India's Debt level on the rise, still behind China

The country`s economy is on a strong wicket going by the debt level while other Asian countries such as China, Hong Kong and Malaysia have witnessed a sharp rise in their domestic credit, a latest report says.

According to a Citigroup analysis, the ratio of domestic credit levels in the gross domestic products in six out of the 10 economies of Asia, excluding Japan, has risen. Major economies -- China, Hong Kong, Korea, Malaysia, Taiwan and Thailand -- have recorded the credit levels higher than their GDP in 2006.

"In six out of the 10 economies of Asia, excluding Japan, the domestic credit to GDP ratio has risen and six economies have domestic credit to GDP ratio in excess of 100 per cent," Citigroup analyst Marcus Rosen said in the report.

For India, the credit to GDP ratio of 64 per cent in 2006 is at a comfortable level and much less than that of other major Asian economies. The country recorded a GDP growth rate of 9.4 per cent for the financial year 2006-07.

In the United States, the credit to the GDP ratio is nearly equal. This means debt is balanced by the sum of market value of all final goods and services produced within a country in a given period of time.

In Japan, the level is over 200 per cent, indicating that the debt is double the GDP, while in the euro area it is 152 per cent, the report said.

The report highlights the progression of domestic credits as a per cent of GDP over 3 time frames - 1995, 2000 and 2006.

India has witnessed one of the biggest rises in credit of about 20.8 per cent from 2000 to 2006. Korea with over 29.2 per cent and China with 14.7 per cent are the other countries where big increases have been seen.

According to IMF staff estimates for 2007, India`s GDP is around Rs 32,810.86 billion, while China`s GDP is at 9,618.29 billion Yuan. The economy of Hong Kong, Korea and Malaysia stands at 1,829.236 billion Hong Kong Dollar, 792,894.66 billion won and 292.945 billion Ringgit respectively.

Besides, America`s GDP is estimated at USD 11,663.241 billion and Japan`s at 518,100.98 billion yen for 2007.

On the other hand, India has seen the degree of operating leverage (DOL) rise over the past 24 months as capex has taken hold but returns from the investment have not yet flowed through to the bottom line.

DOL refers to the ratio of fixed to variable cost ratio. The reason behind the rise in operating leverage in Asia, including India, is due to the success of outsourcing.

Companies in the US, Europe and Japan have a tendency to outsource the manufacturing part of their businesses to the developing countries. The emerging economies take on more fixed cost while holding on to the variable cost, that is, marketing and R&D