16 Nov 2011

India's ticking debt bomb

According to Finance Ministry report, India’s external debt at end-March 2011 was US$ 305.9 billion, up 17.2 per cent over 2010. Government (sovereign) debt remained near-static 25.6 per cent of the total, while the share of commercial (corporate) borrowing was 28.9 per cent and rising.

The Finance Ministry is of the opinion that, "The changing composition of [external] debt in favour of commercial borrowing is also an indication of [...] the increasing role that corporate sector is playing in sustaining high growth rate."

(Also, the US$ is the predominant currency component accounting for 53.5 per cent of India's total external debt. The INR sliding in value against the US$ can't be good news. And already Moody's has warned that India's public debt burden at 70% of GDP is a "constraint". But that's another story...)

We need to focus on the growing corporate sector. And the unquestioning support they receive from individuals within the GoI - like our unelected Prime Minister (he's a Rajya Sabha 'nominee') and Kaushik Basu, the uneleced PM's unelected Chief Economic Advisor.

Because India's corporate giants seem to have the serious potential to trigger an economic collapse!

A BusinessWorld article is the only one I came across that mentions the risk for Kingfisher's bankers - saying,
The million-dollar question, according to airlines CEOs, is whether the government would actually step in and try to salvage the situation in some way through the public sector banks, since they cannot afford to allow Kingfisher Airlines to collapse. “The contagion effect on banks — many banks have large exposures to the airline — will be a cause of worry for the government”, says a ministry official. However, setting a precedent by helping in a bailout of one private company would be dangerous for the future — across industries.

The article quotes the CEO of the Centre of Asia Pacific Aviation (CAPA),
"The airline’s immediate cash requirement is estimated at Rs 1,000 crore. This includes dues to the private airports, AAI, oil companies and other vendors... [Moreove, Kingfisher] needs $800 million [Rs 4,000 crore] plus over the next two years. Out of this, $400 million [Rs 2,000 crore] is required urgently..."

Kingfisher's overall debt stands at over Rs 7,000 crore with annual losses exceeding Rs 1,000 crore.

In fact, it was just last year that a consortium of 13 lenders, led by SBI and ICICI Bank, restructured Kingfisher Airline's debt by turning Rs 1,200 crore worth of debts into equity paying a 50% PREMIUM (Rs 65 per share) over the market price of Rs 40. This year the price per share went down to Rs 17!

The sheer futility of everyone scrambling to save Kingfisher Airline should be obvious by now!

An article in BusinessToday by Harsh Vardh, former MD of Vayudoot, candidly questions the long term viability of the airline's business plan...

He says,
Mallya has recently tweeted "Why should Kingfisher operate on loss-making routes on government directive?"

[But] The main cause of losses for the industry is its excessive deployment of capacity on metro routes where over 70 per cent of capacity is deployed. Metro and international routes account for the majority of losses of Kingfisher, and not government directed sectors.

And on the Indian Prime Minister's response, Mr Vardhan rightly points out,
A PM who only few days ago has taken a firm stand on petrol prices being market driven should not be seen contradicting himself in favour of private enterprises.

Obviously, that there are different rules for corporate houses and individual citizens - but it is no time for indignation. We really should be worried about huge recklessness and profligacy in the corporate sector unleashing a financial contagion in India!

Yet again, it the hapless aam aadmi and his parivaar that will bear the brunt. The oligarchs will simply set sail to a tax haven on their plush yachts.

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