The pan-India electricity demand has gradually recovered and stood at 98% of the pre-Covid levels in Aug’20, backed by the recovery in rural areas, even as recovery in industrial activity was low. However, there is no change in the rating agency’s outlook for about a 5-6% decline in the all-India electricity demand in FY21 over FY20. Further, the decline in demand and collection is estimated to increase the revenue gap for discoms at all India level by ~Rs. 420-450 billion in FY21. In view of this, the GoI has announced a liquidity support scheme of Rs. 900 billion for the state power discoms. For ICRA’s sample set of power generating companies, accounting for ~65% of pending payments from discoms as of Mar’20, the recovery of overdue payments will lower the interest costs by ~9-10% p.a., subject to certain assumptions. More importantly, efforts are required to address the structural issues confronting the distribution segment for a sustainable improvement in discom finances
The Covid-19-induced disruptions continue to adversely impact the financial performance of India Inc. ICRA has taken a large number of negative rating actions since the onset of the COVID-induced disruption and the lockdown, affecting around 16% of its rated portfolio. The instances and the intensity of negative rating actions could have been higher but for the relief availed by the borrowers from lenders in the form of payment moratorium, as permitted by the Reserve Bank of India (RBI). Around 27% of ICRA-rated entities availed a moratorium in payments from lenders, more so in sectors like, real estate, textiles, hospitality, engineering and auto ancillaries. Going ahead, the terms and conditions of the revised loan terms under the resolution plan framework specified by the RBI vide its August 6, 2020 circular would be an important determinant of the credit profiles of entities.
Following global demand and price trends, the domestic HRC prices have gone up, which, coupled with the fall in key input prices, will moderately benefit steelmakers. The full benefit would be visible in the Q2 FY2021 financial performance and would more than offset the price hikes announced by domestic iron ore miners in the last two months. In terms of recovery in domestic demand, the same has not yet reached pre-Covid levels and contraction remains significantly high at 43% in 4M FY2021. Recovery is linked to revival in the user sector’s demand, rural demand and Government spending in H2 FY2021. Steel production contracted at a slower pace due to growth in exports, which rose 140% in 4M FY2021. Steel imports contracted by 42% during 4M FY2021, keeping India a net steel exporter. ICRA expects the export volumes to reduce going forward, owing to improving domestic demand and reduced price-competitiveness in the export market, following the successive price hikes, July onward.
The Indian economy is undoubtedly recovering from the lows seen in Q1 FY2021. However, the
pace of the improvement in Q2 FY2021 is fragmented, in ICRA’s view. While the improvement
in the industry had gathered speed in July 2020, the momentum of the recovery in the services
sector stalled that month. Available indicators for August 2020 have provided mixed cues, with a
sharp improvement in coal and rail freight, juxtaposed with dips in electricity generation and
We expect the contraction in GDP to narrow considerably to 11-13% in Q2 FY2021, from 23.9%
in Q1 FY2021. The evolving situation remains consistent with our forecast of a 9.5% contraction
in economic activity at constant prices in FY2021. Nevertheless, the unabated rise in Covid-19
infections in India, even at the tail-end of Q2 FY2021, and the health and economic challenges it
continues to pose, remain a risk clouding the outlook.
As expected, GDP and GVA plunged in the lockdown-ridden quarter of Q1 FY2021, printing similar to our forecast of a 25% contraction.
Private final consumption expenditure, the mainstay of the economy, shrank by 26.7% in Q1 FY2021, with economic uncertainty, income and job losses, and feeble remittances curtailing spending.
Unsurprisingly, gross fixed capital formation nearly halved in Q1 FY2021, with sentiment, investment intentions and project completion battered by the lockdown, even as government capital spending grew on a small base.
Government final consumption expenditure (GFCE) recorded a five-quarter high expansion of 16.4% in Q1 FY2021, preventing a deeper de-growth in GDP. Excluding GFCE, GDP contracted by nearly 30% in Q1 FY2021, highlighting the harsh of the economic situation during the Covid-19 crisis.
With infections continuing to climb and some states extending local lockdowns further, we maintain our forecast that the Indian economy will contract by 9.5% in FY2021.
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