia's third largest economy.

This is not simply idle speculation. Last Friday, the rupee crashed to an all-time low against the dollar of 54.9 and it was stuck most of Tuesday at the psychologically significant Rs55/USD level, where the currency is seen as having no obvious technical support. And the implications of a rupee collapse would be immense.

"It could go to stratospheric levels against the dollar and it looks to me as if the Indian government is aiming at a de facto devaluation in an effort to prop up flagging economic growth. And you then have to worry about all the unpleasant boxes such an action would inevitably tick, such as straining further the country's already strained balance of payments as well as bringing on an almighty wave of inflationary pressure," said a credit analyst at a ratings agency in Singapore.

He added that a spike in the rupee would strain the cashflow of corporates and banks as they struggled to service dollar-denominated debt and that the odds of a widespread Indian debt restructuring would be low.

In his opinion the market will determine the rupee's level, with a formal devaluation seen as unlikely given the consequent need for interest rates to be pushed significantly higher to contain capital flight and counter toxic inflation levels.

This scenario was seen in the UK in 1992 when the country exited the ERM and the government pushed short term interest rates up to 15% from 10%, spending billions of pounds of reserves to defend the currency in the process.

Should something similar occur to India, it would almost certainly lose its coveted investment-grade rating, with a one-notch demotion required for that to occur. S&P has India on negative watch for its Baa3 foreign currency rating while Moody's and Fitch retain a stable outlook on the country.

As the country's government faces political impasse amid infighting, principally between prime minister Manmohan Singh and finance minister Pranab Mukherjee on the subject of tax reform, and India limps from one corruption scandal to the next, the sense of decay is palpable.

Surprisingly, India's deteriorating economic fundamentals and toxic politics have not yet impacted the relative value of its issuers offshore debt. In fact, on Tuesday India's dollar offshore curve recovered the 10bp it had widened on Monday. But that situation is unlikely to hold much longer.

"As market players start to fret about the possibility of a full-blown rupee devaluation, you will see this start to impact spreads on the country's offshore curve. If the currency goes in a big way, you will have a unilateral replaying in India of the Asian financial crisis, which involved default on short-dated offshore debt and a mass round of debt restructuring. India is hanging in the balance right now, and the worst case scenario seems increasingly likely to play out," said a Hong Kong-based syndicate head.

Just as the tide moves against them, though, Indian corporates are seeing the need for offshore funding increase. According to the credit analyst, many Indian corporates have reached borrowing ceilings with local banks and are sizing up offshore bond issuance as a result. That would be a tall order and an expensive trip, though.

With massive convertible maturities coming up, some in dollars, a local market that is increasingly saturated and has less support from foreign investors and a closed dollar market, it seems inevitable that restructuring will soon become the main activity for Mumbai-based investment-bankers.

Riaz Haq said...

Here's an FT report titled "Indian tortoise slips into reverse":

Not so long ago there was excited chatter in India about the possibility of the country overhauling China to become the world’s fastest growing large economy. But the Indian tortoise, far from gaining on the Chinese hare, is going backwards. Growth has not edged into double digits. Instead it has sagged back towards 6 per cent. In recent days, three investment banks have downgraded their view of India’s prospects. Morgan Stanley says the slowdown, the result of policy paralysis and a worsening external environment, could be deep and prolonged.

The symbol of India’s fall from grace is the rupee. It has sunk more than 17 per cent against the dollar this year to its lowest level on record. That ought at least to have helped exports. In fact they have shrunk, along with industrial output, which fell 3.5 per cent in March.

The weaker rupee has made oil and other imports more expensive. That has widened an already worrying current account deficit of about 4 per cent of gross domestic product. Nor will the weak rupee help inflation, which has never been brought properly under control and is now nudging 7 per cent again.

The Reserve Bank of India, the only part of economic administration that is semi-functioning, is in a classic dilemma.
All this is unsettling. If foreign investors take fright, India’s balance of payments situation could quickly deteriorate. Standard & Poor’s has warned it may downgrade the rating on India’s sovereign debt unless Delhi can get the fiscal deficit under control. India also needs faster growth to help bring hundreds of millions of people out of abject poverty.

Mr Singh, who used to be lauded as the architect of economic reforms, is now routinely derided. More than a prime minister, he is characterised as an errand boy for Sonia Gandhi, the Congress party leader. Indeed, the 79-year-old Mr Singh seems to have lost all ambition, as well as any grip over the administration he might once have had.

Yet Mr Singh has little to lose. He should lay everything on the line and give economic liberalisation one last push. He may lose the premiership in the attempt. But that would be infinitely better for the country – and for his legacy – than going out meekly as the head of a do-nothing government.

Riaz Haq said...

Here's an Economist story "A Bric hits the wall":

INDIA’S economy has had some bad economic ideas inflicted on it over the past century, from imperial neglect to the cult of the village and big-ticket socialism. Maybe the concept of BRICs—a handful of emerging economies including India that were destined for fast growth—should be added to the list. It led to a bubble of complacency that is now being popped rather brutally. Growth in India was 5.3% in the three months to March—worse than the 6% expected, below the prior quarter and way below the close-to-double digit rates that were meant to be preordained and propel India to economic super-power status.

Other BRICs have slowed too, including China and Brazil. But India's GDP figures, the worst for at least nine years, will have a deep impact on the sub-continent. The country was meant to grow in its sleep—regardless of what happens in the rest of the world. A quick bounce back looks unlikely. The central bank has cut interest rates a little this year, but will struggle to loosen policy further given high inflation. The ruling coalition keeps on promising a bout of reforms to boost confidence, but it is so divided, its behaviour so erratic and its record of delivery so poor that few believe this will actually happen. Expectations for growth over the next couple of years will probably slip further, to 6%.

A 6%-growth-India raises three issues. For one, the old orthodoxy was that after liberalisation India had been on an accelerating path, driven by demographics and its high rate of savings and investment. A rival view is now likely to take hold. It notes that India has grown pretty consistently at 6% since the mid 1980s, with the exception of a faster period in 2004-2007. What looked like a step up in trajectory now looks like a one-off blip driven by a global boom, an uncharacteristic bout of tight fiscal policy and an unsustainable burst of corporate optimism. Political history may have to be rewritten too. The reformers of 1991, who include the present prime minister, have turned out to be not visionaries, but pragmatists without a deep commitment to liberalisation who have been unable to build a lasting consensus among voters and the political class in favour or reform.

Second, financial stability will become trickier. Nominal GDP growth (including inflation) has slipped to the low teens. This is still above the rate of interest India's government pays on its debt and thus in theory enough to avoid a debt spiral—despite high fiscal deficits running at almost a tenth of GDP. Government bond yields are artificially depressed because banks are forced to buy government paper and because the central bank has been buying bonds actively in the last six months. Although this can go on for a while, the stress is showing up in two different areas. One is the banking system where gross bad debts plus "restructured" loans have risen to over 8% of the total—a figure high even by western banks' standards. Bankers and the central bank argue that "restructured" loans are unlikely to result in large losses. But with lower growth more corporate borrowers will come under strain, as will the credibility of those reassurances.
Perhaps growth will bounce back. And if it doesn't, perhaps public frustration will be expressed at the ballot box, creating a new, less complacent political climate. The view that India's democracy is a self correcting mechanism that steers the country back onto the right course when things go wrong, was an integral part of the bulls' view of India. Hopefully it is one idea from the boom that proves to be correct.

Riaz Haq said...

Here are a few excerpts from Wall Street Journal story titled "India Fades":

India's growth prospects have been fading for some time. Multinationals are walking away from the country, withdrawing some $10.7 billion worth of investments in 2011 alone, according to Nomura. Manufacturing contracted by 0.3% for the year that ended March 31. Agriculture and services faltered as well.
Delhi managed to keep the party going after the 2008 financial crisis with more government spending and easier credit. But that only postponed the reckoning—while sending the inflation rate north of 8% for the better part of the last two years.

After growth dipped below 7% late last year, Prime Minister Manmohan Singh turned to gimmicks, like having state-owned Coal India boost coal supply to power producers in a one-off manner or proposing to set up special manufacturing zones where factories would get tax breaks. But businesses want less red tape permanently, especially when it comes to energy investments, as well as labor reform to make hiring and firing easier. On both fronts, the Prime Minister has done nothing.

Then there was his one serious attempt at reform. In late November he announced plans to allow foreign investment in big-box retail stores. The reform would have been a boon for consumers, and would have helped import some crucial supply-chain know how. But the reform met the usual combination of populist and special-interest resistance, and the government folded in 10 short days.

Indians are increasingly disenchanted with Congress's failure to push for pro-market reforms, and have voted accordingly in recent state elections. That's the good news. There's been a lot of talk about India's emergence as a new economic superpower. An India with the ambition to rise in the world will not treat a high-growth economy as a national birthright.

veerar said...

Superb article.The Graphs are self-explanatory.I have used your article in the form of a link in my Blog.Do you mind?

Hopewins said...

Dr. Haq,

Please feel free to use the following graphical depiction of the World Bank data--

1)Current Account Deficits:

2)Government Fiscal Deficits:


Riaz Haq said...

Here's an Atlantic Mag piece arguing that China is much bigger than the rest of BRICs:

In 2001, China's GDP was equal to the GDP of all the RIBS combined. In the five years since the global financial crisis, just the increment of growth in China's economy is larger than the entire economies of Russia and India combined. Indeed, in the half decade since the financial crisis, 40 percent of all growth in the global economy has occurred in China.

Last year, the economy of China expanded by $1 trillion; Russia and India grew by $100 billion; Brazil and South Africa shrank. In 2001, China ranked sixth among the world's economies. Today it stands at number two, on track to overtake the U.S. and become the world's largest economy in the next decade.

In trade, China accounts for 11 percent of global merchandise exports, roughly double that of the RIBS combined. Moreover, the markets to whom China and the RIBS export and from whom they buy are the U.S., the EU, and Japan. Merchandise trade among China and the RIBS barely registers in world trade statistics.

In foreign reserves, China held twice as much as the RIBS combined in 2001 (with $220 billion), and now holds three times as much as the others (with $3.3 trillion). In greenhouse gas emissions, China accounts for 30 percent of the global total, more than twice the amount of the RIBS combined.

Goldman Sachs continues trumpeting the rise of the BRICS (though it refuses to include South Africa, which was pulled into group by China in 2010). Its latest "BRIC Fund" prospectus forecasts that by 2030, the BRIC nations will have a combined economy larger than that of the G7. If this happens, the most important part of the story will be that China added $17 trillion to the global economy, effectively creating another United States in less than 20 years.

Concepts that jumble together elements with more differences than similarities sow confusion. While it may have played a useful purpose at the beginning of the century to highlight faster-growing emerging economies, BRICS has become an analytic liability. Like generalizations about per-capita growth in countries where wealth disparities are widening (as the rich get richer while the income of the poor declines), submerging China in this acronym misses more than it captures. If a banner is required for a meeting of these five nations, or for a forecast about their economic and political weight in the world ahead, RIBS is much closer to the reality. Even if governments, investment banks, and newspapers keep using BRICS, thoughtful readers will think China and the rest.

Riaz Haq said...

India is closer to a debt crisis. Read the following:

1. “We are becoming little more dollarised than we were earlier. We need to curb this tendency, $390 billion of debt against $290 billion Fx reserves is a ratio in the recent times at one of the lows and that is the external debt numbers, external debt situation should get more focus now,” said Samiran Chakraborty of Standard Chartered Bank in an interview with CNBC-TV18.

2. Foreign institutional investors have pulled out a record $7.53 billion —Rs 44,162 crore with the dollar at Rs 60 — from the Indian debt and equity markets this month, more than double the previous high of $3.53 billion in October 2008 when India suffered the after-effects of the financial crisis triggered by the collapse of Lehman Brothers in the US.

FIIs sold a net $5.68 billion (Rs 33,135 crore) in debt and a net $1.85 billion (Rs 11,027 crore) in equities. While the debt outflow is the highest in Indian capital market history, the outflow from equities is the highest since October 2008. FIIs sold a net Rs 15,347 crore in equities in October 2008 as against Rs 11,027 crore this month.

India has been a huge beneficiary of US Fed's easy money policy. It's enjoyed hot money (FII) inflows which could disappear with any tightening by Bernanke.Rapidly falling rupee could also scare away portfolio investments.

And India's short term debt is huge...with $172 billion due by March 2014.

India could very well face a serious debt crisis with any major change in US Fed policy.

Riaz Haq said...

Here's a Hindu newspaper report on Indian corporate foreign debt:

July 8, 2013:
India’s international investment position (IIP) saw significant deterioration in the year-ended March 31, 2013. The country’s net liabilities to other countries rose by $57.8 billion to $307.8 billion over the course of the year. This caused the net IIP to worsen from a negative 14 per cent of GDP to a negative 16.7 per cent.

The International Investment Position compares what India owes to entities located overseas (liabilities) relative to what it is owed by foreign entities (assets). In recent years, India’s liabilities have been expanding while assets have stagnated.


Liabilities have soared on the back of exporters taking more short term credit, and loans and deposits flowing in from overseas. A break-up of the country’s international liabilities indicates that overseas trade credit, loans and deposits extended to India, grew by 13.8 per cent in 2012-13 from 2011-12 levels. This amounted to 18.4 per cent of GDP in March 2013, up from 16.8 per cent in 2012-13.

This was a weak year for inbound foreign direct investments, which grew only by 5.1 per cent. Portfolio investment expanded by 10.4 per cent during the year. This was mainly in the form of equity inflows.

In contrast, Indian companies remained rather cautious about investing across the border. International assets — which capture investments in foreign currency — stagnated at 24.3 per cent of GDP compared to 24.5 per cent a year ago. This was driven by the 0.8 per cent decline in the foreign exchange reserves.

Portfolio investments by Indian companies fell by 6.6 per cent, but direct investments overseas rose by 6.3 per cent. This depicts the value of the country’s direct investment abroad, portfolio investments, equity and debt security investments, trade credits, loans and reserve assets, among others, as a proportion of its cumulative economic output in a given year.

The ratio of net foreign liabilities to GDP is regarded as an indicator of default risk. This indicates that the country’s liabilities to external parties have been rising as a proportion of its economic output.

Anonymous said...

Commercial borrowings currently total $134.229 billion — a jump of over 90 per cent since December 2009: it was after January 2010 that the RBI increased interest rates 13 times in 18 months. Even NRI deposits saw a spectacular rise, especially after the central bank aggressively campaigned for them — starting in September 2013 — to counter the steep rupee depreciation.

NRI deposits amounted to $98.639 billion in December 2013, a clear increase of 107.7 per cent over the $47.490 billion in December 2009. These NRI deposits need to be repaid over the next two-three years.

The rising external debt number is bound to induce a sense of foreboding when viewed through the prism of critical macro ratios — the RBI’s total hoard of foreign exchange reserves can now service only 69 per cent of external debt (compared with 138 per cent in 2007-08), the total outstanding is 23.3 per cent of GDP (it has always been lower than this since 1998-99), and concesssional debt comprises only 10.6 per cent of total debt stock (which means a higher debt servicing burden).

Clearly, one of the objectives of the circular mentioned above — apart from avoiding the cosmetic transfer of risk from the domestic balance-sheet — is to keep a lid on external debt, especially since tapering by the US Fed Reserve is likely to keep the external economy volatile. Allowing Indian companies to raise funds overseas to repay domestic debt might aggravate the situation now.

RBI tightens the screws
The second purpose of the circular is to address the probable risks that might arise from short-term external debt, or loans to be repaid within 12 months. Short-term debt was 21.8 per cent of total debt as of December 2013, and is lower both as a percentage of total outstanding external debt as well as in absolute numbers compared to the immediate preceding months.

The country’s stock of short-term external debt touched $92.707 billion at end-December 2013, or close to 21.8 per cent of the total debt, compared with $91.881 billion in December 2012 comprising 24.4 per cent of total external debt then.

What could be worrying the RBI is the rush of money streaming into short term debt instruments — such as 91-day treasury bills issued by the government or commercial paper floated by companies. Such a deluge could be facilitated both by the interest rate differential between western markets and India, as well as the stronger rupee vis-à-vis the dollar.

One of the clear indicators to central bank strategy was revealed in RBI Governor Raghuram Rajan’s first bi-monthly policy statement of April 1. The RBI announced that henceforth foreign portfolio investors will not be allowed to invest in any government security, including treasury bills, with maturity less than a year. While the ceiling for investments in government securities remains fixed at $30 billion, the RBI wants it invested entirely in government paper with maturity of more than a year.

This, the bank hopes, will deter the yield-chasing, short-term investors and insulate the economy from volatility. To soften the blow, the apex bank has handed out portfolio investors a number of sweeteners that facilitate the process, and lower the cost, of investing in the Indian capital market.

One, portfolio investors can now open a local bank account and transfer investible capital into that account directly, unlike the earlier tedium of having to route funds through a custodian bank, which widened the time lag between intent and investment.

Also, portfolio investors can now hedge their currency risks in local exchanges, provided their investments are in government debt of more than 12 months maturity. This is bound to lower their costs, apart from providing them further inducement to invest in Indian paper.

Riaz Haq said...

(Reuters) - India's external debt stood at $461.9 billion as of end-December, up 3.5 percent from end-March 2014, the government said in a release on Tuesday.

India's external debt-to-gross domestic product (GDP) ratio stood at 23.2 percent as of end-December, compared with 23.7 percent as of end-March 2014.

The country's short-term debt fell 6.7 percent from March-end 2014 to $85.6 billion as of December-end, while long-term debt rose 6.1 percent to $376.4 billion, the statement from finance ministry said.

Riaz Haq said...

MUMBAI—A large pile of debt on the books of India’s big infrastructure companies is complicating Prime Minister Narendra Modi’s plans to boost the country’s economy and improve its woeful roads, electric grids and other public works.

The companies that build big projects owe more than 3 trillion rupees ($48 billion), the result of a failed effort by the previous government to get businesses to help improve India’s infrastructure. The total amount of debt for Indian infrastructure companies is at its highest in more than a decade, affecting the overall economy because banks, fearing the loans won't be repaid, are reluctant to lend to other companies.

Debt levels have risen across Asia in the past five years and are now higher than they were before the Asian financial crisis in 1997. The borrowing has taken different forms in different countries. In China, giant state-owned companies borrowed the most, in Thailand and Malaysia, consumers took on debt, while in Japan, the government boosted its world-leading borrowing.

High debt levels could limit India’s ability to help drive global growth at a time when China is slowing and many of the world’s economies are weak. Foreign portfolio investors have poured $42 billion into Indian stocks and bonds over the past year, leaving them vulnerable to cracks in the country’s economy.

In India, overall debt levels are relatively low. But the sector struggling the most with its borrowing is also one that Mr. Modi is counting on to juice the economy and boost the country’s productivity. Instead, the companies are now focused on reducing their debt.

“At this point, we are not able to commit more equity to new projects,” said Ankineedu Maganti, managing director of Soma Enterprise Ltd., a south India-based developer of roads and other infrastructure projects. “We’re still trying to recover from the past.”


In 2014, bank credit to infrastructure was 14% of overall credit, and now infrastructure companies account for among the biggest portions of the bad and stressed loans on the books of Indian banks.

The bad debt has made banks less willing to lend, weighing on the overall economy, according to a Finance Ministry report in December. “The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12% of total assets,” the report said. “Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend.”

Banks have been pushing infrastructure companies to sell assets and pay back debt. But India’s insolvency laws make it unattractive for lenders to push companies into liquidation, so the standoff is likely to continue.

Riaz Haq said...

#India infrastructure: While elephants built on #India's exploding debt - via @FT

Some day, the Delhi Metro will be able to take race fans to the Buddh International Circuit, a $400m, 16-turn, state-of-the-art track on the outskirts of India’s sprawling capital.

And once a gleaming new highway is completed, the track will be connected to Delhi and the tourist destination of Agra. But for now, there is little traffic on the highway leading to Buddh and even less on the pristine racetrack.
It has been three years since Formula One abandoned the Buddh International Circuit, adding it to the sporting world’s crowded list of white elephants. It does not stand in total isolation, however.
Block after block of concrete skeletons of towers that were meant to provide up to 200,000 apartments line the highway, casting shadows on dusty wasteland, dried riverbeds and mesquite weeds.
Welcome to what is likely India’s largest ghost city, which extends across five expansive parcels of land along the highway adjacent to the racetrack. What was meant to be the crowning achievement of Jaypee Group and Jay Prakash Gaur, its 85-year-old patriarch, has become a monument instead to unrealistic aspirations and poor execution on the one hand and a shortfall in growth, the high cost of capital and an uncertain political landscape on the other.
The scale of Jaypee’s ghost city rivals that of some of China’s famous unoccupied cities. Fortunately for Jaypee, it also owns a collection of power and cement plants across India as well as three listed companies. Unfortunately, it also has about $12bn of debt, creditors and analysts say.

Jaypee is not alone in its plight. The company is ranked number six of 10 indebted Indian conglomerates that collectively owe about $125bn to their bankers, and account for 13 per cent of all bank loans in India, according to data from Ashish Gupta, an analyst with Credit Suisse. Others on the list include Lanco, a construction and power company; GVK, an energy and transport group; and GMR, an infrastructure conglomerate.
They are among the companies that should be leading India’s efforts to bolster its inadequate infrastructure, but instead are hampered by high debt levels and weak balance sheets.
In many ways, the difficulties of these groups embody the problems facing modern India, where private sector investment has virtually ground to a halt. The cost of capital is high, and banks are reluctant to extend credit because they have too many bad loans.
“Infrastructure companies are struggling and only the government can kick-start infrastructure,” says the chief executive of a prominent Indian company. “I don't see any market trigger.”

If Narendra Modi, the prime minister, is to achieve his goal of boosting economic growth, he needs to attract private sector capital to improve roads, rail, ports, power and other infrastructure. India’s infrastructure could require investment of up to $1.7tn by the end of the decade, the World Bank has estimated.
Though the government says it is building 13km of road per day, construction in India’s cities has not kept pace with the rapid growth in the urban population, and the state of public transport remains poor.
This has contributed to a host of problems in India’s cities, including traffic congestion, high numbers of road accidents and pollution, Barclays has noted.

Riaz Haq said...

Corporate #India suffers debt crisis - via @FT

Most Indian companies rely on bank financing, rather than the debt capital market, yet banks are now reluctant to lend even working capital to already stressed borrowers. These debt worries — as well as capacity utilisation of more than 70 per cent — explain why the private sector is not investing and growth remains below potential. “Companies are still way overleveraged while the banks fear throwing good money after bad,” says the head of one foreign bank in Mumbai.
As a result, bond markets can look attractive to cash-strapped corporate bank clients: they can often raise funds more cheaply, while still giving investors higher yields.
But bond markets can be risky for investors who do not do extensive due diligence. Corporate circumstances can deteriorate with little warning and, all too often, the rating agencies — which should be the first to raise the alarm — fail to do so. Liquidity can vanish in a heartbeat.
In spite of the faith in US markets shown by Mr Rajendran, the problem of liquidity is not confined only to India or, indeed, developing markets in general.
One sobering thought is that if two simple bond funds can suddenly restrict withdrawals, what about more complex investment products? Many on both sides of the Pacific have yet to be tested by a lasting bear market.
That test may not be far off. Corporate bond markets in many places are in flux: China seems to have weathered the downdraft in the stock market but there are increasing fears of a bubble in its corporate bonds. Analysts suggest it has been inflated by leverage of up to five times from the commercial banks in Shanghai.
Meanwhile, in the US bond market, yield spreads — how much higher corporate bond yields are, compared with safer government issues — have widened dramatically in recent weeks. Many analysts fear there could soon be a stampede for the exit, as worries over a Federal Reserve rate increase in December intensify. That would test the liquidity of US high-yield bond funds and exchange traded funds.
Some funds will not be able to survive a sell-off without imposing limits on redemptions. For example, there are leveraged loan ETFs in the US promising instant liquidity, even though it takes a minimum of 20 days for deals in this debt to settle.
In corporate bond markets, the distinction between developing markets such as India and developed markets such as the US may not be as great as some believe.

Riaz Haq said...

$59 billion in unpaid bank #debt by rich borrowers in #India sparks outcry. Non Performing #Loans jump 450% #Mallya

In December, the flamboyant Indian liquor baron Vijay Mallya threw a bash for 600 people to celebrate his 60th birthday at a five-star beach resort in Goa, where Enrique Iglesias was among the performers.

At the same time, Mallya, known in Indian media as the “King of Good Times,” owed Indian state-owned banks more than $1.4 billion and had not paid $120 million in salaries to employees of his failed airline.

He was due in India’s Supreme Court last week for a hearing on his debts, but authorities said Mallya had fled the country. The turn of events sparked a public outcry and cast a fresh spotlight on the nexus between Indian bankers and profligate corporate titans.

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Mallya is one of many industrialists who owe massive amounts of money to Indian public sector banks. According to the Reserve Bank of India, Indian state banks are carrying more than $59 billion in bad loans, a 450% increase since March 2011. For some banks, the volume of such nonperforming loans — for which there is little hope of repayment — exceeds their net worth, officials say.

The unpaid loans deprive India’s economy of much-needed financing. According to an analysis by the nonprofit website IndiaSpend, the amount is “enough to pay for India’s 2015 spending on defense, education, highways and health.” Another $58 billion in corporate debt also remains unpaid and could become nonperforming loans in the near future, the group’s website said.

Two Mumbai businessmen who owe a total of $380 million to 10 banks cannot be found, according to a report in the Mid-Day newspaper. Y.S. Chowdhary, a government minister and owner of three deeply indebted companies, has been declared in default for twice that amount.

Even as the high-volume debts have grown, the list of defaulters has remained under wraps. Last month, the Supreme Court directed the reserve bank to disclose the list of defaulters holding more than $75 million in debt. The bank has challenged the order; a hearing in the case is due March 30. There is no publicly available list of high-volume debtors but the number is believed to be in the hundreds.

Mallya’s case has taken on added prominence because even as his companies were swamped in debt by 2010, he enjoyed impunity across the political spectrum and in the banking industry.

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In 2010, he earned a seat in the upper house of Parliament with the backing of India's governing Bharatiya Janata Party. His debts piled up during the previous government, led by the Indian National Congress, now the most prominent opposition party.

And Indian authorities are accused of negligence for allowing him to flee the country despite the cases against him.

“Lending to Mr. Mallya was the bankers' season ticket to corridors of power and glamour,” Shekhar Gupta, a journalist and commentator, wrote in the Business Standard. “Borrowing from them was like a favor Mallya did to them.”

Mallya once owned United Breweries, India’s biggest spirits company, which he inherited from his father. He launched Kingfisher Airlines in 2003 — named for the liquor company’s leading beer brand, Kingfisher — and planned to build a world-class carrier.

The airline quickly faltered under high oil prices, aggressive business decisions and the global economic downturn, and was grounded in 2012.

Even as his financial troubles mounted, Mallya’s lavish spending and partying were fodder for tabloids, particularly the steamy calendar photo shoots he did with Indian models. In 2008, he spent more than $110 million on a professional cricket franchise. He holds a 41.5% stake in a Formula One racing team, allegedly purchased with revenues from his airline — which prompted accusations of money laundering.