In the wake of the financial crisis, India decided to reduce public savings in favour of better growth.
“The collateral damage has been persistent consumer inflation and declining corporate savings or profit share in GDP,” wrote Morgan Stanley’s Ridham Desai.
And now five years on, India’s debt load has shifted from the public sector to the private sector.
It’s the exact opposite of what has taken place in developed markets, where public sector balance sheets grew massively while the corporate sector delevered.
Desai calls this massive change the “Great Debt Transfer.”
“Persistent inflation has deflated public debt relative to GDP — but it has also punctured corporate profits (and, thus equity), causing corporate financial leverage to rise,” Desai writes in a new note to clients.
And the fall in public savings has dogged corporate profits.
Here’s the shift from public to private debt.
“The world’s reserve currency is no longer interested in funding India’s external deficit (caused by the persistent fall in savings),” Desai writes. “Thus, it becomes imperative for India to reduce this deficit.”
Like in 1998 in India, real rates need to be held high at the expense of growth, Desai argues.
“India’s macro construct threatens its relative gains against its most relevant peer group (the BRICs) in the 18 months preceding mid-July,” said Desai.