Who pays when big boys don’t go bust?
Nov 22 2013
Big bankruptcies are rare in India where state-owned banks often end up refinancing loans
Batista secured extraordinary loans and investments from a government bank against the promise of high productivity from his oil fields; he used taxpayers’ money to fund a lavish lifestyle for himself, with such plutocratic accessories as fast cars, yachts and a wife who was a former Playboy model. His debt-fuelled engine spluttered to a stop when his fields were exposed as dry and his flagship oil company, OGX Petroleo & Gas Participacoes, was left with no cash to service debts amounting to more than $5 billion.
Recently as I drove past the forlorn, deserted airport in Shimla, which India’s high-flying Kingfisher Airlines once connected to the world, I thought of India’s own version of Batista: the flamboyant owner of Kingfisher, Vijay Mallya, who was as much the poster boy for an apparently supercharged economy as the Brazilian businessman was. A liquor baron, Mallya worked hard to live up to his beer’s tagline “the king of the good times” by partying with Bollywood stars onboard his luxury yacht, the Indian Empress; he also ran a race-car franchise and supervised a swimsuit calendar.
Laden by debt, Kingfisher imploded last year after failing to pay its employees for seven months.Shortly after the wife of one of the unpaid staff members committed suicide, Mallya’s son posted on Twitter that he was playing “volleyball with bikini-clad models.”
His business empire now imperilled at other weak points, Mallya has lowered his profile. In August, India’s state-backed banks, which are owed about $1.4 billion by Kingfisher, departed from their own culture of leniency and taped a notice to the door of the carrier’s headquarters: Their plan, unrealisable for now, is to seize the building in order to recover unpaid debts.
You would be wrong, however, to conclude that the profligacy of India’s corporate borrowers and spenders belongs safely to the past. The dramatic slowdown in India’s economy over the past few months has exposed what many of us suspected all along: that the country’s economic boom in the past decade was largely fuelled by debt, enabled by unprecedented inflows of foreign capital, rather than by broad, sustained and sustainable liberal reforms. Indeed, the idea of reform itself came to be confused with “the liberalisation of economic policy restraints on organised business,” as Santosh Desai, an advertising professional and commentator, points out.
An August report titled “House of Debt — Revisited” from Credit Suisse Group reveals that 10 of India’s biggest industrial conglomerates, including Anil Ambani’s Reliance companies, Ravikant Ruia’s Essar Power, Gautam Adani’s Adani Power and the Essar Group, had combined gross debts of more than $100 billion. Much of this debt — the highest leverage since the late 1990s — is denominated in foreign currency.
A weakened rupee has only increased the size of the debt in local terms; the overall slowdown in the construction, infrastructure and mining sectors hasn’t helped. According to Credit Suisse, the moment of reckoning will come early next year, in the fiscal period ending March 31. By then, slowing growth would have seriously affected the ability of these corporations to make profits and service their debts, repayments for which will be much higher in fiscal 2014.
According to Bloomberg News, the reckoning may come even earlier for companies such as Mukesh Ambani’s Reliance Industries, India’s most powerful business house, and Anil Agarwal’s Vedanta Resources, which has $10.6 billion of bonds and loans maturing by December 31 and $7.4 billion in the following three months. A Brazilian scenario — overleveraged corporations with falling productivity — looks to be developing in India. According to Bloomberg, the yield from Reliance’s biggest Indian gas field has plunged 75 per cent from its peak in 2010.
So could the next Batista-style implosion occur in India? There are several arguments for why it won’t. Large corporate bankruptcies are uncommon in India, where the nexus between big business and government is stronger than it is in Brazil. State-owned banks are likely to refinance and restructure their loans to corporations, even at the risk of saddling their own balance sheets with nonperforming assets. Mukesh Ambani may find his elusive profits from investments in the US’s shale oil and gas revolution; last quarter, earnings from his multibillion-dollar American wager eclipsed those in India for the first time.
In any case, the Credit Suisse report ignores their diversely sourced sociopolitical power. In recent years, they have been beneficiaries of a culture in which, as Desai writes, “the lives of the rich are discussed admiringly, and every act of indulgence greeted with applause.” This encourages them “to live on an island of delusion, aided by media and feted by the public that is visible to them.”
Batista had his connections and cronies, but he can only envy the influence of his Indian counterparts. Photographs from a lavish birthday party for Ambani’s wife this month — held in a royal palace in Rajasthan rather than the Ambanis’ 27-storey Mumbai residence — show a loyal and gratified Indian elite in attendance, flown in on 32 chartered planes, including the union minister for heavy industries.
In 2009, a taped conversation between lobbyists quoted Mukesh Ambani as boasting that the ruling Congress party was now his dukaan, or shop. He may not have asserted proprietorial rights over the government so explicitly, even though his part ownership of, and immense influence over, the Indian media is barely concealed. Nevertheless, one can only marvel at how, responding to a demand from Reliance, the government doubled domestic natural gas prices from April next year, and how a decision with profound ramifications for small and medium enterprises and farmers.
The end of loose monetary policy in the US, a dramatic shrinking of capital inflows, and further blows to the rupee could worsen the situation for Indian corporations sinking in debt. But even if all the preconditions for it were to be present, a Batista-style implosion in India still seems unlikely. Rather, the damage would be inflicted upon the lending banks, some scapegoated politicians, the credibility of the media, and the usual suckers — the voting taxpayers.
(Pankaj Mishra is the author of “From the Ruins of Empire: The Revolt Against the West and the Remaking of Asia” and a Bloomberg View columnist.)