Reduction in India Inc’s core debt as a share of GDP (Gross Domestic Products) limits the concern of debt vulnerability in India, a monthly report by the Finance Ministry said on Monday.

February’s edition of the Monthly Economic Review, prepared by the Economic Affairs Department, said the Russia-Ukraine conflict and tightening of monetary policy have again brought the issue of corporate debt vulnerabilities to the fore. This is after the Covid-19 pandemic had directly impacted the balance sheets of the corporate sector globally, which were already highly leveraged.

“With back-to-back shocks, the risk of a spillover of the stressed balance sheets of the corporates to the balance sheets of financial institutions has risen. Analysis, however, reveals that India is one of the few countries that have a lower corporate debt as a percentage of the GDP in Q3 of 2022 as compared to the corresponding quarter in 2008,” the report said.

Apart from the lowering of debt coinciding with the de-leveraging phase in the credit cycle, a declining trend observed since mid-2021 is a reflection of a relatively less debt-financed strong recovery of India’s economy. Consequently, the quality of corporate debt has been showing steady improvement as assessed by an improvement in the CareEdge Debt Quality Index (CDQI) since November 2021.

“India’s corporate sector credit-GDP ratio is also below its historical trend, indicating ample space for the corporate sector to enlarge its debt burden. The strong debt profile of the corporate sector has proven to be key in maintaining the macroeconomic stability of the economy,” the report said.

CAD may fall

Taking note of higher export of services, lower prices of crude oil and fall in import, the report estimated current account deficit to fall in current fiscal and next fiscal. It will provide some cushion to the rupee. Also, ”this will provide a much-needed cushion to India’s external sector at a time when the Fed is likely to raise rates further and ensure that India’s external finances are not a major cause of concern,” it said.

Federal Reserve is meeting this week. Considering the ongoing banking crisis in the US and some other parts of the world, there are two sets of expectations. Either, the rate hike will be in the range of 20-25 bps or there will be no rate hike at all. Meanwhile, the Monetary Policy Committee in India will meet during first week of April and is likely to raise the policy rate of 25 bps as retail inflation is still above upper tolerance level of 6 per cent.

Inflation concerns ease

Talking about inflation, the report noted ease of retail and wholesale inflation in the month of February, “With WPI inflation easing, its transmission to CPI inflation is soon expected. Forecasts by various international agencies show that inflation will moderate in FY24 compared with FY23 and is likely to remain in the range of 5-6 with risks evenly balanced,” it said.

The report also showed optimism about growth momentum to sustain in January-March quarter (Q4 of FY23) as all the high frequency economic indicators showed healthy sign in January and February.