Zombie firms are rising up again in India

By Andy Mukherjee

The living dead are rising once again. 

After a temporary decline between 2016 and 2019, corporate zombification has once again been on an upward trend globally, says a recent study by Bruno Albuquerque and Roshan Iyer at the International Monetary Fund. This, the researchers say, leads to “congestion effects.” Healthy firms experience lower investment, employment and productivity growth as unviable rivals waste resources.

Better-quality enterprises also suffer faster exits, and new entrants are slower to arrive. “Zombie firms may cast a long shadow on the economy,” the IMF economists conclude.  

That shadow crept up on India a decade ago. In 2012, Credit Suisse Group AG — which, as irony would have it, has itself gotten swallowed up by UBS Group AG — wrote an influential report about the country’s most indebted companies, titled “House of Debt.” As the house burned, and flames threatened to singe the banking system, India rustled up modern bankruptcy legislation in 2016. The monetary authority embarked on a controversial campaign to turn off life support for businesses that were too bloated and unprofitable to survive in the normal course.

However, Covid-19 changed everything. Like in many other countries, the government came in with an emergency credit guarantee for failing firms, allowing lenders to regain their footing. Post-pandemic shortages and the war in Ukraine boosted inflation and interest rates and shored up banks’ profitability. The focus on zombies went away. So much so that instead of being swiftly dispatched to corporate-obituary pages, they are once again being allowed to roam indefinitely in the twilight zone, as a source of easy revenue and cheap talent for their healthy rivals. 

Take Vodafone Group Plc’s India joint venture with cement-and-aluminum tycoon Kumar Mangalam Birla. As of June 30, Vodafone Idea Ltd. had long-term liabilities of more than 2.2 trillion rupees ($27 billion), most of which are the wireless carrier’s deferred payment obligations to the government for spectrum. Forget rolling out a fifth-generation telecom network. The company is  struggling to pay for the 5G airwaves it won in a 2022 auction. Millions of customers are deserting the service every quarter.

India’s successful telco czars — Mukesh Ambani’s Jio Infocomm Ltd. and Sunil Mittal’s Bharti Airtel Ltd. — are not complaining. And why should they? Not only is New Delhi the largest creditor to Vodafone Idea, following a halfhearted rescue, it’s also the one-third owner of the loss-making enterprise. If somebody needs to be alarmed about a duopoly emerging in a core infrastructure business crucial to productivity, then it’s the government.

But it doesn’t seem to be too perturbed. Just like it seems unconcerned about the same thing happening in the world’s fastest-growing large aviation market. Go Airlines India Ltd., with a 7 per cent domestic passenger share, filed for bankruptcy in early May and temporarily grounded its flights, promising to be fully back by June 1. The latest update is that flights are canceled until Sept. 25 for “operational reasons.”

With every passing day, Go’s fate is looking similar to that of Jet Airways India Ltd., which collapsed under the weight of debt in 2019 and hasn’t resumed operations even after exiting bankruptcy in January. What’s the point of an insolvency law that takes in dead firms and sends out zombies?

It isn’t in anyone’s interest to ask that question right now. The status quo is working very well for InterGlobe Aviation Ltd., whose low-cost carrier IndiGo now controls 63 per cent of the Indian market. Air India Ltd., privatized in 2021, also benefits, as its new owner, the Mumbai-based Tata Group, forges an unwieldy empire of four carriers into one. To be surrounded by weak competition means monopsony power to set wages: Why pay more for pilots when your rivals can’t pay them at all? 

Until the deadwood is cleaned up, new capital will be reluctant to enter government-regulated sectors in India. Consumers may grumble, but not complain too loudly — not as long as Ambani’s Jio is wooing them to its burgeoning digital empire, and until Tata needs passengers to fill the hundreds of planes it has ordered. But lack of effective competition will ultimately show up in prices as corporate greed. 

Even when it doesn’t look like the starting point for another haunted house of debt, zombification of the economy has to be stamped out, and it must be done before the next bout of “greedflation” forces future policymakers to raise interest rates — hurting investment, jobs and wages.