By Sachin Gupta,
The first half of FY25 paints a picture of cautious optimism within India’s corporate sector, where stability and resilience meet global challenges head-on. Recent data from CareEdge Ratings reveals a credit upgrade-to-downgrade ratio of 1.62 for H1FY25, slightly lower than in the previous half but still reflective of overall stability. Yet, a closer examination reveals significant disparities between sectors, as well as between large and mid-sized companies, providing deeper insights into the current economic landscape.
Sectors focused on the domestic market have fared particularly well, benefitting from consistent demand and significant government infrastructure investments. However, the anticipated boost in private capital expenditure is yet to materialise, signalling a lingering hesitancy among businesses to commit to long-term investments in an uncertain global environment.
A key trend that stands out is the disparity in performance between large corporations and smaller enterprises. Large companies, especially in sectors like capital goods, real estate, hospitality, pharmaceuticals, iron and steel, and automotive components, have shown strong credit performance. In contrast, mid-sized and smaller firms, particularly those reliant on exports, have encountered greater difficulties. These stem from weaker global demand and the impacts of China’s economic slowdown, which have hit export-dependent sectors like textiles and chemicals particularly hard.
The infrastructure sector, a key driver of economic activity, continues to be a bright spot. The commissioning of projects, especially in road hybrid annuity model and solar power, has driven a credit ratio of 3.50 for the sector in H1FY25. Timely payments from state distribution utilities have helped power producers reduce their debt, while favourable regulatory interventions and medium-term power purchase agreements have provided stability. These developments underscore the critical importance of policy support in driving sectoral growth and highlight the infrastructure sector’s role in underpinning India’s broader economic recovery.
Financial services also present a mixed picture. While larger financial institutions have shown strength, driven by expanding assets under management and robust capitalisation, smaller non-banking financial companies and fintech firms are facing regulatory challenges. Regulatory changes that have increased risk weights on unsecured consumer loans have led to slower growth expectations and higher funding costs for smaller players. This highlights the delicate balance between encouraging financial innovation and ensuring adequate regulatory oversight, particularly in the rapidly evolving fintech space.
There are three critical factors that merit close attention. First, interest rates remain a key variable. The Federal Reserve has already implemented rate cuts, and the Reserve Bank of India is expected to follow suit with possible reductions of up to 50 basis points in FY25. However, the key question is whether these cuts will lead to corresponding reductions in bank lending rates. With high credit-deposit ratios and intense competition for deposits, banks may be reluctant to pass on the full benefits of lower policy rates. This could create a lag in the transmission of monetary policy, affecting borrowing costs for both businesses and consumers.
Second, while India’s GDP growth remains robust at 6.7% for the first quarter, with full-year estimates hovering around 7-7.1%, there are early signs of weakening consumer demand, particularly in automotives. Passenger vehicle sales have shown a decline, which may reflect broader economic headwinds. While this could be a temporary blip, especially with the festive season approaching, it will require careful monitoring. The health of rural demand, in particular, remains a crucial indicator, as it often acts as a bellwether for broader consumption trends.
Third, China’s economic slowdown and aggressive export strategies pose significant challenges for Indian manufacturers. The much- discussed “China+1” strategy, aimed at diversifying global supply chains, has been overshadowed by Chinese dumping particularly in sectors like chemicals, steel, and textiles. While government initiatives like the production-linked incentive scheme aim to enhance competitiveness, many Indian manufacturers find themselves in a defensive posture, focusing on protecting revenues and margins rather than pursuing aggressive growth strategies. This calls for a more nuanced policy approach that balances the need for trade protection with the need to be globally competitive.
The festive season offers a glimmer of hope, particularly in terms of boosting rural demand and consumer spending. If realised, this could provide a much-needed lift to corporate credit profiles in the second half of FY25. However, this optimism must be tempered by the reality of ongoing global challenges, including weak export demand, elevated freight costs exacerbated by geopolitical tensions, and continued uncertainty in the trade environment.
For Indian corporations, navigating this complex landscape will require both strategic foresight and operational agility. While strong domestic demand provides a solid foundation, the sustainability of this demand, combined with external factors such as geopolitical risks and shifts in global monetary policy, will shape the corporate credit outlook for the remainder of FY25. Companies will need to focus on maintaining operational efficiency while preserving financial flexibility to navigate potential disruptions.
The manufacturing sector, in particular, faces a critical period of transformation. As global supply chains continue to evolve, Indian manufacturers must capitalise on the opportunities presented by the China+1 strategy, while competing effectively against low-cost Chinese exports. Success in this area will require government support and also substantial investment in technology, quality control, and cost optimisation.
India’s corporate sector has shown remarkable resilience in the face of global uncertainty, supported by robust domestic fundamentals and government-driven infrastructure initiatives. However, the months ahead will test this resilience as businesses grapple with global headwinds while seeking to capitalise on domestic opportunities.
Sachin Gupta, Chief rating officer & executive director, CareEdge Ratings
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.