News ID: 200475
Published: 0524 GMT September 13, 2017

As India Inc struggles to cut down debt, the economy suffers

As India Inc struggles to cut down debt, the economy suffers

India's cash crunch and confusion over the introduction of a national sales tax were initially blamed for pulling economic growth down to its weakest pace in more than three years. But that is masking a more debilitating factor affecting the economy — corporate debt.

Thomson Reuters data, based on the latest annual earnings reports, showed India's corporate debt rose to a seven-year high at the end of March. More than a fifth of large companies did not earn enough to pay interest on their loans and the pace of new loans fell to the lowest in more than six decades, Reuters wrote.

The Indian government reported on Aug 31 that annual GDP growth in the quarter ended June dropped to 5.7 percent, an envious pace for many countries but India's weakest since early 2014.

It was blamed on attempts by the government to flush out money hidden from the tax man, which caused a cash crunch, and the introduction of a general sales tax (GST), which prompted businesses and consumers to hit the pause button.

But Indian business executives said they are more concerned about the impact of soured loans on bank balance sheets, which prevent them from getting the full benefit of central bank rate cuts. That is sapping India's economic vitality, they said.

Since January 2015, the central bank has cut policy rates by 200 basis points, or two percentage points, but commercial bank benchmark lending rates have come down less, by about 120 basis points.

"Interest rates are still very high," said A. Issac George, chief financial officer of GVK Power and Infrastructure Ltd . He said his firm's borrowing costs have remained unchanged at about 11 percent.

That makes it tougher for the conglomerate to lower its net debt of around 179 billion rupees (£2.1 billion).

GVK's earnings covered just half of its debt servicing costs, Credit Suisse data showed, below the one percent threshhold typically seen as a bare minimum.

"We are not in a position to take a decision on whether we should expand our business or set up new businesses," said George. GVK is not alone in trying to manage high debts.

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