India Inc coming out of debt crisis

The worst of India’s corporate debt crisis seems to be over as companies are reporting positive free cash flow (FCF) for only the second time in two decades, says a Morgan Stanley report.

According to the global financial services firm, the distress in corporate India’s balance sheet is unchanged for the past four years.

“Even as the consensus thinks that distress in corporate India’s balance sheet has been rising persistently over the past seven years since the global financial crisis, our work shows that the distress is unchanged for the past four years,” the report said. “It peaked in 2012 and has held steady at that level. Indeed the pace of debt accretion on corporate balance sheets has fallen sharply. This is good news for a turn in the debt cycle,” it said.

Moreover, corporate India in aggregate is reporting positive free cash flow (FCF) for the second time in two decades and the reversal in the aggregate FCF augurs well for medium term corporate spending and therefore for growth.

The report noted the risks to the above view is that the pace of balance sheet recovery depends on the global outlook for growth and disinflation. Second, the government is unlikely to front-load the recapitalisation of state owned banks, and third concentration of debt is high, which in turn might impede a faster resolution.

It said India does not have an aggregate debt problem. The problem of leverage is concentrated in the private corporate sector. “Indeed, India has been one of slowest accumulators of debt since the global financial crisis in Asia on top of what is also an overall low aggregate debt to GDP even in the context of its low per capita income,” it said.