FORESIGHTS-November
The US Federal Reserve, and to some extent our own Reserve Bank of India (RBI), have adopted a hawkish stance in their recent meetings, indicating that policy interest rates will remain elevated for an extended period. This stance contradicts the earlier market expectations of a decline in interest rates in the near future. The "higher for longer" policy approach of central banks has wide-ranging effects on global financial and real markets.
In this discussion, we will focus on the impact of this policy on Indian corporates. Firstly, let's assess the impact on the corporate credit profile. For Indian corporate borrowers, the interest rate increase has been approximately 150 basis points (bps). Given that most corporate borrowers were previously in the range of 7.5% to 10%, this 150-bps increase translates into a 10% to 15% rise in their overall interest costs. While this represents an additional expense for borrowers, most business plans are robust enough to withstand this added cost, and it is unlikely to affect the credit profile of the corporates significantly. This situation contrasts with that of corporates in the United States and Europe, where interest rates for corporate borrowers have risen by 300-400 bps over the past two years. Considering that US corporates were borrowing at around 2%-3% previously, this 300-400 bps increase implies that their interest costs have more than doubled and, in some cases, even tripled. Such a significant increase can certainly impact credit profiles, as evidenced by the rising bankruptcies in vulnerable sectors like commercial real estate in the US.
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Indian economy continues to see healthy high-frequency economic indicators. The index of industrial production growth jumped by 10.3% in August 2023, with healthy growth in consumer goods and infrastructure sector. Monthly GST collections surged to Rs 1.72 lakh crore in October 2023. Both manufacturing and services PMIs have slowed in October but remain in the expansion territory. However, the economy continues to face heightened uncertainties and challenges. The consumption growth has not been broad-based, with rural consumption being weaker than urban.
The poor monsoon has further jeopardized the rural consumption recovery. The kharif foodgrain production is likely to be lower by 4.7% (YoY) (as per the first advance estimate). Inflation in some basic food items like cereal and pulses is already high. Poor agriculture production could further exacerbate the inflation in these items. This in turn will have adverse implications on broad-based consumption recovery.
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Public Capex
Central Capex Continues to Perform Well Over the past few years, the public capex has remained strong mainly led by the centre. The Government's steadfast commitment to capex is reflected in its budgetary priorities. Notably, the share of capex within the total expenditure has undergone a substantial increase, rising from 12.1% in FY21 to 22.2% in the budget estimate for FY24. Centre’s capex witnessed a growth of 48.1%YoY in the April-August FY24, with spending of 37.3% of the budgeted value of Rs 10 trillion which is higher than the spending of 34.6% of the budgeted value in the same period in FY23.
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Government Receipts– H1 FY24
Gross tax revenue collection during H1 FY24 increased by 16.3% compared to last year on account of higher revenue from all major tax heads except excise duty. Net tax revenue has risen by 14.7% during the same period. The overall gross tax collection in the first half of the fiscal year stands at 48.2% of the FY24 budgeted estimate, which is lower than the 50.5% of the budgeted witnessed last year.
The non-tax revenue has remained robust, with a growth of 50.2% from the same period a year ago. Receipts from dividends and profits, which is a major head in the non-tax revenue, grew by 127.4%, surpassing the full-year budget estimate. The RBI has announced a surplus of Rs 87,416 crore, higher than the budgeted amount of Rs 48,000 crore under the Dividend/Surplus transfer of the Reserve Bank of India, Nationalised Banks, and Financial Institutions.
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China’s Property Predicament: In August 2020, China implemented the “three red lines” policy to tackle the issue of excessive leverage among developers and to improve the financial health of the real estate sector. Developers were required to meet all three red lines by June 2023. The consequences for failing to adhere to the red lines would be strict limits on developers’ annual debt growth, depending on the number of red lines crossed. When initially introduced, about 50% of China’s top 30 developers, in terms of sales, failed to meet at least one of the red lines. Since then, there has been a growing apprehension in the markets regarding the debt levels of developers and their ability to meet their debt obligations. Rating agencies have downgraded several developers due to these concerns. Creditors have become more selective when it comes to exposing themselves to the sector. There have been instances of bond defaults and the overall outlook for China’s property market has dampened. Due to the liquidity crunch, developers are also struggling to deliver homes on schedule, which is eroding homebuyer confidence. Some developers are resorting to cutting home prices to clear their unsold inventory. However, this strategy is backfiring as potential buyers are delaying their purchases in the hopes of further price reductions.
Consequently, pre-sales, which represent a significant percentage of developers’ sources of funding, have declined. As a result, developers’ revenues and profits have been severely impacted. For instance, Country Garden, China’s largest developer in terms of sales, reported a staggering 35% year-on-year drop in sales in the first half of 2023. It incurred a net loss of USD 6.72 billion in H1 2023 as opposed to a net profit of ~USD 91 million during the same period a year ago.
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The Indian pharmaceutical sector holds a prominent global position, particularly in the generic drugs market, ranking as the third largest by volume and thirteenth by value. Over the period spanning FY17 to FY23, the industry, encompassing both domestic and export markets, achieved a notable CAGR of 8%. This growth was driven by a 7% increase in exports and an 8% rise in the domestic market during the same timeframe. Consequently, the Indian pharmaceutical industry expanded from approximately USD 34.7 billion in FY17 to reach approximately USD 50 billion in FY23; and is envisaged to further increase to USD 57 billion by FY25. Globally, the Indian pharmaceutical industry has established a robust presence in the generics segment, with pharma exports and the domestic market contributing equally to its overall stature. However, in FY23, the industry's growth rate moderated to approximately 5%. This deceleration can be attributed to pricing pressures experienced in export markets and the influence of a high base effect stemming from the preceding fiscal year, FY22.
Approximately 80–85% of pharmaceutical exports comprise formulation products, which exhibited a CAGR of approximately 7% during the period from FY17 to FY23. The growth in pharmaceutical exports during FY22 and FY23 experienced marginal increments, which in turn impacted the industry's CAGR over the FY17-FY23 period. While growth remained subdued in FY22 due to the high base effect from FY21, the growth in FY23 was influenced by pricing pressures in the US market and multilateral funding agencies continuing to emphasize Covid-related drugs. Concurrently, the domestic market demonstrated consistent growth in consumption, leading to a CAGR of approximately 8%. Looking ahead, CareEdge anticipates that domestic consumption will continue to grow, both in terms of value and volume, at a CAGR of approximately 8% to 8.5% over the next two years. The upward price adjustments permitted for essential medicines under the National Essential List of Medicines (NELM) are expected to bolster domestic growth to a certain extent.
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In a positive development for the aviation sector, the Ministry of Corporate Affairs (MCA) on October 3 issued a notification exempting transactions, arrangements, and agreements related to leased aircraft, aircraft engines, airframes and helicopters from the application of the moratorium clause of Insolvency and Bankruptcy Code (IBC).
Under the Cape Town Convention (CTC), a global treaty initiated in November 2001 under the umbrella of the International Civil Aviation Organization (ICAO) and the International Institute for the Unification of Private Law (UNIDROIT), aircraft lessors, who are the rightful owners of these assets, enjoy robust safeguards to repossess aircraft in the event of lessee defaults on lease rental payments. This global framework has been a cornerstone of confidence in aviation leasing arrangements.
However, in contrast to the CTC, the IBC in India has imposed limitations on the ability to repossess aircraft when an airline, facing financial difficulties, files for insolvency, and the National Company Law Tribunal (NCLT) accepts their plea. This situation leads to a moratorium on the recovery of leased assets, significantly affecting the risk perception of global aircraft owners when leasing their assets to Indian airline operators, causing them to impose higher risk premiums on their transactions.
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Fuelled by the strong demand for overseas education among Indian students, specialised NBFCs have effectively established a niche in the overseas education loan segment. Currently, Canada stands as the second-largest market in terms of regional exposure for education loans among specialised education loan NBFCs, second only to the US. The impetus for this growth is primarily attributed to the robust demand for education in Canada, which is further substantiated by the increasing number of student visa issuances to Indian students. The trend of Canada's student visa issuances to Indian students has been on the rise since 2015. Visa issuances to Indian students constituted 39.9% of the total student visa issuances to international students for CY2023 (till August 31, 2023).
In 2022, Canada launched the Student Direct Stream (SDS), a fast-track visa processing program designed for students hailing from India, China, the Philippines, and Vietnam. The Canadian government unveiled the Post-Graduation Work Permit (PGWP) Extension program in April 2023, allowing international students to extend their stay in Canada for up to three years after graduation. This program provides them with ample time to gain valuable work experience in Canada and potentially secure a permanent job. The increase in student visa issuances to Indian students is also partially attributed to decreased demand from Chinese students. Of 319,130 Indian students in Canada as on December 31, 2022, around 209,930 were pursuing undergraduate degrees, 80,270 were pursuing post graduate degrees, and 28,930 were pursuing diplomas or certificate courses. The aggregate AUM of the retail education loan portfolio of CareEdge Ratings-rated NBFCs for students pursuing education in Canada, demonstrated a remarkable Compounded Annual Growth Rate (CAGR) of 77.5% from March 31, 2021, to June 30, 2023. The outstanding AUM reached Rs. 5,183 crore, significantly up from its standing at Rs. 1,426 crore on March 31, 2021.
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The microfinance crisis that unfolded in the state of Andhra Pradesh in October 2010 represents one of the most significant challenges ever faced by the microfinance industry. This crisis emerged in the wake of disturbing incidents, such as microfinance institutions (MFIs) employing unethical methods for loan recovery, which tragically resulted in borrower suicides. It also involved allegations of borrowers taking multiple loans and MFIs imposing exorbitant interest rates. As a response to these concerns, the Andhra Pradesh government found it necessary to enact an ordinance in October 2010 to safeguard the interests of borrowers.
The key provisions of the ordinance included:
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