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Corporate debt, a drag on economy

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, shows 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.

The Indian government reported on August 31 that annual GDP growth in the quarter ended June dropped to 5.7%, 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.

Soured loans

But Indian business executives say 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 say.

Since January 2015, the central bank has cut policy rates by 200 basis points, or 2 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 & Infrastructure Ltd. He said his firm’s borrowing costs have remained unchanged at about 11%.

That makes it tougher for the conglomerate to lower its net debt of around ₹179 billion ($2.80 billion).

GVK’s earnings covered just half of its debt servicing costs, Credit Suisse data shows, below the 1% threshhold typically seen as a bare minimum.

Thomson Reuters data shows net debt for 288 companies with a market capitalisation of more than $500 million, covering most big firms in India, has hit at least a seven-year high of ₹18 trillion ($281 billion). Soured debt was 12% of total loans held by lenders at the end of March.

Another Thomson Reuters analysis showed more than a fifth of 513 Indian companies had interest cover of less than 1%.

New loans are also hard to come by. On an annual basis, the pace of new loans in the year to the end of March, fell to the lowest since the fiscal year ended in March 1954.

The impact can be seen in the GDP data. Gross capital formation, a gauge of private investment, fell to less than 30% of GDP in the June quarter, from 31% a year earlier and 38% a decade ago.

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