India in a Volatile Global Economy
What lies ahead?
Parthapratim Pal
Indian Institute of Management Calcutta
Emerging Markets are experiencing their worst capital flight….
Foreign Exchange Reserves of AEs and Developing Countries
Foreign Exchange Reserves
9000
8000
7000
6000
5000
4000
3000
2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1
Advanced Economies
Emerging and Developing Economies
Global Growth Rate is Slowing Down…China Rebalancing
Countries/Regions
Estimates
2014
Projections
2015 2016
2017
World Output
3.4
3.1
3.4
3.6
Advanced Economies
1.8
1.9
2.1
2.1
United States
2.4
2.5
2.6
2.6
Euro Area
0.9
1.5
1.7
1.7
0
0.6
1
0.3
4.6
4
4.3
4.7
Russia
0.6
-3.7
-1
1
China
7.3
6.9
6.3
6
India
7.3
7.3
7.5
7.5
1.3
-0.3
-0.3
1.6
Brazil
0.1
-3.8
-3.5
0
Mexico
2.3
2.5
2.6
2.9
5
3.5
4
4.7
Japan
Emerging Market and Developing
Economies
Latin America and the Caribbean
Sub-Saharan Africa
India’s recent economic developments…
• Growth projections by the Central Statistical Organization (CSO) for the fiscal year 2015-16 is 7.6 percent.
This is higher than estimates by the Reserve Bank of India and the IMF.
• Wholesale prices fell for the 15th straight month in January 2016, with the Wholesale Price Index or WPIbased inflation declining 0.9% from that a year ago after the 0.73% fall recorded in the previous month.
• Inflation based on Consumer Price Index (CPI) is positive and around 5.5 percent. Mostly led by high food prices in the
country.
• Data released this January show exports fell for the 14th consecutive month.
• Current account, however, is somewhat more resilient as import bill came down due to decline in commodity prices.
• Corporate profitability is going down. Excess capacity on the rise in the industrial sector. Investments
declining.
• Exchange rates are close to historical low
• Recent reports indicate severe stress on the banking system due to massive write-offs and Non performing
assets
• Credit offtake from the banking system is slowing down
Devaluation of currencies among developing countries and emergence of mega
trade blocks…increased vulnerability for India
• India’s exports have been declining for the
last 14 months
India’s Trade with China (in million US $)
EXPORT
• The current account has not been affected
much because of declining import bill (due to
decline in fuel prices)
%Share
IMPORT
%Share
TOTAL TRADE
%Share
• China is not India’s major export market but
its biggest source of imports
• The depreciation of yuan is likely to put
pressure on India. Trade deficit with China
may increase
• Emergence of mega trade blocks like TPP is
likely to affect India’s exports negatively
TRADE BALANCE
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015
14,168.86
18,076.55
13,534.88
14,824.36 11,934.25
5.67
5.91
4.51
43,479.76
55,313.58
52,248.33
11.76
11.3
10.65
57,648.62
73,390.13
65,783.21
9.3
9.23
8.32
-29,310.90
-37,237.03
-38,713.45
4.72
3.85
51,034.62 60,413.17
11.34
13.48
65,858.98 72,347.42
8.61
9.54
-36,210.26 -48,478.92
India is part of the global problem of growing corporate debt
• BIS reports estimate that the outstanding US$ denominated debt of non-banks located outside the
United States is at $9.2 trillion at the end of September 2014. The corresponding figure at the
beginning of 2010 was around US$ 6 trillion.
• The IMF Global Financial Stability report suggests that the emerging market firms that have
borrowed the most are most vulnerable when debt-service costs go up as interest rates begin to
rise in the developed countries.
• BIS asks: what motivates a non-US firm to issue US dollar bonds? Second, they try to
find out what do the corporate borrowers do with the proceeds of the bond
issuance? (Bruno and Shin, 2015)
• “The answers to our pair of questions suggest that non-financial firms from emerging market economies
(EMEs) have used US dollar bond issuance to take on financial exposures that have attributes of a dollar carry
trade, in addition to any use of such funds for real investment.
• In this respect, our results add to the evidence that favourable global financial conditions have been
important determinants of firms financing decisions, especially for firms from emerging economies whose
dollar bond issuance activity has been a defining feature of the post-crisis period in international capital
markets”. Pp1-2
Data on India’s external debt (in million US$)
Some more information on external commercial
borrowings by Indian firms
Year
ECB Automatic ECB
Approval Weighted
6-month
Route (US $ Route
(US
$ average
of Libor (%)
million)
million)
maturity in years
Weighted
Average Interest rate range for
Margin over 6-month Fixed Rate Loans (%)
LIBOR or reference rate
for Floating Rate Loans
(%)
2004-05
9177
1597
4.11
4.77
1.3
0.00-11.50
2005-06
14062
2006
3.99
4.76
0.75
0.00-12.00
2006-07
15673
7360
4.9
4.92
1.04
0.00-9.54
2007-08
17555
10560
5.58
6.04
0.92
0.00-9.45
2008-09
6988
8450
5.54
5.59
1.76
0.00-8.50
2009-10
13271
7177
4.93
1.42
2.7
0.00-8.00
2010-11
15566
9443
5.46
0.97
2.6
0.00-7.00
2011-12
27492
7862
5.69
1.16
2.89
0.00-8.00
2012-13
18395
13651
6.27
1.09
2.73
0.00-12.44
2013-14
12340
20892
4.88
0.6
1.98
0.00-12.79
2014-15
19215
9170
6.49
0.68
2.12
0.00-13.50
More on Indian ECBs…
• To put these numbers in perspective, during the same period, benchmark Prime
Lending Rate (PLR) by State Bank of India varied between 11.75 percent and 14.75
percent.
• So the effective lending rate is the PLR + spread
• A look at the data published by the Reserve Bank of India on ECBs show that for the
period 2005 to 2015,
• Reliance Industries used ECBs 53 times to borrow amount equivalent to US$ 24.8 billion;
• Reliance Communication Ltd. and ONGC Videsh have ECBs of around US$ 8 billion.
• There are more than 30 Indian companies which have borrowed more than US$ one billion
through ECBs between 2008 and 2015.
Some examples of use of ECBs by Indian firms
Reliance
Industries Ltd.
Reliance
Communications
Ltd.
JSW Steel Limited
Amount
Amount
Amount
No.
No.
No.
ONGC Videsh
Ltd.
Tata Steel
Amount
No.
Amount
No.
Automatic
Route
5,935
23
3,921
14 2,400
36
1,783
9
2,212
1
Approval
Route
18,887
30
4,010
6 705
5
3,014
5
5,700
6
Total
24,822 53
7,932
20
3,105
41
4,797
14
7,912
7
Poor Export performance and declining Hedge Ratios
• A look at the balance sheets of Indian firms show:
• The quantum of naturally unhedged ECB is three to four times the amount of borrowing that are
naturally hedged.
• Around 50 percent of the firms undertaking ECB, which constitute over 70 percent of the ECB amount
borrowed in a year, have not hedged to cover any risks arising out of foreign currency mismatches.
• In October 2014, indicative data with RBI showed that “the hedge ratio for ECBs/FCCBs declined sharply from
about 34 per cent in FY 2013-14 to 24 per cent during April-August, 2014 with very low ratio of about 15 per
cent in July-August 2014”.
• With exports declining steadily, the problem of unhedged corporate debts is likely to increase even more…
Tightening of policy rates in Advanced countries and possibility of competitive
devaluation creates major problem for these companies
• In the eventuality of a generalized tightening of monetary policy among developed
countries,
• there will be a double impact on the Indian corporate sector through exchange rate and global rate of
interest.
• Monetary policy loses policy space due to possibility of reversal of capital flows?
• This double impact on corporate debt will be easier to handle if the corporate sector is
performing well.
• But recent reports indicate that profitability indicators of the Indian corporate sector show worrying signs.
RBI (2015) highlights that for period 2011-12 to 2013-14, profitability of public limited companies
exhibited a steady declining trend.
• Profitability improved marginally in the case of small and medium private limited companies. But
profitability of large private limited companies declined.
• Recent revelations points to huge write-offs and build up of very high level of NPAs among
the Indian banking system. More signs of weakness of the corporate sector.
04-Feb-2016
04-Jan-2016
04-Dec-2015
04-Nov-2015
04-Oct-2015
04-Sep-2015
04-Aug-2015
04-Jul-2015
04-Jun-2015
04-May-2015
04-Apr-2015
04-Mar-2015
04-Feb-2015
04-Jan-2015
04-Dec-2014
04-Nov-2014
04-Oct-2014
22000
04-Sep-2014
23000
04-Aug-2014
24000
04-Jul-2014
27000
04-Jun-2014
28000
04-May-2014
29000
04-Apr-2014
BSE Sensex Index
Foreign Exchange Reserves (in million USD)
360000
350000
340000
26000
330000
25000
320000
310000
300000
21000
290000
20000
280000
What lies ahead…
• While growth will help the system, it would likely be significantly impaired
if we did not nudge the process of clean up. Non-food credit growth from
public sector banks, the more stressed part of the system, grew at only
6.6% over the calendar year 2015. Industrial credit growth for PSBs was
only 3.3% while growth in lending to agriculture and allied lending was only
10.4%. The only area of strength was personal loans, where growth was
16.9 %. In contrast, non-food credit growth in private sector banks was
20.2 %, in agriculture 25.4%, in industry 14.6%, and 23.5% in personal
loans. Put differently, in each of these areas except personal loans, loan
growth in private sector banks was at least 10 percentage points higher
than public sector banks, while loan growth in personal loans was 6.6
percentage points higher.