While the tightening of financial conditions has raised concerns over corporate debt vulnerabilities globally, Indian companies are much less leveraged and have sufficient space to borrow further to invest, the Union finance ministry said on Monday.
“As of end of September 2022, India’s corporate sector credit-GDP ratio is about 12.3 percentage points below its historical trend,” the ministry noted in its monthly economic review for February. The comments come at a time, when the jury is still out on whether a new private capex cycle has indeed started.
Non-food credit growth rose to 15.9% in April-February of FY23, nearly double the rate at which it grew in the year-ago period, although the credit flows have seen some fluctuations in recent months. Rise in capital and construction goods imports is another factor that has given some credence to the assumption that at least in some sectors like chemicals, fresh investments are picking up.
“While the current rate hike cycle and monetary tightening continue to cause turbulence in global financial markets, the impact of adverse developments on the domestic private sector will remain limited on account of its strong debt profile, which has proven to be key in maintaining macroeconomic stability,” the ministry said.
As per the Bank for International Settlements (BIS), the core debt of the corporate sector increased in both advanced economies (AEs) and emerging market economies (EMEs), reaching 149% of GDP in Q3 2022 for emerging market economies (compared to 82.3% in Q3 2008) and 153% in G20 in Q3 2022 (139.4%). Whereas for India, it has declined to 87.7% in Q3 2022 compared with 107.3% in Q3 2008, the period of the global financial crisis, the ministry observed.
The contribution of Gross Fixed Capital Formation (GFCF) to the growth momentum softened as its share in the real GDP moderated from 34.2% in Q2 FY23 to 31.8% in Q3.
The government has hiked budgetary capex steeply in the last two years and has budgeted to keep the pace in FY24 as well, hoping that this will help crowd in private investments.
India’s real GDP growth in Q3FY23 has come in at 4.4%, lower than expected.
With the wholesale inflation declining to a 25-month low in February, its transmission to retail inflation is expected soon, the ministry said, also adding that lower current account deficit (CAD) would provide a buffer to the rupee in uncertain times. A rise in exports of services and a recent drop in import intensive consumption demand will also help lower the CAD in FY23 and FY24 as against estimates, the ministry said.
The CAD for the first half of 2022-23 had stood at 3.3% of GDP, and the full-year deficit is expected to be 3%. Crisil has estimated the deficit to be lower at 2.4% in 2023-24.
“Going forward, the inflation trajectory will likely be determined by extreme weather conditions like heatwaves and the possibility of an El Nino year, volatility in international commodity prices and pass-through of input costs to output prices,” it said.
CPI inflation eased slightly in February 2023 to 6.4% from 6.5% in January 2023, with a decline in both food and core inflation. The WPI inflation, however, moderated in February to 3.8%, driven by a decline in manufactured goods and primary articles.
Overall, during Apr-Feb 2022-23, CPI inflation stood at 6.7%, well above the RBI’s target range, reflecting the persistence of the inflation challenge. Forecasts by various international agencies show that inflation in India will moderate in FY24 compared to FY23 and is likely to remain in the range of 5-6%, with risks evenly balanced, the ministry said.