Anil Ambani may be feeling a little smug. Barely two weeks after India’s election in May, the canny billionaire rushed to raise around $800m in equity for Reliance Communications, his heavily indebted mobile telecoms operation. Always a shrewd operator, he sensed that India’s post-election optimism might not last.
Rival industrialists such as billionaire Gautam Adani also began readying fundraising plans, hoping to patch up their balance sheets, which had been damaged in the country’s recent downturn. Few, however, have yet managed to follow Mr Ambani’s lead.
Now, with foreign investors growing nervous about the global economy, the risk is that corporate India may already have missed its chance to raise capital – and, with it, an opportunity to kick off a virtuous cycle of debt repayment and deleveraging. “The idea that capital markets are going to bail out all these overleveraged companies, that moment is probably now gone,” says the head of one global investment bank in Mumbai.
At one level, such gloom seems odd. India’s prospects are improving. Prime Minister Narendra Modi appears to have rediscovered his zeal, following victories in regional elections last weekend. His government has unveiled new reforms in recent days, including ending diesel subsidies and raising gas prices. Business leaders are enthused. Economic data are moving in the right direction too.
But global economic difficulties are also real enough, making fund managers less likely to take risky bets in emerging economies. India’s industrial and banking sectors remain badly undercapitalised. Major conglomerates – such as London-listed Vedanta and Mr Ambani’s wider Reliance Group – carry heavy debts. Many smaller infrastructure and power businesses are barely solvent. Indian banks are also struggling with bad loans, and must raise $200bn by 2018, according to the rating agency Fitch.
All of this matters because India’s economic fortunes are unlikely to recover until these industrial groups increase their spending, which has collapsed over recent years. Even an optimist like Arundhati Bhattacharya, chairman of State Bank of India, says such a recovery is unlikely for at least a year. If investors get spooked, and equity markets close up, it will take longer still.
Narendra Modi and his plan to transform India
India’s prime minister has grabbed the headlines with high profile meetings with leaders of the US, Japan and China, and announcing a successful satellite mission to Mars. Many see him as the best hope India has had for years to transform the country into an industrial power. Victor Mallet, South Asia bureau chief, talks to Fiona Symon about Mr Modi’s ambitions and the things that stand in his way.
Investors have reason to be wary. Those brave enough to back struggling Indian conglomerates over recent months have done badly. RCom’s stock is down by around a third since June. GMR Infrastructure and Jaiprakash Associates – two other troubled industrial groups that managed to raise funds following India’s election – have also seen sharp falls.
Further signs of nerviness may also dent government plans to sell stakes in larger state-backed businesses, such as miner Coal India and energy explorer ONGC. Whether these move ahead now depends partly on Mr Modi’s willingness to sell at a generous discount. Even if he does, it will only complicate the task facing capital-hungry businesses by crowding out their own attempts to raise funds.
Optimism about Mr Modi’s administration and signs of an improving economy seem unlikely to counteract wider worries about a global slowdown – or any further rise in anxiety about the state of developing economies.
Worse, Indian companies in sectors ranging from power and steel to aluminium and mining are yet to see much of an improvement in their operating environments. Many have encountered worsening conditions in 2014 – notably those caught in the aftershocks of a supreme court ruling last month, cancelling more than 200 coal mining licences belonging to private sector businesses.
If equity fundraising becomes less likely, however, it makes other steps to curb debts even more important. Some of these can only come from Mr Modi’s government. Others lie in the hands of bankers and industrialists – such as a willingness to write down past debts, or sell off assets at reasonable valuations.
Either way, the path forward for Indian companies will be difficult. Hopes that a post-election market boom combined with “big bang” reforms from Mr Modi would quickly cure longstanding problems of indebtedness were always far-fetched. India’s industrialists took years to get into this hole. It will take just as long to dig themselves out.