Higher Government Spending Buoys Infrastructure Sector Credit Ratings

India's infrastructure sector's credit ratings have remained elevated this year, aided by high budget allocation to the sector and a pick-up in domestic demand, according to credit rating agencies.

Infrastructure and related sectors accounted for around 29% of the upgrades in the first half of the ongoing financial year, Crisil Ratings said in a note on Tuesday.

"To be sure, infrastructure has benefited not just from high budgetary allocation but also from better risk sharing among stakeholders and acceptance of investment vehicles such as InvITs, or infrastructure investment trusts," Gurpreet Chhatwal, managing director at the credit ratings agency, said.

Arvind Rao, head of credit policy at India Ratings and Research Pvt., said infrastructure and financial corporations have largely maintained their rating upgrade intensity. Infrastructure asset operators, largely from the renewable power sector, have witnessed positive rating actions, he said. "These entities had either their capacities coming online or strengthened their operating performance."

Consumption-led demand, government-led capex investments, and strong services supported the profitability of corporations, the credit ratings agency said.

However, the credit profile of manufacturing ad service corporates, particularly large corporates, deteriorated. This resulted in a moderation of rating upgrades, and the momentum is likely to continue going forward, India Ratings said.

The credit ratio—defined as the ratio of the number of entities upgraded to those downgraded during the year—fell to 2.0 in the first half of financial year 2024 from 2.8 in the previous fiscal year, data from another credit ratings firm, ICRA showed. "Negative movement in the rating directional indicator nearly doubled to 11%, compared to 1HFY23, all evidencing a likely moderation in rating upgrades," India Ratings said.

Crisil's Chhatwal pointed out that "the conditions now seem ripe" for the private capex cycle to restart amid an increase in capacity utilisation, deleveraged balance sheets, and steady demand. However, higher interest rates and inflation may be a stumbling block for the private sector capex for a few quarters, he added.

Financial Sector Credit Profile Improves

The financial sector showed improvement in credit profile due to steady credit growth, stable asset quality, and equity capital mobilisation, ICRA said. This has prompted upgrades, particularly in the microfinance segment.

Crisil expects non-banking financial companies to continue strong momentum across retail asset classes and register a 16–18% growth in credit. Banks may show healthy credit growth, too, despite tightening liquidity conditions and higher deposit rates.

"Corporate and MSME credit growth is expected to be slower, while retail credit is expected to continue to grow at a healthy clip," Crisil said in the press release. "That said, the pace of deposit growth will bear watching. The asset quality of NBFCs has improved over the past few fiscals and should stay benign. But delinquencies in unsecured loans need to be monitored, keeping in mind the high pace of growth and target customer profile."