India's growth high, but still below potential, S&P panellists say
This story was originally published at 11:59 IST on 18 July 2024
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NEW DELHI – India's GDP growth is outpacing that of its peers, but its debt servicing obligations are restricting its potential growth, according to panellists at an S&P Global Ratings conference in early July. The ratings agency published a note summarising the virtual conference on Wednesday.
India's GDP grew 8.2% in the financial year ended March, and S&P Global Ratings estimates GDP growth in 2024-25 at 6.8%. Infrastructure spending has more than doubled over the last decade to 3-4% of GDP, reducing bottlenecks and setting up the country for higher growth, the note said. By contrast, China spent around 8% of its GDP on infrastructure as it was developing a few decades ago.
"If India managed to spend even more on infrastructure, its potential growth rate would exceed 8% versus the current 7%," S&P Global Ratings credit analyst YeeFarn Phua said at the event.
The high cost of servicing government debt drags the growth trend. India's debt servicing is often 22-23% of its revenue, compared to 10% for Brazil. This is capping its potential growth. Moreover, private companies have complained of high funding costs in India, even relative to peers like China.
"Most of the panellists in this session agreed that staying on trend with lower funding costs would help India reach its growth potential," S&P Global Ratings said.
Meanwhile, the country's strong macroeconomic fundamentals and growing economy are attracting capital from foreign investors, particularly for debt. Until Jul 15, foreign portfolio investors had bought over $11 bln worth of Indian debt, according to data from the National Securities Depository Ltd.
The country's banking system has also undergone a balance sheet clean-up which, in tandem with growth, has attracted investors, the ratings agency said. Shilpa Singhal, a senior fund manager at British asset manager Schroders, called India a "darling" in emerging market portfolios. The lack of dollar-denominated debt had also helped valuations climb to tight levels.
"But overall, we continue to see India remaining a key part of EM (emerging market) portfolios, at least in the near to medium term," Singhal said at the event.
Debt funding would improve due to India's inclusion in JP Morgan's Government Bond Index – Emerging Markets on Jun 28, according to Anjan Agarwal, the head of debt capital markets India at the US investment bank. The staggered increase in weightage – by 1% every month – would not lead to a linear infusion, and large investors may wait till India's weightage rises to 4-5% before investing their own capital in the country.
Many large funds are looking to set up offices in Gujarat International Financial Tec-City, or GIFT City, to use as a base for investment into India, Agarwal said. These investments may also tighten yields not only in government bonds but 'AAA' and high 'AA' rated non-government securities as well, he said.
India's equities also have a higher positive outlook bias compared to their emerging market Asian peers, S&P Global Ratings' Phua said. Operating cash flows of S&P-rated entities are up 70-100% in the last four years, while capital expenditure has gone up 30-40%. As for currencies, the base case was that emerging market currencies in Asia will be flat or see mild appreciation against the dollar by the end of 2024, according to the note.
"A big risk-off event would be associated with capital outflows to emerging markets, including Emerging Markets Asia," said Vishrut Rana, a senior economist at S&P Global Ratings. End
Reported by Aaryan Khanna
Edited by Avishek Dutta
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