[Reader-list] Who pays when India’s billionaires don’t go bust?

[Asit Das]

Who pays when India’s billionaires don’t go bust?
Large bankruptcies are uncommon in India, as public banks refinance loans
even at the risk of saddling their own balance sheet
  Pankaj Mishra <http://www.livemint.com/Search/Link/Author/Pankaj%20Mishra>


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 [image: Laden by debt, Kingfisher imploded last year after failing to pay
its employees for seven months. Photo: AFP]
Laden by debt, Kingfisher imploded last year after failing to pay its
employees for seven months. Photo: AFP
 Last month, the business empire of Eike
Batista<http://www.livemint.com/Search/Link/Keyword/Eike%20Batista>,
once the world’s seventh-richest man and a mascot of economically resurgent
Brazil, collapsed. The disaster ought to focus our minds on the perils of
credit-fueled economic growth and highly leveraged corporations not just in
Brazil but also in other BRICS countries.
 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-fueled engine spluttered to a stop when his fields
were exposed as dry and his flagship oil company, OGX Petroleo and Gas
Participacoes SA, was left with no cash to service debts amounting to more
than $5 billion.
Last week, as I drove past the forlorn, deserted airport in Shimla, which
India’s high-flying
<http://www.livemint.com/Search/Link/Keyword/Kingfisher%20Airlines%20Ltd>
Kingfisher <http://www.livemint.com/Search/Link/Keyword/Kingfisher>Airlines
Ltd once connected to the world, I thought of India’s own version
of Batista: the flamboyant owner of Kingfisher, Vijay
Mallya<http://www.livemint.com/Search/Link/Keyword/Vijay%20Mallya>,
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.
*‘Bikini-clad models’*
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 in October 2012, Mallya’s young son posted
on Twitter that he was playing volleyball with bikini-clad models.
His business empire now imperiled 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,
unrealizable 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 last few months has exposed what many
of us suspected all along: that the country’s economic boom in the last
decade was largely fueled 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
liberalization of economic policy restraints on organized business, as
Santosh Desai, an advertising professional and commentator, points out.
Thus, in what a senior executive speaking to the *Financial Times *likened
to a Ponzi scheme, large corporations making overambitious investments when
the going was good were able to repeatedly restructure loans from
state-backed banks, which the government faithfully recapitalized with its
own money. One result of this collaborative capitalism with Indian
characteristics was always very likely to be an extraordinary degree of
corporate leverage and frothy asset markets. It is what we are witnessing
today.
An August report titled *House of Debt—Revisited from Credit Suisse Group
AG *reveals that 10 of India’s biggest industrial conglomerates, including Anil
Ambani <http://www.livemint.com/Search/Link/Keyword/Anil%20Ambani>’s
Reliance companies, Ravikant
Ruia<http://www.livemint.com/Search/Link/Keyword/Ravikant%20Ruia>’s
Essar Power Ltd<http://www.livemint.com/Search/Link/Keyword/Essar%20Power%20Ltd>,
Gautam Adani <http://www.livemint.com/Search/Link/Keyword/Gautam%20Adani>’s
Adani
Power Ltd <http://www.livemint.com/Search/Link/Keyword/Adani%20Power%20Ltd>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 31 March. By then,
slowing growth will 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.
*Brazilian scenario*
According to *Bloomberg News*, the reckoning may come even earlier for
companies such as Mukesh
Ambani<http://www.livemint.com/Search/Link/Keyword/Mukesh%20Ambani>’s
Reliance Industries
Ltd<http://www.livemint.com/Search/Link/Keyword/Reliance%20Industries%20Ltd>,
India’s most powerful business house, and Anil
Agarwal<http://www.livemint.com/Search/Link/Keyword/Anil%20Agarwal>’s
Vedanta Resources
Plc<http://www.livemint.com/Search/Link/Keyword/Vedanta%20Resources%20Plc>,
which has $10.6 billion of bonds and loans maturing by 31 December 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% from its
peak in 2010. India’s Directorate General of Hydrocarbons has fined
Reliance nearly $2 billion over the last three years for falling short of
output targets.
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 the 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 non-performing assets. (It is also nearly
impossible for banks in India to recover large bad debts, as the
desperation of Kingfisher’s hapless lenders reveals.)
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. Credit Suisse’s warnings may turn out to be speculative and
misguided, as alleged by a Reliance representative.
In any case, the Credit Suisse report, which focused exclusively on
aberrations in the balance sheets of large Indian corporations, 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.
*Enviable influence*
Batista had his connections and cronies, but he can only envy the influence
of his Indian counterparts. Photographs from a lavish birthday party for
Mukesh Ambani’s wife this month—held in a royal palace in Rajasthan rather
than the Ambanis’ 27- story Mumbai private residence—show a loyal and
gratified Indian elite in attendance, including the union minister for
heavy industries and cricketing legend Sachin
Tendulkar<http://www.livemint.com/Search/Link/Keyword/Sachin%20Tendulkar>.
Guests, flown in on 32 chartered planes, included a maker of socially
conscious cinema, Aamir
Khan<http://www.livemint.com/Search/Link/Keyword/Aamir%20Khan>,
as well as the new Bollywood teen icon Ranbir
Kapoor<http://www.livemint.com/Search/Link/Keyword/Ranbir%20Kapoor>
.
In 2009, a taped conversation between lobbyists allegedly 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, not to mention
ordinary middle-class Indians, went almost entirely unchallenged by the
political opposition and the mainstream media.
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 will be inflicted upon the lending banks, some
scapegoated politicians, the credibility of the media, and the usual
suckers—the voting taxpayers. *Bloomberg*
*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.*