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Revealed
India's Third Giant Leap

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Maximum interest burden to fall on...
Wed, 12 Jan Pre-Open

The overriding concerns for Indian companies in 2011 are steep rises in input and interest costs. However there is a stark difference between the two. The impact of the former on operating margins can be hedged to an extent by raising the prices of the products. However, doing away with steeper interest payouts may not be an option for most companies. For that will entail paying off debt and letting go of liquidity at a time when raising funds could be expensive. To confront these challenges in the coming months, most companies may have to restructure their product portfolio and balance sheets.

But there is one entity that is in dire need of restructuring its balance sheet. Not being able to safeguard its P&L against further rise interest payouts could wreck havoc with the planned outlays for the year. We are referring to the central government.

Data source: RBI

Relentless spending on subsidies for agriculture and energy sectors may have had marginal contribution to India’s socio economic well being. But doing the same with incremental borrowing has come at a heavy cost to the exchequer.

Despite having the pressure of reigning in the fiscal deficit, the government may have to borrow more YoY in 2011. Proceeds from sale of shares in PSUs and telecom auctions are unlikely to bring down the same. With nature playing truant and crude oil prices spiraling skywards neither of the subsidy burden is expected to subside. Given such a scenario the government will have to compete with private players in a situation of tight liquidity. Doing so over the past 24 months has raised interest rates for the government by nearly 1.5%. Hence it is only natural that the maximum burden for dearer liquidity will be borne by the government (indirectly taxpayers).

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