NEW DELHI, India — How bad can things get in India?
Experts say a full-blown financial crisis like the one that devastated the so-called “Asian tigers” in 1997 is unlikely.
But some of India Inc's marquee names are in big trouble.
“You don't have the kind of [foreign] debts you had during the Asian Financial Crisis,” Franklin Templeton's Mark Mobius told GlobalPost. “The balance of payments [problem in India] may be similar, but it's a different scenario. It's a matter of losing an opportunity rather than being hit by incredible debt that you can't pay.”
During the Asian financial crisis of 1997, Thailand's short-term foreign debt eclipsed its foreign reserves by nearly $10 billion, before it went to the International Monetary Fund for a bailout. Indonesia's forex reserves were only enough to cover about half of its short-term foreign debt. South Korea's cache of dollars dwindled to a measly 25 percent of its $100 billion in short-term borrowings – enough to cover just two weeks of imports.
On Friday, Prime Minister Manmohan Singh sought to reassure the nation that India is not facing a similar situation, in the leadup to the release of official growth figures for the quarter ended in June and the fiscal deficit figures for July later in the day.
“Foreign exchange markets have a notorious history of overshooting. Unfortunately this is what is happening not only in relation to the rupee but also other currencies,” Singh said in a speech before the parliament.
“While global factors... have caused general weaknesses in emerging market currencies, the rupee has been especially hit because of our large current account deficit and some other domestic factors. We intend to act to reduce the current account deficit and bring about an improvement in the functioning of our economy.”
The signs are indeed grim, despite those intentions. Later Friday, India's July deficit numbers revealed the government has already fallen two-thirds of the way toward its deficit target for 2013-14 in the first four months of the fiscal year, according to Reuters.
India's growth has slowed to 4-5 percent, while inflation remains in double digits. The rupee has plummeted nearly 20 percent since the beginning of the year. The stock market has dropped 10 percent over the past three months, with foreign institutional investors dumping nearly $1 billion worth of Indian stocks over the past eight trading sessions, according to India's Mail Today.
But there's a ways to go before it hits crisis levels, experts say.
India and Indonesia will face a rocky road in the coming months because their current account deficits — meaning the balance of funds flowing out versus in — are high. But “we don't think this is the Asian crisis all over again,” Standard & Poor's chief economist for Asia Pacific said in a recent report.
After rebounding 3.5 percent to 66.6 against the dollar Thursday – its largest gain since January 1998 – on Friday the rupee was down slightly before Singh's speech, but was trading at 66.3 shortly before closing. The Bombay Stock Exchange's benchmark Sensex gained another 1.19 percent on Friday after closing up 2.25 percent the day before, while the National Stock Exchange's Nifty added 1.16 percent after closing up 2.35 percent Thursday.
Does that mean the worst is over? Maybe, and maybe not.
With short-term debt of around $172 billion and forex reserves of around $280 billion, India is in much better shape than the victims of the Asian financial crisis. Moreover, the rupee's freefall indicates that India's central bank is not making the same mistakes made by the Asian tigers in the 1990s, when Thailand, Indonesia and South Korea burned up their foreign exchange reserves in a doomed effort to defend their currencies.
“The external positions for the emerging Asian economies are much stronger [than in 1997]. The central banks are also not defending their exchange rates,” S&P's Paul Gruenwald said in a report titled “South and Southeast Asian Economies Grapple with Growth and External Financing Risks.”
The rocks in the road could be pretty big for some of India's most respected companies, however.
“The fact of the matter is that 25 percent of corporate India today technically does not have adequate money to make its interest payments, and 15 percent of corporate India has negative cash flows,” Morgan Stanley's Ruchir Sharma told GlobalPost.
“When you look at that kind of territory you know that the corporate system is under a lot of stress.”
The numbers may be even worse than that.
A third of India's big corporations are already busted or on the brink of insolvency, according to India's Business Standard newspaper. And every point the rupee plunges makes their dollar debts that much more difficult to repay.
Citing data from the Capitaline database of Indian corporations, the paper reports that companies like Tata Steel, Hindalco Industries, Tata Power, Larsen & Toubro, Jaypee Associates, Adani Power, GMR Infra, GVK Power, JSW Steel, Reliance Infra, IndianOil, HPCL, Shri Renuka Sugars, Bajaj Hindusthan and Suzlon face dollar debts amounting to as much as double their market capitalization.
That means some of India's biggest blue chips are deep in the hole, and there's no way for them to tap the equity markets to raise money to finance projects or make their interest payments.
“Looking at valuations at that point doesn't really matter,” said Morgan Stanley's Sharma. “If companies are making losses or don't have adequate money to cover their debts, it's just too bad.”