Consumerism and Covid-19 struck Indians are loading up more debt. The trend is, however, contrary to other major economies, barring China.

According to the Bank for International Settlements (BIS), Indian household core debt has gone up from 32.9% of GDP to 35.8% of GDP between 2016 and June 2021.

Not only Indian households, even government debt rose in the last five years. The silver lining though is an increasing affordability of debt by Indian non-financial corporate (NFC).

In the same period, government debt went up from 68.8% of GDP to a worrisome 85.3% of GDP. In absolute terms, government debt has gone up from $1.5 trillion to $2.4 trillion while for households it zoomed from $725 billion to $1 trillion in the last five years.

Due to rising debt in both the categories, risks are now at elevated levels in India. Foreign institutional investors (FIIs) are also jittery on the back of rising debt and have sold Indian equities worth over ₹93,000 crore in 2021. For FIIs, debt dynamics play a key role in ascertaining investment decisions as India is primarily a net importer. Rising debt along with inflation impacts currency as well as the government's macro policy.

The only silver lining for India is improving affordability of debt by non-financial corporations. Between 2016 and June 2021, total credit to NFC has reduced from 59% of GDP to 54.6% of GDP. This reduction may be on account of both lack of capex as well as deleveraging exercise undertaken by major corporate houses.

India's Debt Story

India ranks third in emerging markets in terms of total debt of $4.65 trillion, private sector (PSC) debt of $2.55 trillion, non-financial corporate (NFC) debt of $1.54 trillion and household debt of $1.01 trillion. Private sector debt is a combination of NFC debt and household debt. China and South Korea rank first and second, respectively, in the emerging market debt category.

The key feature of India's debt dynamics is a relatively lower share of private sector debt (51%) of total debt. This matters as risks associated with elevated private sector debt are greater than those associated with public sector debt, writes London based economist Chris Mallin, founder of Chris Mallin Macro Perspectives in a research report published on January 27.

While Indian debt markets are large in absolute terms, the level of indebtedness is relatively low. Both the NFC (55% of GDP) household (36% of GDP) debt ratios are below the BIS threshold limit of 90% and 85% respectively. Indian debt ratios are also relatively low from the historical context as the household debt ratio of 36% is 7 percentage points below the 43% of GDP (peak) reached back in the third quarter of 2007. The NFC debt ratio of 55% of GDP is 16 percentage points below the 71% of GDP (peak) reached in the fourth quarter of 2012, the point at which the private sector debt ratio also peaked at 106% of GDP.

India has experienced periods of elevated risks associated with excess credit growth in the not-so-distant past, first in NFC sector until Q4 2014 and then in the household sector since Q3 2019 but the current risks are moderate, Chris Mallin's report states.

Affordability risks in India are also relatively low as India's private sector debt service ratio of 10% is well below its 10-year average of 13%. India scores relatively well in terms of the risks associated with structure, indebtedness, growth and affordability of debt, the report adds.

Corporate India's Deleveraging Exercise

With an improved income statement, corporate India followed a massive deleveraging exercise and cut down its net debt (gross debt minus cash) by around one third (30%) while gross debt by almost one fifth (17%).

The biggest overhang on the corporate balance sheet was debt and for a change, instead of amassing debt corporate India was repaying loans. Leaner balance sheet has become a mantra for a whole host of companies.

According to Capitaline database, overall, 750 companies have reduced their gross debt by ₹3 lakh crore to ₹14.7 lakh crore in FY21 from ₹17.71 lakh crore in FY20 and net debt by ₹4 lakh crore to ₹9.5 lakh crore in March 2021 from ₹13.51 lakh crore in March 2020.

Top five gross debt reducing sectors in the last fiscal (FY21) were: refineries (₹75,823 crore), steel (₹44,635 crore), textiles (₹14,384 crore), fertilisers (₹10,780 crore) and power generation (₹10,230 crore)

In FY21, Reliance Industries reduced gross debt by ₹67,656 crore while Tata Steel lowered debt by about ₹31,000 crore. At group level, Reliance’s gross debt came to ₹2.43 lakh crore in FY21 from ₹3.1 lakh crore in FY20.

Global Outlook On Debt

Governments across geographies have piled up debt in the last five years. Government debt on all reporting economies have gone up from $54.3 trillion to $78.9 trillion between 2016 and June 2021. The US government debt level has gone up from $18.4 trillion to $26.2 trillion in the same period.

Total credit to NFC of all reporting companies has gone up from $104 trillion to $141 trillion. For emerging market economies, it has gone up from $35.6 trillion to $54.4 trillion. Out of this $18.8 trillion rise, bulk NFC debt of $15 trillion is on account of China where debt level rose to $37 trillion from $22 trillion between 2016 and June 2021. In NFC category, the US with $35 trillion is having the second highest level of private sector debt among the BIS reporting countries. Globally, both China and the US account for 51% of total private debt collectively.

The maximum threshold levels identified by the BIS for NFC debt stands at 90% of GDP while it is 85% for household debt. The BIS considers debt above these levels to be a drag on future growth.

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