March 2022


From Chief Ratings Officer’s Desk


The intensified Russia-Ukraine conflict propelled the international crude oil price, in Indian basket terms, to above US$130/bbl mark on March 7, 2022, a 22.9% surge relative to US$93.3/bbl in February 2022. Commodity prices, especially of crude oil, are expected to remain volatile unless tensions ease or OPEC raises oil output. The immediate fallout of this will be a widening of India’s current account deficit (CAD) by ~US$14-15 billion (0.4% of GDP) for every US$10/bbl rise in the average price of the Indian crude basket. The CAD is expected to widen to 3.2% of GDP if the crude price averages at US$130/bbl in FY2023, thus crossing 3% for the first time in a decade. However, strong forex reserves are likely to avert a sudden sharp depreciation in the INR. The rise in WPI inflation due to fuel prices will be rapid, whereas the transmission to the CPI inflation would be slower, and partly dependent on whether and by how much, excise duties on petrol and diesel are reduced.

We also examine the impact of the GoI’s PLI scheme on 14 significant sectors, involving an outlay of ~Rs 3 trillion. The programme will boost India’s manufacturing, employment generation, import reduction and exports growth. The sectors, which have been strategically selected - solar, semiconductors/electronics, automobiles etc., are critical to develop manufacturing capabilities and will generate employment for nearly >3 million. However, potential challenges are expected. Of the total manufacturing outlay, about ~80% is concentrated towards electronics, auto, solar panel manufacturing, of which the focus towards semiconductors/electronics value chain is ~50% of the outlay. Incentives are based on incremental production/revenue, spread over five years on an average across sectors.

The domestic air passenger traffic is expected to witness a strong YoY growth of ~50-55% in FY2022 (on a lower base) supported by the fast pace of vaccination and gradual relaxations in restrictions. The recovery to pre-Covid levels is expected by FY2024. A major concern, however, is ATF prices, which have been higher by ~68% on a YoY basis in 11M FY2022. The aviation industry is expected to report a net loss of ~Rs 250-260 billion in FY2022, which may reduce to ~140-160 billion in FY2023. It will need additional funding in the range of Rs. 200-220 billion over FY2022-24. The evolving geo-political scenario may affect ATF prices further. The industry’s outlook remains negative.

Lastly, we examine the GoI’s recently notified - Green Hydrogen Policy - which is in line with its strong policy focus on renewable energy and the path of net zero energy transition by 2070. The policy comprises several supportive measures and will also help meet growing hydrogen demand. However, even in a scenario of 30% of hydrogen demand to be met through Green Hydrogen by 2030, incremental renewable energy (RE) capacity requirement is estimated to remain significant, at about 60 GW. The cost competitiveness of Green Hydrogen would remain contingent upon the reduction in capital cost and an improvement in the energy efficiency level of electrolyser, besides the cost of RE procurement.

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 interesting.

Best Regards

K. Ravichandran
Chief Ratings Officer, ICRA Ltd.

Sai Krishna

Assistant Vice President & Sector Head, ICRA

Views on Indian Port Sector

Prashant Vashisht

Vice President & Co-Group Head, ICRA

Views on Crude Oil Prices

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Upcoming Events
 
Indian Hospitality Industry
India Oil & Gas- Implications of the Russia-Ukraine Crisis
Big Picture and Insights
 

Aditi Nayar

Chief Economist, ICRA

Spike in crude oil prices could push current account deficit above 3.0% of GDP after a decade

The international crude oil price, in Indian basket terms, surpassed the US$130/bbl mark on March 7, 2022, fueled by intensifying geopolitical tensions between Russia (the world’s third largest oil producer) and Ukraine, and the possibility of sanctions on Russia’s oil exports. The price of the Indian crude oil basket has averaged US$114.6/bbl so far in March 2022 (March 1-7, 2022), a steep 22.9% surge relative to US$93.3/bbl in February 2022. We expect it to remain volatile in the near term, until the geopolitical tensions ease or OPEC decides to materially raise the magnitude of production.

Rohit Ahuja

Head – Research & Outreach, ICRA

PLI scheme to unlock India’s manufacturing capacity, with cumulative outlay of Rs. 3 trn across 14 sectors

The Government of India with the intention of boosting India’s manufacturing, employment generation, import reduction and exports growth has announced the Production-Linked Incentive scheme (PLI) covering 14 significant sectors of the economy involving a total outlay of ~ Rs. 3 trillion. ICRA has analysed the cumulative positive impact of the PLI scheme. It says that the sectors have been strategically selected by the Government, considering India’s surging demand (solar, semiconductors/electronics, automobiles etc.), and are critical to develop manufacturing capabilities (semiconductors, telecom gears, medical devices).

Suprio Banerjee

Vice President & Sector Head, ICRA

Indian aviation industry to report net loss of ~Rs. 250-260 billion in FY2022, net loss to moderate to ~Rs.140-160 billion in FY2023; incremental funding needs at ~Rs. 200-220 billion over FY2022-24

ICRA expects domestic air passenger traffic to witness a strong Y-o-Y growth of ~50-55% in FY2022 supported by the fast pace of vaccination and gradual relaxations in restrictions by the regulatory authorities. However, this recovery will be on a much lower base of FY2021. The recovery in domestic air passenger traffic is expected to be supported by pent up demand in the leisure travel segment and gradual recovery in business travel as corporate offices move towards the resumption phase, post the third wave.

Girishkumar Kadam

Senior Vice President & Co-Group Head, ICRA

Green Hydrogen policy, a positive step towards energy transition plans; to support significant Renewable Energy (RE) capacity addition

The Government of India (GoI) has recently notified a “Green Hydrogen Policy” in February 2022, in line with its strong policy focus on renewable energy, a path of net zero energy transition by 2070. Green Hydrogen is the hydrogen produced through electrolysis of water using renewable energy. The policy comprises several key enabling measures such as, waiver of inter-state transmission charges for projects commissioned till June 2025; fast track timelines for open access approvals; availability of energy banking for 30 days; renewable energy purchase obligation (RPO) applicability for the consuming entities of Green Hydrogen/Green Ammonia; and centralised portal by MNRE for ease of doing business, amongst the other provisions. Majority of the hydrogen demand currently in India pertains to the industrial segment (i.e. refining, fertilisers & chemicals), at about 6 MMT in FY2020, which is projected to grow at a CAGR of 3.5-4% till FY2030, as per ICRA estimates.

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