View from India: Infrastructure projects key to growth in next fiscal

As we step into the next fiscal year, the risks are shifting from a pandemic-driven crisis to geopolitical strife. The sustainability of growth next year could be shaped by the interplay of such risks and the government’s execution of its capex goals.

“The gross domestic product (GDP) growth is projected at 7.8 per cent for the next fiscal, with risks like Fed-rate tilting to the downside. The risk factor associated with Covid-19 has now shifted to geopolitics, crude oil and interest rate hikes in the US.” That’s the view of Dharmakirti Joshi, chief economist at analyist firm CRISIL Ltd. However, “government-initiated infrastructure-investment-led growth is expected to lift the lid off risks to an extent,” he told media at CRISIL’s recent India Outlook webinar.  

Infrastructure-investment-led growth could gradually filter to smaller companies and lower income categories and, consequently, have a mild positive impact on private consumption in the near term. The forex (foreign exchange) cover seems to provide some sort of buffer for some shocks or unprepared incidents. “On the demand side, the biggest one is private consumption and it is the slowest to recover. But the fact that the infrastructure plan is being executed, could be a silver lining,” Joshi continued.

Healthy growth in infrastructure investments which CRISIL forecasts, can be seen through fiscal 2026. Urban infrastructure is projected to see fastest growth, led by rapid urbanisation. Expressways could drive investments over FY22-26 on a high base, which will ramp up the National Highways Authority of India (NHAI) construction as well. In rail, traditional areas like electrification and track doubling, coupled with new avenues such as dedicated freight corridors and high-speed rail could generate large numbers of jobs. The accent is on connectivity and accessibility. The metro rail length can be seen doubling by 2026 and investments in airports are preparing to double. Interest-free funds for capex (capital expenditure) to states provided by the Centre are towards scaling up investments in irrigation. That could improve the agricultural scenario, with investments in irrigation tools and water conservation-management for better agricultural production.

In the case of the production linked incentive (PLI) scheme, things may be looking up. “The PLI scheme has been evaluated. Findings reveal that the potential emerging from export promotion and import push have opportunities worth 20 trillion rupees (£200bn). The PLI capex is estimated to support almost 14 per cent of industrial capex. Overall industrial recovery could happen as avenues can emerge from pharmaceuticals, metal, food processing and agro,” explained Hetal Gandhi, director, CRISIL Research.

India, the world’s third largest polluter with CO2 emissions of around 3 billion tonnes in 2021, plans to turn net-zero by 2070. The transition will be made in phases with the first one focusing on investing heavily in established technologies, while exploring new ones. This will mean increased green investments until 2030, which will help India move closer to its ambition of reaching 500GW of additional non-fossil-fuel capacity, and higher share of renewable energy in the power mix, among others. Green investments are growth drivers, as investments to the tune of 22-24 trillion rupees will probably happen till 2030. Power, it is touted, will drive 85 per cent of green investments and green capex to be 50 per cent-55 per cent of total annual investment spend. Over the last 10 years, large power investments have been towards building fossil-fuel-based capacities. Now this will see a reversal as non-fossil projects will attract investment.

The geopolitical Russia-Ukraine strife will slow down global growth and push up oil and commodity prices. Europe could be hit the hardest. As for India, the impact on the country’s overall trade flows are probably lesser, owing to low share of trade with Russia and Ukraine. India’s top exports to Russia and Ukraine are necessary goods like pharmaceutical products, so it is unlikely to be impacted. Yet, the import cost will rise owing to higher prices of edible and crude oils that can affect mineral fuel and fertiliser imports. There could be a possibility of disruption in the supply chain, as India’s major trading partners like US, Europe and China have a high import dependency on Russia and Ukraine for select commodities. 

“Sectors like commodities, semiconductors and natural gas are impacted by the Russia-Ukraine crisis. The shortage of semiconductors or chips due to surging demand amid pandemic-led disruptions in production may persist till next fiscal. Palladium and neon are among the key raw materials used by chip fabricators,” added Gandhi. As much as 44 per cent of palladium is supplied by Russia, while 50 per cent of neon is supplied by Ukraine. While they may not be the sole suppliers, and there might be inventories of the material, the duration of their current conflict would determine the extent of impact on the supply chains. Hopefully, the semiconductor supplies may not deteriorate from current levels. Computer hardware and LED conductor products have not yet attained full recovery largely due to the global shortage of key components disrupting the entire value chain.

 “The industrial sector might experience pressure and the recovery on margin might get muted. For instance, tyre manufacturers could be weighed down by the ongoing geopolitical strife,” highlighted Krishnan Sitaraman, senior director, CRISIL Ratings.

Covid-19, it appears, may perhaps be at the beginning of the endemic phase. Each successive wave of Covid-19 may have been less dangerous than the previous one. Probably because we have learnt to live with it or that over 40 per cent of the population has been vaccinated. In the first wave, mobility fell by 90 per cent, in the second wave it was 66 per cent and in the third wave it was 17 per cent. CRISIL has incidentally deduced that if Covid-19 lies low, contact-based services, which have been hit the hardest and are still 10.9 per cent below the pre-pandemic level, will rebound and provide support to people associated with these. This holds particularly for urban areas, as two thirds of contact- based services are urban-centric.

Well, we hope so.

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