India might be headed for a debt crisis with the rest of Asia

02 September 2019 4 min. read

McKinsey & Company reports that Asia might well be headed towards another debt crisis, given that most major economies in the region are only falling deeper into debt. In India, the number of companies that are locked up in long term debt with considerable interest has increased by 30% over the last decade. 

The global management consultancy writes that the conditions across Asia right now are ominously similar to those that preceded the debt crisis of 1997. Economies in the region were hard hit by the Global Financial Crisis in 2008, and continue in their struggle to regain economic stability.

Despite considerable economic growth over the last decades, few economies in the region appear to have made any progress in fighting the aggressively high debt levels that appear to be accumulating. The report identifies three patterns that are likely to spell trouble in the near future.

Stress levels among corporates in Asia

The first is that businesses operating in the real sector across Asia are now facing growing pressure to repay their debt, while households across major economies such as South Korea and Australia also find themselves deeply indebted. The problem appears to have permeated through most economic segments. 

The second pattern is that the overall financial structure across Asia appears to have significant gaps, with growing risk costs in developing markets, declining margins, a weakened capital buffer as well as a retained dependence of banking and financial institutions when it comes to lending.

Thirdly, Asia is seeing a substantial level of foreign capital inflows, a figure that has expanded beyond the levels they had reached in 2007 when global cross-border capital inflows were on a high. The global figure has declined since then, while the number for economies across Africa continues to rise.

Share of debt by sector

India is among the most prominent economies in Asia, and has touted by economists as a future driver of economic growth in the region, particularly as China’s market begins to age and saturate. Compared to other major economies in the region, India has also reported lower debt levels. 

Last year, Big Four accounting and advisory firm Deloitte reported that debt levels in India are remarkably lower than those in Japan, Australia, South Korea and China when it comes to household gross debt as well as gross debt in the non-financial corporations sector, when measured as a percentage of the GDP.

Household gross debt in India amounted to only 10% of the GDP in 2016, which is staggeringly low when compared to 123% in Australia, 93% in South Korea and 44% in China. Similarly stark contrasts are visible when examining gross debt of non-financial corporations as a percentage of the GDP.

However, McKinsey’s latest report shows that the pressure on the Indian business sector is increasing faster than many major economies across the globe. 43% of Indian companies are currently in long-term debt that has an interest coverage ratio of less than 1.5%, which is higher than any other Asian country by some distance.

Risk costs across Asia

The next highest share is that of China with 37%. The majority of India’s long term debt lies in the industrials and utilities sector, which cumulatively contribute nearly 60%. Other areas that contribute to high debt levels are the materials, energy and real estate sectors. Risk costs in India are also increasing, consistent with the other Asian economies.

"Whether cumulatively these conditions are enough to trigger a new crisis remains to be seen, of course. Since 1997, financial regulators have become wary and safeguards have been put in place, such as a shift from the fixed exchange rate to a managed-float-exchange-rate regime in Thailand," states the report.

"Yet, governments and businesses need to monitor potential triggers carefully, like defaults in repayment of debt, liquidity mismatches, impact of higher interest rates, or large fluctuations in exchange rates, and take adequate preventive action," the report adds.