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India poised for higher growth as more investments pour in

Indian economy overcomes coronavirus fears, set to pick up growth

India has emerged as one of the few major economies to post growth in the Oct-Dec quarter of 2020 due to the sharp drop in Covid-19 infections in the country that enabled economic activity to revive. In sharp contrast to this, the advanced western economies registered a sharp contraction in GDP as the surge in Covid cases forced them to go in for strict lockdowns that crippled businesses.

With India’s vaccination drive in full swing there is reason to be optimistic that the country is poised to win the war against Covid-19 even though there has been an uptick of the deadly disease in some states, primarily Maharashtra and Kerala, that poses a downside risk.

Rise in investment brings hope

India’s GDP data released on Friday shows that there has been a growth in investments during Oct-Dec period after several months of contraction. This raises hopes of a faster growth rate going forward. Investments have a multiplier effect on GDP creating jobs and incomes that generate a higher demand for goods and services which in turn lead to even more investments and employment.

According to the SBI’s Ecowrap report, the gross fixed capital formation growth has turned positive in Oct-Dec, which is a good sign and hopefully it will translate into better credit demand. The improving investment scenario is also reflected in the fact demand for bank loans from corporates shot up by 16% in Oct-Dec to Rs 2.14 lakh crore compared to July-Sept quarter, it adds.

“With IIP manufacturing growth to remain in the positive territory in Jan-March and bank credit showing a robust growth in January, growth will continue to show some traction,” the report opines.

The SBI report analysed more than 3,000 listed corporate entities, excluding BFSI (banking, financial services and insurance), and observed an increase of over 60% in their net profit in Oct-Dec
2020-21 compared to the same period of 2019-20. This augurs well for future growth as the cash cushion has increased the capacity of these companies to make further investments.

Sector-wise scenario

Sectors such as automobile, FMCG (fast moving consumers goods such as soaps and cosmetics), pharma, cement, steel and  consumer durables reported better growth number in all key parameters during the Oct-Dec quarter, the report states.

Net profit of India’s largest carmaker Marutu Suzuki, for instance, rose 24% year-on-year to Rs 1,941 crore in the three months ended December. Similarly, FMCG major Hindustan Unilever Limited (HUL) has posted a 19% year-on-year growth in its standalone net profit at Rs 1,921 crore for this three-month period.

The IT sector has done well as Covid-19 has accelerated the adoption of digital technologies, helping companies like Infosys, TCS, Wipro and HCL Technologies win large deals. Further, profit margins have got a boost. According to a Credit Suisse analysis, “The current pandemic has also helped the margins of the top four firms with the reduction in travel and other overhead costs."

As far as pharma companies are concerned, the pandemic has improved the outlook, with Covid-19 related opportunities. The pharma sector was also immediately categorised as essential services and experienced relatively lesser disruptions owing to the lockdown.

The cement and steel sector revived during this period as government expenditure on large infrastructure products such as highways, bridges and ports was kept up creating a demand for these products.

Farm sector

The farm sector has performed well during the Oct-Dec quarter to clock a 3.9% compared to a 3.4% growth in the same period of the previous year which will help to keep inflation in check. Higher incomes in the rural areas will also provide an increased demand for goods such as tractors and motor cycles which will spur industrial growth.