Vijay Kumar Gaba

 The former NITI Aayog Vice Chairman, Arvind Panagariya claimed that India may record a real GDP growth rate of 8% in FY23. However, there are not many who would agree with him. The Reserve Bank of India has projected a growth rate of 7% for FY23, in their latest forecast. Most professional forecasters have much lower forecast for the growth in the next few quarters. The average of professional forecasters’ projected growth of the Indian economy for 2023, as per Bloomberg, is close to 6%. In their latest forecast, Goldman Sachs Group projected the Indian economy to grow at 6.9% in calendar year 2022 and 5.9% in 2023. Morgan Stanley Research expects the Indian economy to grow at 6.8% in 2022 and 6.2%in 2023. Fidelity International expects the Indian economy to grow between 5.5 to 7% in 2023.

Recent economic data has been giving mixed signals about the economy. While the domestic sector is showing resilience, the external sector continues to remain a concern.

Weak external sector

The external sector has been weak for a few quarters now. The trade deficit in October 2022 widened to a worrisome US$26.91bn. Exports dropped ~17% in October 2022 on slower global demand; while imports were still higher by ~6%.

Notwithstanding the efforts of the government to improve trade account by import substitution and export promotion; the exports have grown at a slow 4.3% CAGR in the past three years; whereas the imports have registered 14.3% CAGR in the same period, resulting in larger trade deficit. The external situation thus remains tenuous.

…offset by resilient domestic sector

In the domestic sector however there are some signs of stability. GST collections have been strong; credit growth has started to pick-up; manufacturing and services PMIs are indicating expansion and inflation is showing signs of peaking.

As per the Nirmal Bang Institutional Research, “incremental flow of credit to the commercial sector in 1HFY23 is at a multi-year high when compared to the recent past.” A recent report by the brokerage highlights that Incremental credit flow from banks, while being led by retail credit, is now becoming more broad-based, with services (mainly NBFCs), industry (particularly MSMEs) and agriculture also contributing.

As per the rating agency CARE Ratings, the quality of debt being raised and outstanding in India has been improving consistently. The proprietary CareEdge Debt Quality index (CDQI) of CARE ratings is now at almost 7 year high. As per the latest release, CDQI inched up further to 92.74 in October 2022 as compared to a level of 92.70 in September 2022 on account of increase in higher rated debt and upgrades in the investment grade rating categories.

The commentary of most corporate management indicates that rural demand is a matter of concern for now. A good rabi crop could address some of this concern; but overall the growth prospects remain modest. The Indian economy certainly does not face any prospect of recession or even a sharp slowdown; but we may not see any meaningful acceleration also in the next couple of years. The external shocks may create large volatility in the markets and provide good entry points for the money waiting on the sidelines; otherwise we are in a boring market for the next many months.

As per the latest reported data (7 January 2022), RBI was holding a total of US$632.7bn in non INR assets. This includes US$569.3bn foreign currencies, US$39bn gold, US$19.1bn SDRs and US$5.2 reserve position in the IMF.

Considering our emotional attachment to gold, I would like to categorize it as emergency reserve only. So effectively, RBI has US$569.3bn worth of foreign currency to meet the regular demand.

Considering an expected trade deficit of US$200-220bn for FY23, we appear adequately covered for monetary tightening by global central bankers and consequent unwind of USD carry trade potentially leading to FPI outflows.

Assuming, that the global central bank monetary tightening is able to reign the runaway inflation, and India inflation remains at midpoint of RBI target range, we may end up with 2-2.5% INR depreciation for the year, implying end FY23 exchange rate (INR/USD) of 75 to 75.5; of course, not a matter of much concern.

Some recent news headlines have drawn attention to the impending redemption of US$256bn foreign debt in 2022 (see here). This is ~44% of the total last reported US$596bn external debt (September 2021). Some reports have presented the situation as challenging, given the tightening monetary conditions overseas.

Some analysts have drawn attention to the fact that the pace of forex reserve accretion has slowed down in 2021. RBI added US$124bn to its kitty in 2020, while 2021 addition was only US$48bn. Material outflows on account of net negative FPI flows resulting in larger than presently anticipated current account deficit could potentially result in a mini crisis; though not to the tune of what we saw in 2013.

In this context the following points are noteworthy:

(a)   Private commercial borrowings (ECBs) are largest component of this debt with ~37% share; followed by NRI deposits ~25% and short term trade credit (~17%).

(b)   Only about 52% of India’s external debt is denominated in USD. Over ~33 is actually INR denominated debt. Rest is ~6% (JPY); ~3.5% EUR) and ~4.5% (SDR).

(c)    Non-Financial companies owe ~41% of India’s foreign debt. This includes top private and public sector corporations. Deposit taking lenders owe ~28%; government ~19% and other financial corporations owe ~8%. About 5% is intercompany lending.

(d)   Of the total debt due for repayment in 2022, about 40% is owed by deposit taking lenders (Banks and NBFCs). Most of this is long term debt maturing in 2022. Obviously, these borrowers would have made adequate arrangements to repay/renew this debt. About 50% is owed by other corporations and mostly comprises of short term trade credit that mostly keeps on renewing automatically.  (See details here)

I would also like to draw attention towards the following recent headlines:

Ø  RIL raises US$4bn in 10 to 40yr debt at coupon rate ranging between 2.8% to 3.8%. The offering was oversubscribed 3 times. Out of this US$1.2bn will be used to repay the debt becoming due for repayment in 2022. (see here)

Ø  Including RIL, a total of US$6bn debt has been raised in first two weeks of January alone. Corporations like SBI, JSW Infra, Shriram Transport Finance, India Clean Energy etc. have been able to reduce their borrowing cost by 30-35bps in these renewals. (see here)

Ø  The global arm of UPL Limited has raised US$700m to repay its older debt at 35bps lower cost. The proceeds of the loans will be used to repay part of the debt it had raised to fund the $4.2-billion acquisition of Arysta Life Sciences in 2019. The company has redeemed US$410m debt recently and plans to repay more in 4QFY22. (see here)

Obviously, raising money overseas may not be a challenge for corporate India. Reduction or complete elimination of QE money may not be a significant credit or currency event for Indian economy in 2022. Insofar as the lower addition to new forex reserve by RBI in 2021 is concerned, it may be due to change in RBI stance toward liquidity (buying USD from market involves increasing INR liquidity). Net FPI outflows were not much as secondary market selling was mostly offset by primary market buying.

The real potential challenge for Indian Economy and INR could come from the following:

1.    The Central Bankers fail in reining the inflation despite monetary tightening, as the inflation presently is mostly a supply driven phenomenon. India’s crude cost import cost crossing US$100/bn could put a serious pressure on current account.

2.    Persistent erratic weathers across the globe could further deteriorate the food supply situation leading to further rise in global food prices.

3.    A major geopolitical even could cause temporary supply restriction further worsening the present logjam at major ports hampering exports and exacerbating supply challenges.

4.    Outbound FDI outpacing the incoming FDI, as more Indian businesses look to establish local presence in foreign jurisdiction to counter hyper nationalism or continued mobility restrictions.