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Moody’s Analytics on April 12 projected India’s economy to expand 6.1% in 2024, lower than 7.7% growth clocked in 2023.

It said output in India remains 4% lower than it would have been without the COVID pandemic and its various aftershocks — from supply snags to military conflicts abroad.

“Economies in South and Southeast Asia will see some of the strongest output gains this year, but their performance is flattered by a delayed post-pandemic rebound. We expect India’s GDP to grow 6.1% in 2024 after 7.7% last year,” Moody’s Analytics said.

In its report titled ‘APAC Outlook: Listening Through the Noise’, Moody’s Analytics said the region overall is doing better than other parts of the world. “The APAC (Asia Pacific) economy will grow 3.8% this year, which compares with a growth of 2.5% for the world economy,” it said.

Moody’s Analytics said looking at the GDP relative to its trajectory prior to the pandemic shows that India and Southeast Asia have seen some of the largest output losses worldwide and are only beginning to recover. With regard to inflation, it said the outlook for China and India is more uncertain.

“Inflation in India is at the opposite extreme, with recent consumer price inflation rates hovering around 5%, close to the upper end of the Reserve Bank of India’s target range of 2 to 6% and without clear evidence of a trend towards slowing price pressures,” said the report authored by Stefan Angrick, Senior Economist, and Jeemin Bang, Associate Economist at Moody’s Analytics.

Earlier this month, the Reserve Bank said food price uncertainties continue to weigh on the inflation trajectory going forward, and retained 4.5% retail inflation projection for the current fiscal 2024-25.

“Continuing geopolitical tensions also pose upside risk to commodity prices and supply chains,” RBI said. RBI forecast June quarter inflation at 4.9% and September quarter at 3.8%. For December and March quarters, inflation is projected at 4.6% and 4.7%, respectively.

Global rating agency Moody’s on March 4 raised India’s growth forecast for 2024 calendar year to 6.8%, from 6.1% estimated earlier, on the back of ‘stronger-than-expected’ economic data of 2023 and fading global economic headwinds.

India’s real GDP expanded 8.4% year-over-year in the fourth quarter of calendar year 2023, resulting in a 7.7% growth for full-year 2023.

“Capital spending by the government and strong manufacturing activity have meaningfully contributed to the robust growth outcomes in 2023,” Moody’s Investors Service said.

“With global headwinds fading, the Indian economy should be able to comfortably register 6-7% real GDP growth,” it added.

“India’s economy has performed well and stronger-than-expected data in 2023 has caused us to raise our 2024 growth estimate to 6.8% from 6.1%. India is likely to remain the fastest growing among G20 economies over our forecast horizon,” Moody’s said in its Global Macroeconomic Outlook for 2024. For 2025, the GDP growth is estimated at 6.4%.

The agency said high-frequency indicators show that the economy’s strong September and December quarter momentum carried into the March quarter of 2024.

“Robust goods and services tax collections, rising auto sales, consumer optimism and double-digit credit growth suggest urban consumption demand remains resilient. On the supply side, expanding manufacturing and services PMIs add to evidence of solid economic momentum,” Moody’s said.

This year’s interim Budget targets capital expenditure allocation of ₹11.1 lakh crore or 3.4% of GDP in 2024-25 (fiscal year 2025), 16.9% above the 2023-24 estimates. “We expect policy continuity after the general election and continued focus on infrastructure development,” Moody’s said.

The agency said while private industrial capital spending has been slow to pick up, it is expected to pick up with ongoing supply chain diversification benefits and investors’ response to the government’s Production Linked Incentive scheme to boost key targeted manufacturing industries.

“The year 2024 is an election year for several G20 countries including India, Indonesia, Mexico, South Africa (Ba2 stable), the U.K. and the U.S. Implications of elections can go beyond borders and economic and public policy in today’s increasingly fractious world,” it said.

“Leaders elected this year will influence domestic and foreign policies for the next four to five years. Businesses are accordingly responding to evolving geopolitical dynamics by reorganising supply chains and capital sources,” Moody’s said.

It said geopolitical realities will be influencing international trade flows, capital flows, international migration trends and international organisations in the years to come. Domestically, industrial and trade policies of several countries are intertwined with foreign policy.

Petrol and diesel prices are unlikely to be increased despite firming raw material costs because of upcoming general elections next year, Moody’s Investors Service said.

Three state-owned fuel retailers — Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) — which control roughly 90% of the market, have kept petrol and diesel prices on freeze for a record 18 months in a row.

This is despite the raw material (crude oil) cost surging last year, leading to heavy losses in first half of 2022-23 fiscal year before easing oil prices propelled them to profitability.

Also Read | High oil prices to weaken profitability of 3 PSU oils firms, says Moody’s

International oil prices have firmed up since August, leading to margins of three retailers turning negative again.

“High crude oil prices will weaken the profitability of the three state-owned oil marketing companies in India — IOC, BPCL and HPCL,” Moody’s said in a report.

“The three companies will have limited flexibility to pass on higher raw material costs by increasing the retail selling prices of petrol and diesel in the current fiscal year because of upcoming elections in May 2024.”

The OMCs’ marketing margins — the difference between their net realized prices and international prices — have already weakened significantly from the high levels seen in the quarter ended June 30, 2023 (1Q fiscal 2024). Marketing margins on diesel turned negative since August while margins on petrol have narrowed considerably over the same period as international prices increased.

“The increase in raw material costs comes after the price of crude oil jumped around 17% to more than $90 per barrel in September, from an average of $78 a barrel in 1Q fiscal 2024,” Moody’s said. “An extension in production cuts by the Organization of the Petroleum Exporting Countries (OPEC) of around 1 million barrels a day until December 2023, combined with Russia’s extended export cuts of around 300,000 barrels a day over the same period have driven oil prices higher.”

Nonetheless, high oil prices are unlikely to be sustained for long as global growth weakens, it said.

“The decline in the OMCs’ marketing margins has been mitigated to some extent by the increase in gross refining margins (GRMs). The benchmark Singapore GRMs have improved since June in part due to continued growth in liquid fuels consumption in the region as well as planned refinery outages which constrained the supply of petroleum products in the region,” it said.

The ratings agency expected GRMs and international prices of transportation fuels to moderate in subsequent quarters as concerns over China’s economic slowdown dampen demand while supply increases as refineries come back online after the completion of scheduled maintenance activities.

“Although a smaller gap between international and domestic prices will reduce marketing losses for the OMCs, their overall profitability will remain weak as retail selling prices will likely remain unchanged,” it added.

After very strong earnings in April-June quarter, OMCs’ operating performance is expected to weaken over the next 12 months as oil prices remain at current elevated levels.

“Still, the three companies’ fiscal 2024 (April 2023 to March 2024) earnings will remain strong and higher than historical levels, even if crude oil prices remain at current levels of $85 per barrel to $90 a barrel in the second half of fiscal 2024.

“This is attributable to the OMCs’ exceptionally strong earnings in 1Q fiscal 2024. The three companies’ EBITDA in the first quarter alone was close to their average annual EBITDA for the last few years,” Moody’s said, adding the OMCs will start incurring EBITDA losses in the second half of fiscal 2024 if crude oil prices increase to around $100.

Strong marketing margins for petrol and diesel drove the robust operating performance in 1Q fiscal 2024.

OMCs’ net realised prices on sale of diesel and petrol have largely remained unchanged since April 2022 even though feedstock costs had declined steadily. The price of Brent crude declined to $78 per barrel (bbl) in 1Q fiscal 2024 from $112 in 1Q fiscal 2023.

Among the three OMCs, IOCL and BPCL are better positioned to withstand any further increase in crude oil prices, compared to HPCL, the rating agency said, adding the difference in the OMCs’ capacity to absorb an increase in feedstock costs stems from the difference in their business profiles.

IOCL’s and BPCL’s larger-scale operations and a high degree of integration between their refining and marketing segments allow them to weather the impact of adverse changes in the operating environment. IOCL’s presence in petrochemicals and pipelines also reflects its business diversification. Meanwhile, HPCL’s smaller scale and a higher dependence on its marketing operations make it more vulnerable to any unfavourable price movements.

“Strong earnings in 1Q fiscal 2024 and lower crude oil prices compared with fiscal 2023 have reduced the OMCs’ working capital requirements and allowed them to reduce their borrowings over the past few months. As a result, we expect leverage, as measured by debt/EBITDA, for all the three companies to remain well positioned compared with the rating thresholds through fiscal 2024. This is despite capital spending and shareholder payments remaining high and rising crude oil prices resulting in increased working capital requirements in the period,” it said.

Meanwhile, the Indian government’s ₹30,000 crore in capital support for the oil marketing sector announced in the budget earlier this year will boost cash flows for the OMCs and partially cover their capital spending needs. To this effect, IOCL and BPCL have already announced rights issues to the government.

Moody’s said it has however not factored this into its projections as the timing and quantum of such proceeds remain uncertain at this time.

New Delhi:

Moody’s Investors Service on Friday affirmed India’s rating at the lowest investment grade of ‘Baa3’, with a stable outlook, saying high growth will support a gradual increase in income levels, but flagged risks of populist policies due to rise in political tensions.

Moody’s said although India’s potential growth has come down in the past 7-10 years, the growth would outpace all other G20 economies through at least the next two years, driven by domestic demand.

Moody’s said the restoration of robust growth prospects post-pandemic, the effective commitment to inflation targeting and the rehabilitation of the financial system aided by reform supports its view of strengthening monetary and macro policy effectiveness.

“However, the curtailment of civil society and political dissent, compounded by rising sectarian tensions, support a weaker assessment of political risk and the quality of institutions,” Moody’s said while affirming the government’s long-term local and foreign-currency issuer ratings and the local-currency senior unsecured rating at Baa3.

The US-based rating agency said the violence in Manipur has led to at least 150 deaths since May 2023.

“Although elevated political polarization is unlikely to lead to a material destabilization of government, rising domestic political tensions suggest an ongoing risk of populist policies–including at the regional and local government levels–amid the prevalence of social risks such as poverty and income inequality, as well as inequitable access to education and basic services.”

“Moreover, the periodic flaring of border tensions with neighbouring countries was an outlier among sovereigns assessed as having a lower overall susceptibility to political risk,” Moody’s said.

Baa3 is the lowest investment grade rating.

All three global rating agencies, Fitch, S&P and Moody’s, have the lowest investment grade rating on India, with a stable outlook. The ratings are looked at by investors as a barometer of a country’s creditworthiness and affect borrowing costs.

Moody’s said in the absence of more material gains in revenue, the central government will be challenged to achieve its fiscal deficit target of 4.5 per cent of GDP for the fiscal year beginning April 2025 (fiscal 2025) from 6.4 per cent in fiscal 2022.

Consequently, Moody’s projects general government debt to stabilize at around 80 per cent of GDP over the next 2-3 years, lower than the peak of almost 90 per cent reached in fiscal 2020 but higher than many similarly-rated sovereigns.

The stable outlook reflects Moody’s expectations of broad financial and external stability as represented by resilient credit growth, ample domestic liquidity to meet the funding requirements of the public and private sector, manageable current account deficits and sufficiently large foreign-currency reserves to meet the country’s external payment obligations and import needs.