Last month, the business empire of Eike Batista, 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 & 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 Kingfisher Airlines Ltd. once connected to the world, I thought of India’s own version of Batista: the flamboyant owner of Kingfisher, Vijay Mallya, 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.
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’s Reliance companies, Ravikant Ruia’s Essar Power Ltd., Gautam Adani’s Adani Power Ltd. 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 March 31. 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.
According to Bloomberg News, the reckoning may come even earlier for companies such as Mukesh Ambani’s Reliance Industries Ltd., India’s most powerful business house, and Anil Agarwal’s Vedanta Resources Plc, which has $10.6 billion of bonds and loans maturing by Dec. 31 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 percent 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 nonperforming 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 U.S.’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.”
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. Guests, flown in on 32 chartered planes, included a maker of socially conscious cinema, Aamir Khan, as well as the new Bollywood teen icon Ranbir Kapoor.
In 2009, a taped conversation between lobbyists 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 U.S., 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.
(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.)
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