India ‘Zombie’ Companies Adding Drag To World Economy

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India has been slammed with bad news in recent weeks. The stock market has been under performing, investors are rushing to buy up gold, the rupee has dropped to an all-time low, and economic growth is slowing. These tough economic conditions are starting to strain businesses, and now many of them are having trouble repaying their loans.

India 'Zombie' Companies Adding Drag To World Economy

Loan performance in India

Several large Indian banks have reported bad, or “non-performing” loans as economic growth has slowed across the country. Companies that were borrowing heavily when times were good are now suddenly finding themselves unable to repay their debts. The State Bank of India reported a jump in non-performing loans from 5% a year ago to 5.7%. Punjab National Bank also reported a jump from 3.4% to 4.8% from a year ago. Numerous other banks have seen a similar increase non-performing loans, which are beginning to create a serious drag on their books.

Many analysts believe that the problem could be far worse than the Indian government or banks are willing to acknowledge. Loopholes in reporting measures allow Indian banks to restructure many loans and allow submerged companies to make far lower payments. In many cases, these companies may already be all but dead and buried, but the restructured payments allow them to continue on as “zombie” companies.

See: Chandrakant Sampat Sees Danger Ahead For Global Economies

USD to tighten India’s financial market

As bad as things are now, there is a serious risk that conditions could worsen. As the United States looks to ease its sequestration policies, the U.S. dollar is sure to gain strength. As such, investors who had previously been flooding emerging Asian markets with cheap money will begin to reinvest their funds in the United States. This could cause financial markets in places like India to tighten and funds available for lending may dry up.

Further, Western markets, including the United States, European Union, and Japan, remain stagnant. This is resulting in slumping demand in export oriented Asian countries, including most importantly China, which has already lowered its growth projects for 2013. This global slowdown is being felt in India and the rest of Asia. While the economy appears to be relatively stable at the moment, there is still a lot of risk and uncertainty in markets. The result of both global and local economic conditions is resulting in a slow down of economic growth, with India projected to grow by only 5.5% this year.

While a growth rate of 5.5% may sound high to people from a developed country, such as the United States, there are important nuances to understand regarding how GDP numbers are calculated. Generally speaking, the GDP accounts for the “formal” economy and largely ignores the “informal” economy. The informal economy refers to any part of the economy not taxed or monitored by the government. If a farmer sells rice to his neighbors and does not report this to the government, he is engaged in the informal economy. This type of activity is generally not accounted for in GDP calculations.

GDP growth rates

A quick way to boost official GDP growth rates is to simply formalize the information economy. For example, by monitoring and taxing farmers when they sell at local markets or to neighbours, the government can record economic “growth” even if actual economic activities remain the same. As developing countries emerge, they begin to “formalize” their economies, which accounts for a large portion of their economic “growth”. India is now in the process of formalizing vast portions of its economy. Thus, the 5.5% growth in India could literally mean that the economy is on the verge of stalling out.

With over a billion people and massive consumer markets, a slow down in India would be felt throughout Asia and the rest of the world. In combination with stagnant Western markets and a Chinese economy that is losing steam, a slump in India could stall global economic growth. And if markets were to take a serious blow in India, the impact could prove to be enough to set off another world-wide economic downturn in an already weak global economy.

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