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The start of the year, presents a mixed bag for the global and Indian economy.

Globally, the world is inundated in debt (see Chart 1) like never before and interest rates are at the highest levels seen since the last decade. A slowing global economy and range bound crude keeps the hope alive for lower inflation prints and a subsequent cut in interest rates. The hopes are quite high for interest rate cuts into calendar year 2024.

United States Government Debt Outstanding

The Cold War between the US & western world and China & Russia, and actual conflicts between Ukraine and Russia and the conflict in the Middle East has broken down conventional supply chains across the world. Self-sufficiency goals of nations have taken precedence over procurement from the most efficient producing nation. This invariably builds in some inefficiencies which manifests as inflation.

The amount of money printing (see Chart 2) which has happened post Covid, will also push money supply high, which leads to increased demand and inflation.

Global Money Supply Estimates

Given that inefficiencies in supply chain and higher money supply both induce inflation, it is unlikely that inflation will come off meaningfully, unless, a collapse of M2 Money supply or extended high inflation kills demand, leading to a slowing economy, inflation cooling off and rate cuts follow. In such an uncertain environment, India seems to be well positioned both on the balance sheet and the profit growth prospects. While evaluating the balance sheet of the country, we look at:

Corporate Balance sheets:

Corporates, across market capitalisations, have cleaned up debt over the last 5-6 years. Even small & microcap (we evaluated companies up to 1000crs market cap), have got pristine balance sheet, which lend a lot of resilience to the corporate sector. The deleveraging cycle came at the cost of capacity addition, and today capacity utilisation is near to 75% across many segments (in some segments beyond 80%), which is one of the reasons to be positive on the capital expenditure (capex) cycle. Unlevered balance sheet and high capacity utilisation is a potent combination for corporate capex recovery.

India’s corporate debt to GDP ratio has eased

Personal balance sheets:

Indians have generally been savers and debt on personal balance sheets have generally been restricted to housing debt, vehicle loan or credit cards. Off late the RBI has sounded caution, on the growth of unsecured personal debt, but as a percentage of savings, debt on personal balance sheet is comfortable.

 India’s household debt to GDP is low compared to global levels

Government Balance sheet:

The central government has been prudent while managing their fiscal deficit and highlighted towards a path of fiscal prudence. Higher tax buoyancy, strong forex reserves, reasonably stable crude and currency have all aided in the government's fiscal discipline. A higher crude price and some fiscal relaxation (given this is an election year), could be the risks one can foresee. India’s government debt as a proportion of GDP appears to be comfortable as compared to many of the global peers.

 India’s government debt is at comfortable levels

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