FORESIGHTS - BUDGET SPECIAL

Delivering the right Budget is always tricky. Some hard decisions need to be taken for financial prudence while keeping in mind the interest of the larger social welfare. And the last full Budget before general elections take place is even more complex considering the heightened public interest and expectations of sops and vote-driven measures.

I must congratulate the Honourable Finance Minister Nirmala Sitharaman and the government for doing an exceptionally good job this time as the Budget puts the growth in clear perspective along with a thorough commitment to fiscal discipline despite the pressure of doling out popular measures. That said, there is a visible and healthy effort on the part of the government to take everyone along on this growth journey. From tax reliefs to a significant boost in infrastructure spending, from the focus on green growth to research and development in the pharmaceutical industry – this indeed is a Budget for all.

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The Monetary Policy Committee (MPC) of the RBI presented its final bi-monthly monetary policy for FY23 on February 8. In line with CareEdge expectations, the MPC further slowed the pace of policy tightening delivering a repo rate hike of 25 basis points (bps) following a 35-bps rate hike in December.

The Liquidity Adjustment Facility (LAF) corridor was maintained at 50 bps with the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) adjusted to 6.25% and 6.75%, respectively. Retail inflation print in December came at a one-year low of 5.7% staying below RBI’s upper tolerance level of 6% for the second straight month. The consistent easing in domestic retail inflation has provided comfort to the RBI to further moderate the pace of rate hike in today’s meeting. Despite the slowing pace of rate hikes, the RBI has maintained the policy stance as ‘focus on withdrawal of accommodation’. This shows that RBI remains cautious given the high domestic core inflation and global economic uncertainties.

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• CareEdge Ratings expects air passenger traffic to reach 93% of pre-pandemic levels in FY23 and surpass the pre-Covid level in FY24.
• India’s GDP growth and its multiplier effect on air passenger traffic growth with favourable demographics of a rising working population augur well for Indian airport operators.
• Improving the regulatory environment with the timely issuance of tariff orders will pave the way for timely revenue visibility for Indian airport operators.?

The resumption of international traffic w.e.f March 25, 2022, increased vaccination pace, and receding impact of Covid-19 led to a steady recovery for airport passenger traffic. After the third wave in Q4FY22, passenger traffic touched 90% of pre-Covid levels in Q1FY23 compared to Q1FY20. After witnessing a dip in passenger traffic recovery to 86% of Pre-Covid levels in Q2FY23, it rebounded again in October 2022 to 93% of the pre-Covid level in October 2019. CareEdge Ratings expects passenger traffic to reach 93% of pre-Covid levels in FY23 with the onset of the festive season and growth in international traffic, marking V-shape recovery for the sector, indicating growth by 70% in FY23 on a YoY basis. CareEdge Ratings expects a full recovery in international traffic by early FY24 combined with steady domestic traffic growth. Thus, on an overall basis passenger traffic is expected to surpass the pre-Covid level by 1.12 times in FY24.?

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• CareEdge Ratings believes the new marketing rules should help the city gas distribution (CGD) and fertilizer sector in saving around ?15,000 crore in FY24 upon higher availability of domestic natural gas from difficult fields.
• It should result in lower subsidy outgo for government, especially related to the fertilizer sector.
• Profitability margins of domestic natural gas trading companies could be negatively impacted in the medium to long term.
• Reliance on imported natural gas may increase for sectors other than CGD and fertilizers.

Key Takeaways from Government’s Gazette notification dated January 13, 2023

• These rules would apply to the discovery of market price and further trading of natural gas produced from DW, UDW and HPHT areas with ceiling price mechanism, prospectively from the date of issue of this notification.
• Participants in the bidding process for the above-mentioned gas will have to specify whether they wish to purchase gas through the auction for their use as end consumers or as a trader.
• Traders may resell the above-mentioned gas to another trader or an end consumer. However, aggregate trading margin on the resale of this gas would be capped at ~USD 0.08/mmbtu for its resale to urea and LPG producers. For the resale of this gas to other end consumers or traders, the aggregate trading margin would be capped at ~USD 0.20/mmbtu for calendar year 2023.

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• Prior to AQR, the quantum of Restructured Standard Assets in PSU Banks was very high, this has been effectively addressed by the AQR.
• The growth of GNPAs was a result of recognising stress in the system being built-up over a long period in the past.
• The Scheduled Commercial Bank Gross Non-Performing Asset ratio is likely to improve due to moderation in slippages, healthy coverage ratio, lower credit costs, higher credit growth, a declining trend in the stock of GNPAs and transfer of large accounts to new Asset Reconstruction Companies.

Prior to Asset Quality Review (AQR), the quantum of Restructured Standard Assets in all banks especially PSU Banks was high as banks used to restructure advances quite handily. However, the AQR undertaken by the RBI effectively addressed this issue. The AQR resulted in a reclassification of a significant quantum of standard restructured accounts as non-performing assets enabling the steady downtrend. However, in early calendar year 2020, the covid-19 pandemic struck the economy impacting lives and livelihoods. Hence in response to the Covid-19 pandemic, apart from the existing MSME scheme (operational since 2019), RBI announced two restructuring schemes.

In August 2020, RBI, announced Resolution Framework 1.0 (RF 1.0), which was largely aimed at corporate exposures and personal loans facing covid-19 related stress. The framework had a deadline of December 31, 2020, for invocation. ? Resolution Framework 2.0 (RF 2.0) announced in May 2021 and subsequently revised in June 2021, was aimed at MSMEs, individual borrowers and small businesses. This framework had a deadline of September 30, 2021, for invocation.

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