IN THIS EDITION

 
     
 

 

 
     
 

 

 
     
 

 
 

Given the fact that the agriculture sector provides employment to around two-fifths of the total working population of the country, and that more than half of the agricultural households were estimated to be indebted in 2013, there has been a rise in farmer distress and demand for crop loan waivers, announced by several state governments. Since irrigation coverage is limited to around 45.5% of the net sown area, the volume and dispersion of the South-West Monsoons remain crucial in India. Consequently, the monsoon outlook has an impact on a host of macroeconomic factors, such as agricultural output, rural consumption sentiment, fiscal trends, as well as net imports of agricultural items. In this regard, the India Meteorological Department’s (IMD’s) first stage monsoon forecast, being 97% of the long period average (LPA), with an error range of +/-5% will be crucial and keenly looked forward to from many perspectives.

We also look at the indicative calendar of market borrowings for all 29 states and Puducherry, announced by the Reserve Bank of India (RBI), which signalled a significant increase in the state development loans (SDL) in Q1 FY2019. This uptick is likely to be due to factors that are affecting the cash flows of the states, like the modification in the timing of devolution of Central taxes from FY2019 onwards, and the transition to the Goods and Services Tax (GST), and is unlikely to be a definitive indicator of the looming fiscal deterioration. The level at which the GST collections settle, the extent to which funds are released by the states toward the crop loan waivers announced last year, and whether additional expenditure announcements are made in the run-up to various Legislative and Parliamentary elections, would influence fiscal trends in FY2019.

The implementation of the Real Estate (Regulation and Development) Act last May has ushered in a marked shift in the way the real estate sector should operate. Consumers’ confidence in developers has improved in the last one year and so has the rate of project completions and sales volume of finished inventory. However, much more remains to be done by the various stakeholders, including the developers and the state governments to make the RERA more effective, and thereby bringing in more efficiency and transparency in the real estate sector, so that it benefits the overall economy.

Finally, Insight examines the trends in the solar power segment. There has been a substantial decline in tendering and award of solar projects in the last 12-15 months. Consequently, a lower solar capacity addition of 4.0-4.5 GW is expected in FY2019 as compared to FY2018, led by factors such as the GST rollout in July 2017, an upward pressure on the photo voltaic (PV) module price levels internationally, and the continued uncertainty on safeguard duty and anti-dumping duty amongst others. Though the recent amendments in the bidding norms have brought some clarity on the pass-through of import and other duties, the viability of tariffs hinges on various factors, such as structuring of debt with longer tenures, competitive funding costs etc.

The issue concludes with the regular features: monthly rating updates, upcoming ICRA events, and news features related to the company.

I hope you will find this newsletter useful and informative.

Best Regards

Anjan Ghosh
Chief Rating Officer, ICRA Ltd

 
 
 
 
     
  Normal magnitude of rainfall forecast for monsoon 2018; dispersion remains vital  
 

Notwithstanding the modest contribution of agriculture to the overall GVA of around 15-16%, the agricultural sector provides employment to a large proportion of households - 37.8% of the total working population of the country was classified as cultivators or agricultural labour by the Census of India, 2011. Moreover, 51.9% of agricultural households were estimated to be indebted in 2013 (Source: Key Indicators of Situation of Agricultural Households in India, NSSO 70th round). This, in conjunction with other factors, has contributed to the recent vocalisation of farmer distress and demand for crop loan waivers, which several state governments have announced.

Given the moderate irrigation coverage of 45.5% of the net sown area in FY2015 (Source: Directorate of Economics and Statistics, Department of Agriculture, Government of India), the volume and dispersion of the South-west monsoon rainfall remains crucial in India, since the country receives 75% of its total rainfall during this four-month season. As a result, the monsoon outlook has an impact on a host of macroeconomic factors, such as agricultural output, rural consumption sentiment, fiscal trends, as well as net imports of agricultural items.

The India Meteorological Department’s (IMD’s) first stage forecast has predicted that the volume of rainfall in the upcoming South-west monsoon season (June-September) would be 97% of the long period average (LPA), with an error range of +/-5%. Additionally, the IMD estimates a 42% probability of a near normal rainfall scenario. The IMD has indicated that the moderate La Nina conditions, which had developed in the equatorial Pacific last year, have weakened. This is expected to turn to neutral El Nino–Southern Oscillation (ENSO) conditions before the beginning of the monsoon season. The IMD also indicated that weak negative Indian Ocean Dipole (IOD) conditions may develop during the middle of the monsoon season.

The forecast made by the IMD for the 2018 monsoon at 97% of the LPA, is similar to the actual performance in 2017, which had supported the robust kharif and rabi harvests. However, the weak precipitation in the post monsoon and winter seasons in FY2018 resulted in a considerable year-on-year decline in reservoir levels. Therefore, a normal magnitude of monsoon rains is important to rebuild reservoir and ground water levels. Moreover, the temporal and spatial distribution of precipitation will be vital. While higher rainfall in the initial part of the monsoon will be crucial for timely sowing, given the low reservoir levels, adequate rainfall in the second half of the season would remain important for yields.

As of now, ICRA expects agricultural GVA growth to be modest at 3-3.5% in FY2019, if the temporal and spatial distribution of the monsoon is normal. Even if the monsoon is normal, ICRA expects the CPI inflation to rise to 4.6% in FY2019 from 3.6% in FY2018.

 
     
  Sharp rise in indicated SDL issuances in Q1 FY2019 may reflect changes in states’ cash flow  
 

The indicative calendar of market borrowings by all 29 state governments and Puducherry was released by the Reserve Bank of India (RBI) on April 5, 2018. This signalled a spike in the planned gross issuance of the state development loans (SDL) to Rs. 1.16-1.28 trillion in Q1 FY2019 from Rs. 0.65 trillion, in Q1 FY2018. This is in contrast to the budgeted decline in the fiscal deficit of 13 major states (Andhra Pradesh, Bihar, Chhattisgarh, Gujarat, Haryana, Kerala, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal) in FY2019, relative to the revised estimates for FY2018.

The increase in planned borrowings of the states is likely to have been led by the change in the states’ assessment of their cash flows, related to the modification in the timing of devolution of Central taxes from FY2019 onwards. Until FY2018, around 7% of the budget estimate for Central tax devolution would be transferred each month in the first three quarters of the fiscal, to the states at the beginning of the month, irrespective of the actual collections of the Government of India (GoI). Adjustments reflecting the actual trend in the GoI’s tax collections would typically be made in Q4 of the fiscal. The pattern and timing of the release of Central tax devolution is set to change in FY2019, the publication of the provisional fiscal data of the GoI for April 2018 by the Controller General of Accounts at the end of May 2018, would clarify the magnitude of funds transferred to the states in that month. Moreover, some states may still be adjusting to the variation in cash flows following the transition to the Goods and Services Tax (GST).

Since the RBI started to release a calendar for the states, there have been eight upward and nine downward variations between the indicated and actual borrowing amount over 23 quarters, with the actual borrowing within the indicated band on only six occasions. Such trends suggest that all state governments do not undertake a detailed assessment of the likely funding gap that may arise in the ensuing quarter before indicating their quarterly borrowing requirement to the RBI.

Overall, the planned increase in state borrowings in Q1 FY2019 should not be construed as a clear indicator that sharp fiscal deterioration lies ahead in FY2019, in ICRA's view. Looking ahead, some key trends to watch out for to assess the states’ fiscal health, include the level at which the GST collections settle after the pan-India rollout of the e-way bill, the extent to which funds are released by the states toward the crop loan waivers announced last year, and whether additional expenditure announcements are made by the states in the run-up to various Legislative and the Parliamentary elections.

 
     
  RERA is transforming the real estate landscape  
 

The implementation of Real Estate (Regulation and Development) Act w.e.f May 01, 2017 has ushered in a marked shift in the way the real estate sector should operate. Earlier delay in possession/completion of projects, skewed builder-buyer agreement, prevalence of cash in property transactions, and existence of many fly-by-night developers were the norm thereby resulting in low consumer confidence. Moreover, elevated prices and subdued macro environment led to the real estate sector witnessing a slowdown in demand.

RERA has been a potent instrument towards addressing some of the issues plaguing the sector. The most visible is in terms of completions/deliveries. Based on ICRA’s sample set, of 11 listed real estate developers with pan-India projects, completions rate increased from 30.02 mn sq. ft. in FY2015 to 42.94 mn sq. ft. in FY2016, to 45.51 mn sq. ft. in FY2017 and 25.22 mn sq. ft. in 9M FY2018. .

In addition, RERA has covered model builder-buyer agreement, penal clauses for errant developers and more transparency through increased disclosures. All these have boosted buyer’s confidence in the sector.

Consumers preferred finished inventory due to inordinate project delays. RERA has pushed developers to increasingly focus on completing projects in a timely manner. This has also resulted in the steady improvement of sales (value and volume) for ICRA’s sample set.

Though RERA is a good step forward, a lot more needs to be done in terms of adequate staffing and streamlining of operations of the authority and tribunal. Issues relating to registration under the RERA have delayed new project launches by developers.

Apart from resolving the key issues pertaining to RERA, as a first step, alignment of the State RERA rules with the Central rules across India will be a stepping stone to bring in uniformity and higher transparency with in the sector. Rationalization of rules across States will not only help the developers to channelize their resources towards better planning and development but will also strengthen the buyer’s confidence in the process. Developers too will need to adapt their operations to meet RERA norms by focusing more on the planning and development of the projects, enhancing the operational bandwidth by hiring more resources, employing technology or limiting the projects under-development. Only those who change will be able to create strong brand value and raise external finance. State governments will also have to play an important role and be proactive in tackling issues to positively benefit the real estate sector. And boost demand given the sector’s contribution to the overall economy in terms of employment and consumption-demand it offers to other core sectors like cement, steel etc.

 
     
  Lower solar capacity addition at 4~4.5 GW estimated in FY2019  
 

Going by the tendering and award of solar projects in last 12-15 months period, a 40% decline of about 4.0 – 4.5 GW of solar capacity addition is expected in FY2019 as compared to FY2018. As per an ICRA note this mainly, comprises of the projects having PPAs with utilities.

The estimated fall in capacity addition in FY2019 is mainly on account of subdued trend in tendering of solar projects since June 2017 in the midst of several factors such as GST roll out in July 2017, an upward pressure on PV module price levels internationally and continued uncertainty on safeguard duty & anti-dumping duty post the petitions filed by solar module manufacturer associations between June and Dec 2017. Subdued trend in award of solar projects is also evident from the fact that only 4.5 GW capacity was auctioned & awarded in CY2017 as against 7.3 GW in CY2016.

With the recent amendment in bidding norms for solar projects by the Ministry of New & Renewable Energy (MNRE), Government of India, there is now clarity on pass-through of import duty and other such duty under “change in law” which is a positive for the solar developers. However, the quantification of actual tariff changes by SERCs and the timeliness of the same will remain critical from the cash flow perspective of the affected developers. Moreover, the retrospective applicability of such duty under change in law remains critical for projects which have been recently awarded in bidding route from the viability perspective of such projects.

Further, with expected decline in PV module price level, long term debt availability at cost competitive rate and aggressive bidding by IPPs, weighted average solar bid tariff during CY 2017 declined sharply to Rs. 3/unit from Rs.5/unit in CY 2016.

"Though the declining solar bid tariffs levels remain favourable to state owned distribution utilities, the hardening of module prices over the last 6-9 months period along with import duty incidence on module imports (to the extent of 7.5% since Oct 2017) has led to viability related concerns especially for the projects with tariff below Rs. 3/unit, also given the uncertainty on safeguard duty front."

In this context, the viability of such tariffs critically hinges on structuring of debt with longer tenures, competitive funding costs and the ability of the project developers to keep the cost of modules within the budgeted levels.

 
     
 
           
 
   
m Rating Updates for the month of April 2018
   
Upcoming Events
   
15 May, 2018: Moody’s ICRA Conference on Indian Securitization Market
7 June, 2018: Moody’s ICRA 4th Annual Credit Conference
 
ICRA in News
 
The Telegraph : May, 2018: Concern over Iran Issue but no panic
The Financial Express : May, 2018: How RERA changed the real estate landscape
The Economic Times : May, 2018: Falling Rupee to Hurt Jewellery Demand
Contact Us
 
 

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