How balance sheet recession will take its toll on Start-up India

Ever thought how Start-up India relates to Make in India? They are allied the same way as Make in India connects to Indian agriculture, or as rural economy links to urban and industrial economy. How? As things stand today, a major part of consumption market sinks into recession just when rural and semi-urban demand for auto, cement, food and consumer products take a knock.

Similarly, in the world of start-ups, those with the highest valuation belong to e-commerce, but are like a small shopping mall for India’s humongous manufacturing industry. As Start-up India’s buyers come from urban areas, where manufacturing industries and services are the greatest providers of jobs, any slowdown in this segment affects consumers’ purchasing power, in turn, hitting revenues and valuation of start-ups.

Hence, even the success of startups - aka new generation of small industries - hinge on how profitable the brick and mortar sector is, which is reeling under the deep recession embedded in their balance sheets. 

The persistent fall in corporate earnings and subdued growth in industrial output confirm the drought of industrial investment. Despite a major push to Make in India in two budgets, fresh private investment couldn't flow in due to nasty “balance sheet recession”.

A balance sheet recession occurs when high levels of private sector debt causes companies to focus on saving and debt servicing rather than spending or investing, causing economic growth to decline. Global economists are convinced that the Japanese recession of 1990-2005 had come from balance sheet-squeezing bank loans. The 2007-09 slowdown in the United States has also been diagnosed as balance sheet recession.

Loans have really broken the backbone of Indian companies. According to latest reports, at the end of 2014-15, 441 prominent Indian companies were collectively sitting on a loan of Rs 28.5 lakh crore, which was 98.1 per cent of the loan of 656 non-financial companies. Reserve Bank of India governor Raghuram Rajan has already conceded to the fact that indebted companies are the greatest hurdle in the way of investment.

Remember last year’s raging debate on necessity of reduction in interest rate for growth? Then it seemed as if the Reserve Bank and finance ministry stood on two opposing poles. However, the Reserve Bank turned out to be right. Companies’ loans have grown so huge that a major part of their earning is going into loan repayment. This is why even after cuts in interest rate, neither credit offtake nor investment could grow. On the other hand, banks are getting crushed under the weight of bad loans. India’s classic balance sheet recession makes it quite clear that the cure for recession will not come from cheaper bank loans as companies have avoided a medicine that would only aggravate their disease.

Last month, when the prime minister launched a campaign to provide facilities to start-ups, there were no doubts about the entrepreneurs’ foresight or courage, or about the availability of funds for their ideas. As per the NASSCOM report, before the emergence of the idea of government-sponsored Start-up Fund (the fund itself is still far off), the start-up funding had already touched $6.5 billion in 2015.