FORESIGHTS-JUNE,23

FORESIGHTS-JUNE,23

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What Lies Ahead? The outlook for Indian macroeconomic and corporate performance remains positive, with stronger GDP growth and a notable moderation in inflation. This puts us in a favourable position compared to many struggling global economies facing low economic growth and high inflation. However, as with any forward-looking assessment, it is essential to consider uncertainties that could impact our economic and corporate performance. Let us look at the top three points:

  1. ? El Nino’s impact on monsoons
  2. Impact of global economic slowdown
  3. Geopolitical escalations El Nino’s Impact on Monsoons: El Nino, although not uncommon, can have a material impact on monsoons, occurring once every three-four years on average. There is a 70% probability of significant effects on monsoons in the case of ‘strong’ or ‘moderate’ El Nino.

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India’s macroeconomic scenario appears to be on a comfortable pedestal. GDP growth for FY23 turned out higher than market expectations at 7.2%. Inflation has been on a downward trajectory with CPI inflation going below 6% in the last three months and the WPI index contracting in the last month. While merchandise exports have been weak, CAD has narrowed supported by moderation in import growth and healthy services sector exports. FII inflows have improved to USD 8.8 billion in the fiscal year so far compared to USD 5.5 billion outflows in FY23. Our forex reserves have improved to USD 595 billion, further reducing the external vulnerability. While the top-level numbers have improved, this is not to deny that there are lingering concerns around the economy. A deeper dive into last year’s GDP data reflects some weakness in consumption demand. Private Final Consumption Expenditure (PFCE) recorded a weak growth of 2.8% in Q4 FY23, pulling down the PFCE/ GDP ratio to 55% in Q4 FY23 compared to 61.6 in the previous quarter.

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The economic output expanded at a better-than-expected pace of 6.1% in Q4 FY23 from an upwardly revised 4.5% growth in Q3 FY23. The strength in domestic demand supported the momentum amid the global slowdown. There was a broad-based improvement in growth across sectors. Services sector sustained momentum owing to growing travel demand as reflected in strong passenger traffic (both railways and airports) and PMI-Services data. A rebound in the manufacturing sector’s output and double-digit growth in construction supported industrial growth. For the full financial year, the economy clocked a growth of 7.2% (provisional estimate), higher than the earlier estimate of 7% (Second Advance Estimate).

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Services sector was the key driver which benefitted from the pent-up demand. On the expenditure side, the private consumption to GDP ratio stood at 55% in Q4 FY23 and was lower than 56.7% a year ago. On a positive note, the investment rate (GFCF to GDP ratio) jumped to 35.3% in Q4 FY23 compared with 34.3% last year in the same period. The drag from net exports on growth was significantly lower in Q4 amid a narrowing trade deficit. For the full financial year, the private consumption to GDP ratio was only marginally higher compared to the last fiscal. However, the GFCF to GDP ratio bounced to a decadal high supported by the government’s continuous thrust on capital expenditure.?

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The Monetary Policy Committee (MPC) of the RBI maintained a status quo on the repo rate keeping it unchanged at 6.5% in its second bi-monthly policy meeting of the current fiscal. This marks the second consecutive meeting wherein the MPC decided to keep the repo rate unchanged after having raised it by a cumulative 250 basis points (bps) during the last fiscal. The Liquidity Adjustment Facility (LAF) corridor was maintained at 50 bps with the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) unchanged at 6.25% and 6.75%, respectively. The MPC maintained the policy stance at ‘withdrawal of accommodation’ reflective of RBI’s vigilance on the inflation front. In terms of the view of MPC members, while the decision to keep the repo rate unchanged was unanimous, the members were split over maintaining the policy stance at ‘withdrawal of accommodation’ with a vote of 5:1.?

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The decision to continue holding the pause button on policy rates comes at a juncture when retail inflation is seen moderating and domestic growth has been holding up well. Several high-frequency economic indicators such as GST collections, e-way bill generation, air passenger traffic, manufacturing and services PMIs continue to point towards sustained momentum in the economy. Though the RBI decided to keep the policy rates steady drawing comfort from the softening retail inflation, the central bank’s commentary reflects a cautious undertone. With inflation yet to see a durable easing to the medium-term target of 4%, the RBI reiterated its commitment to ensuring price stability. Risks to domestic inflation persist on account of a volatile global scenario, the uncertain trajectory of global commodity prices and domestic weather-related risks. Thus, a fairly resilient growth scenario coupled with inflation ruling above the medium-term target supports the possibility of an extended pause in the policy rates in 2023.?

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CNG prices have displayed a rising trend, with average annual prices in Mumbai growing at a CAGR of 17.1% over the FY19-FY23 period. While the slight decline in FY21 is attributed to the global demand collapse due to Covid, the subsequent surge in prices in FY22 and FY23 is due to the restoration of demand with a bounce back in economic activities, increased household consumption and a sharp uptick from the auto sector. The price rise in FY23 was sharp at 49%, reflecting the surge in gas prices globally on account of supply disruptions caused due to the ongoing Russia-Ukraine war.

Sustained Strong Demand for CNG Vehicles

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The sharp increase in CNG prices was initially expected to dampen the demand for CNG vehicles in FY23. On the contrary, retail sales of CNG passenger vehicles increased by 40.7% in the year, with most other categories also displaying a large jump in demand.

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Following the subsiding impact of Covid, the demand for two-wheelers experienced a resurgence, although it remained below pre-Covid levels in FY23. The overall volume growth in FY23 reached a healthy 9%, encompassing both domestic and export markets, with total volume sales amounting to approximately 19.51 million units. The domestic two-wheeler industry witnessed total sales of 15.99 million units, reflecting a growth rate of 19%, while the volume of exports experienced a decline of 18%. In the first half of FY23, there was a year-on-year growth of 19.3%; however, the second half of FY23, despite encompassing the festive and marriage season, remained lacklustre. This was primarily attributed to factors such as increasing prices, an inflationary trend, rising interest rates, and weak demand in the export market. During this period, wholesale prices of motorcycles and scooters rose by 4.8% and 7.3%, respectively. Industry players implemented multiple price hikes to offset the surge in input prices following the Ukraine-Russia war.

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The demand for two-wheelers, particularly in the rural segment, has remained subdued over the past four years due to significant increases in vehicle and fuel prices, as well as the impact of Covid and the semiconductor shortage. The moderation in exports can be attributed to a slowdown in demand from African and Asian countries.

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CareEdge Ratings has analysed 235 HAM projects awarded between FY16 and FY22, totalling 10,000 km with an aggregate bid project cost (BPC) of ~ Rs 2.74 lakh crore and debt of ~ Rs 75,000 crore. Since the execution of projects awarded post-March 2022 is yet to commence, the same have been excluded. Of the sample, 31% of the projects have become operational, 44% of the projects are under construction and 25% of the projects are awaiting an appointed date till December 2022.

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Exhibit 1. Operational HAM Roads Portfolio: Debt of Rs. 36,000 crore Exhibit Superior Cashflow Resilience



  1. Favourable completion cost of 110-130% of BPC (supported by higher inflation).
  2. Low project leverage: Debt/BPC of ≤ 40%.
  3. Repo linked term debt structure for few projects.
  4. Opportunity to unlock equity with fund raise of Rs. 9,000 – Rs. 11,000 crore as top up loans, stake sale, or InvIT.

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Exhibit 2. Satisfactory Project Completion Status for HAM projects

60% of the delayed projects belong to weak sponsor and hence in CareEdge Ratings opinion, corresponding debt of around Rs. 6,000 crore is viewed to be at high risk. Termination or harmonious sponsor substitution can be probable remedial measures.

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