Dull global demand, high leverage to test India's growth

06 Jul '16

3 min read

Moody's Investors Service says that India's (Baa3 positive) GDP growth over the next two years will be challenged by lackluster global demand and high leverage in some corporate sectors.

"Growth will be adversely affected by high leverage of some large corporates also weighs on credit demand, while impaired assets in the banking system negatively affect credit supply," says Marie Diron, a Moody's Senior Vice President and Manager.

By contrast, India's medium-term potential will be supported by the gradual implementation of further targeted policy reforms, thereby improving the business environment, state of infrastructure and productivity growth.

As for whether or not Brexit will affect India's financial markets, Moody's says that any effects will be limited because exports to the UK and the rest of the European Union account for 0.4 per cent and 1.7 per cent of India's GDP respectively. In addition, India is not significantly exposed to a potential sharp fall in capital flows to emerging markets.

Moody's analysis is contained in its latest edition of Inside India, a quarterly publication that looks at major credit trends in India. The publication also notes that India has acquired energy assets in Russia (Ba1 negative) to enhance the country's energy security.

Specifically, India's national oil companies (NOCs)—Oil and Natural Gas Corporation Ltd. (ONGC, FC:Baa2 stable, LC: Baa1 stable), Oil India Limited (OIL, Baa2 stable), Indian Oil Corporation Ltd (IOC, Baa3 positive), and Bharat Petroleum Corporation Limited (BPCL, Baa3 positive)—signed agreements with OJSC Oil Company Rosneft (Rosneft, Ba1 negative) to acquire upstream oil and gas assets in Russia.

The Indian NOCs have announced four deals, which together will result in the NOCs owning a 49.9 per cent stake in Rosneft's Vankor field, and a 29.9 per cent stake in Rosneft's Tass-Yuryakh field. Moody's estimates that the combined value of the deals will total about $5.5 billion, based on recently concluded transactions for the same fields.

The assets can potentially provide the NOCs with an additional crude oil production of 225-250 thousand barrels per day (kbpd), which would be equivalent to about 34-38 per cent of India's total domestic oil production of 664 kbpd for the fiscal year ended March 2016 (fiscal 2016). The acquisitions will more than double India's overseas oil & gas production of 194 kbpd reported in fiscal 2016.

According to the report, India's relaxation of foreign investment rules is credit positive. It also says that consolidation of public sector banks will face challenges under current conditions.

The analysis says that when it comes to securitization, new regulations will pave the way for the market's transformation and improve creditor rights while the new bankruptcy code will boost bargaining power of creditors. (SH)

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