Indian industry: Displaying resilience
| Photo Credit:
AMIT DAVE
With the world economic environment witnessing heightened uncertainty as tariff war looms, India Inc has proved resilient. The recently unveiled credit ratio data for H2 FY25 finds a robust credit ratio, reflecting the strength of Indian corporates.
According to the credit ratio data, upgrades to downgrades grew substantially to 2.35 times in H2 FY25 from 1.62 times in H1 FY25. There were 386 upgrades during this period as against 164 downgrades. The upgrade proportion rose to 14 per cent from 12 per cent in the half-year period due to sectors favouring robust domestic consumption and government expenditure.
On the other hand, the downgrade rate dropped 200 basis points to 6 per cent, led by asset quality concerns in NBFCs catering to microfinance and unsecured business loans, as well as pressures in a few manufacturing entities. Small players in chemicals and iron & steel struggled with pricing challenges, export-driven cut and polished diamond (CPD) businesses faced headwinds, and small-sized trading and distribution entities came under stress, collectively driving the decline.
The manufacturing and service industries saw a significant turnaround, with the credit ratio improving from 1.21 in H1 FY25 to 2.06 in H2 FY25. The capital goods, automotive and automotive components, and real estate industries spearheaded the upgrade wave. The services sector also experienced continued improvement.
But not all sectors were optimistic. Commodity and essential chemicals, small iron and steel participants, as well as CPD players focused on exports, experienced credit downgrades because of pricing pressures and increasing Chinese import competition.
The credit ratio of the infrastructure sector was better at 3.94 in H2 FY25, led by upgrades in the transport infrastructure and power sectors. The main drivers were the timely commissioning of projects, especially in the road hybrid annuity model (HAM) segment and solar power generation. Prompt payments by most State distribution utilities helped speed up deleveraging for power producers and transmission infrastructure providers.
The banking, financial services, and insurance (BFSI) industry saw a steep moderation in its credit ratio, from 2.75 in H1 FY25 to 1.07 in H2 FY25. This was led by emerging stress in some lending segments, specifically microfinance and unsecured business loans. In spite of this, the overall credit scenario in the BFSI industry is stable, with healthy capitalisation levels in the NBFCs and banks.
External challenges
Even as domestic fundamentals remain strong, the global trade environment is in flux, with the US tariff hikes leaving Indian exporters to navigate an increasingly uncertain terrain.
According to recent credit ratio data, the gems and jewellery sector, which is deeply tied to discretionary spending, may see a dip in demand, while electronics exports could face pricing pressures as buyers explore alternative sourcing options, particularly in China. The textile sector, which accounts for a significant share of exports, primarily comprising cotton-based garments and home textiles, may need to absorb higher tariffs. However, given the relatively low prevailing tariff differential, the overall impact is expected to be limited. Pharmaceuticals, however, are expected to remain well-positioned; India’s stronghold in cost-effective generic drugs and stringent regulatory requirements make it difficult to replace. Any tariff imposition in this sector is likely to be passed on, resulting in minimal disruption.
Despite these challenges, Indian corporates remain fundamentally strong. A noticeable deleveraging trend, coupled with the number of defaults dropping to single digits in the recent year, signals a more robust credit environment. While trade barriers pose short-term headwinds, the underlying strength of Indian enterprises ensures long-term resilience.
The writer is Chief Ratings Officer and Executive Director at CareEdge
Published on April 3, 2025
