The Revised Risk of Downgrade of Indian Economy..Can it Be Ignored

The latest re-rating or downgrade of India economy clearly shows that India does not need any reform measures but the action on those policies is the demand of the hour. Corporate India was not in good shape before COVID 19 strike Indian economies. Liquidity crisis at NBFC level followed with the corporate crisis in IL&FS, DHFL, ZEE and finally Yes Bank was enough to place the brakes and keep corporate Indian under a nightmare of a slowdown. The plummeting sales of Real estate, automobile sales and then the NBFC renowned growth got slaughtered dragged the GDP growth of India. 

Reforms are not taking shape and the Private sector is struggling with NCLT and liquidity. Business means risk and will full default and default due to business risk are two separate things but NCLT makes life miserable. The fear of being marked as NPA has led to pulling back of investments plans. The Rs 20lakhs cr stimulus is a hoax since money in hand and money in circulation has two different things and the real economy is under struggle phase. No one is going to borrow since NCLT is there to take care of even on a retrospective basis.

Further, when Infrastructure projects like road, highway, bridges, airports run over the cost and the cycle of capital and liquidity come under stress the NPA is bound to shoot. India lacks execution skills and this is a cumbersome process. Long term things simplification itself takes time and after several permutation and combination to get the exact benefit to the economy. The GST itself is a big example. 

Why the risk of rerating amplifies since India does not have money to inject like US economy neither ability to buy losses. Further, the fiscal deficit will shoot up to beyond 12% as state deficits get added with falling revenues of direct and indirect taxes. Do remember job loss and salary restructuring leads to less direct tax income for India. Around $3.3 billion of rated bonds maturing through 2021, there are many sectors which will face their bond commitment to come forward and there will be significant risk out of the same. 

Re-rating of corporate debt and papers hold significant risk for the high velocity of risk that Indian corporates carry. Rising risk aversion and accelerating rating downgrades are expected to add to India banks’ asset quality stress. ALM challenges for NBFCs are turning more severe with access to funding differentiated and a 6 months moratorium on 70% of loans. On the other hand under moratorium and 20-40% of corporate book BBB or below where refinance risk has gone up. This is the time bomb ticking under the Indian economy to go for burst.

Now excluding the finance industry, we find that downgrades in the commodity conglomerate, agri and real estate sectors have contributed meaningfully to such debt o/s with non-financials. We find that these sectors will contribute to the downfall and hence the bond commitment from them will be at risk. These companies have nearly around Rs.1.2 tn in bonds outstanding and financials make up more than 85% of such bonds. Of their total bonds out, 55% are due for repayment over the next 18 months and 33% over the next 12 months. Many infrastructure and real estate companies will be under risk. Even those companies name which was never heard will be under default risk. Every sector is under default risk and every category irrespective of size.

The risk of defaults and the strength of affordability of debt are going to be the biggest risk and that is getting weaker day by day. Don’t be surprised that India will not face a re-rating. The risk of default cannot be ruled out and re-rating cannot be avoided.