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How strong balance sheets trigger opportunities

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It is a dramatic turnaround. Between 2013 and 2017, India faced a ‘twin balance sheet’ problem. Indian banks, mostly public-sector banks, had record-high non-performing assets. That meant banks could not lend more money to businesses. Large companies had a lot of debt and could not find more money to fund business growth. That resulted in India’s economy slowing even before the COVID-19 pandemic hit.

The situation has reversed today. Public sector banks are the darlings of the stock market. Share prices have soared as banks have benefited from the government’s move towards consolidation and recapitalisation. The resolution of non-performing loans has stepped up, and banks have recovered money, too. The balance sheets of companies have improved significantly, with more cash on books than ever, according to media reports. That means businesses can plan new expansions and quickly get money to fund them if needed.

The non-banking finance companies are also on a solid footing. According to an analysis by RBI published in the monthly bulletin, the consolidated balance sheet of the Non-banking finance sector exhibited a double-digit annual growth as of December 2022. The sector continues to maintain strong capital buffers, said the report. That is good news for the consumer loans and small business loans sectors.

The government’s balance sheet is also strengthened by substantial monthly tax revenue. The latest data for E-way bills show resilience. These are slips transporters exchange at check posts while transporting goods between states. The Reserve Bank of India publishes a study on the state of the economy in the monthly bulletin. The government has registered a revenue surplus in July 2023. It has allocated money towards capital expenditure, reflected in a higher gross fiscal deficit than last year. That means more money was put into building roads and other infrastructure. It is a crucial trigger for kickstarting economic activity and growth.

The other significant balance sheet is that of the household. While it is not as robust as companies, it could be turning the corner. The average household savings rate is at the lowest in many years. The latest RBI data for 2022-23 shows that financial savings dropped to 5.1% of GDP from 11.5% just two years ago. At the same time, household indebtedness is up to 5.8% of GDP from 3.9% of GDP. Persistently high inflation and poor wage growth hurt household balance sheets, with savings depleting and liabilities rising. However, there is a faster growth in income in urban households than in rural, according to India Ratings, an affiliate of FITCH, a global rating agency. According to the analysis, the current consumption demand is skewed in favour of the goods and services consumed mainly by upper-income households. India needs the real wage growth of the lower income households to get a boost for a wide-spread consumption demand. That is corroborated by the commentary given by the management of Hindustan Unilever, the biggest consumer goods company. It acts as a barometer for India’s consumption story. India Ratings analysis suggests that every 1% increase in real wages leads to a 1.12% increase in private fixed capital expenditure. That adds 0.64% to the GDP. In that context, a boost to rural incomes is necessary in the months ahead. 

You can play the India consumption story by shortlisting companies that ride on the future growth of the Indian economy. As India is expected to grow faster, these companies could do better than ever. You can also use technology to identify such long-term stocks.


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