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Published on: Dec. 28, 2022, 2:34 p.m.
Is it sunny side up for Corporate India?
  • New airports take the investment flow sky high

By Daksesh Parikh. Executive Editor, Business India

Forecasting a year ahead is a mug’s game and very often depends on which side of the bed the forecaster got out of in the morning. The best part of forecasting is that by the end of the year no one remembers what the forecast was, never mind how much one was off the mark (or not). Except the forecaster himself. If per chance the forecast is right two or three years down the line, one might expect all the dailies to swoon over its veracity.

If the forecast is right once, this could be attributed to luck, but if it’s right the second time round, this could mean the forecaster really has an uncanny sense of what will happen in the future and his forecasts should be taken more seriously. More than twice in a span of five years, and the forecaster has a cult-like following. 

Jokes apart, every forecaster normally gives the rationale for arriving at a particular forecast and the methodology used to draw any conclusions. Without exception forecasters will rely on immediate events in the past year. This year, for a change, Business India decided against telling readers how challenging the past year was for Corporate India; nor did it dwell on the level of inflation, rising interest rates and global miseries.

It did not dwell on the rising fuel prices following the Russia-Ukraine war, either. There are too many variables in a fast-changing world to say how Corporate India will perform in 2023. Ultimately, all factors will boil down to how the domestic economy performs in the context of the global slowdown. 

There is no debate over whether the global economy will see a sharp slowdown or not. The probability of the US economy going into recession is quite high at 70 per cent. The EU is already reeling under the fuel crisis due to supply chain disruption following the war in Ukraine. Global problems are likely to spill over and accentuate even further in the coming year. Given the gloom and doom conditions globally, can India manage to emerge unscathed in 2023?

In 2022, the economy did manage to pull through thanks to the large domestic demand. Corporate India also benefitted from riding on this demand. To understand if it can continue to do so next year is dependent on how far exports will be impacted, volume-wise as well as price-wise. Merchandise exports contribute to 13.3 per cent of the GDP which was Rs500 crore during the April-November period, 18 per cent up from the same period in 2021.

Of the total exports, service exports have witnessed a rise of 30 per cent while merchandise exports have shown a double-digit rise (11 per cent). Three major export items – engineering goods, petroleum products and gems and jewellery – contribute to a significant portion of the GDP, accounting for a little under 7 per cent of the GDP which is 50 per cent of total merchandise exports.

In the case of a global slowdown, the export of petroleum goods by companies producing the same such as Reliance Industries, Nayara Energy, and Vedanta (through its erstwhile Cairn arm), could be adversely impacted. However, large producers have the option of diverting some, if not all, products to the domestic market. On the flip side crude oil could see the softening of prices in the case of a global slowdown, thereby reducing the trade deficit.

  • The defence supply chain will easily see the country surpass the export target of $5 billion for 2025

Engineering goods which are exported include steel and steel products, and special steel. Besides this, non-ferrous goods like aluminium are also clubbed together under engineering goods. Some of the leading items exported from India are automobiles, two-wheelers, three-wheelers, cars and trucks. Other major ones include auto components, industrial machinery, textile machinery, dairy and sugar machinery as well as turbines. The removal of 15 per cent export duty on steel augurs well for the sector.

The price of steel, despite a steep fall, is still at an elevated level compared to that prevailing in 2019 and 2022. To what extent the slowdown impacts the engineering sector will really depend on the level of slowdown in the importing countries. It is doubtful if countries in recession are really the key markets for these products. And while some capital goods may suffer, other new categories will more than compensate for the losses. Defence products are an example of this. 

Defence, well protected

The export of defence goods is expected to grow. The best part is that these products are not dependent on the state of the economy. Companies are easily able to pass on additional costs due to the escalation clause which forms part of most contracts. The government’s initiatives to become an exporter of defence products and get ingrained in the defence supply chain will easily see the country surpass the export target of $5 billion for 2025.

In the current fiscal year, FY23, it has set a target of Rs13,000 crore. Offshore vehicles, advanced light helicopters and night surveillance systems are some items which exported by India. The majority of companies in defence, including ship building companies, are in the PSU sector and evoke a good response from investors. These include Hindustan Aeronautics, Bharat Dynamics, Bharat Electronics, Garden Reach BEML, Mishra Dhatu Nigam. Mazagon Dock, Goa Shipyard and several unlisted ones. 

The private sector, however, is also fast catching up. Besides catering to the armed forces as a part of the Atma Nirbhar initiative, several companies have started booking export orders. Pinaka rocket launchers are being exported by a private sector company, Solar Industries. The company, which manufactures explosives, is already a large supplier of detonators in the global market. Kalyani Strategic Systems, a subsidiary of Bharat Forge, has likewise got orders to supply artillery guns. The company has a wide basket of products. Other majors, 

L&T, Mahindra Aerospace, Tata Defence Systems and MTAR, are companies which will be in the forefront of defence in the coming years. Mahindra’s mine-protected and armoured vehicles are already manufactured in overseas locations and exported to other countries. 

The industry which could be impacted is gems and jewellery. The major destinations are USA and East Asia, in particular, Hong Kong. Even in 2022 it is reported that consumers at the retail level were holding back on purchases due to fears of an impending recession in 2023. 

On the domestic front, it is unlikely that India will face a slowdown like the one anticipated in EU and USA. Good agricultural income along with good income from crops in the Kharif season is forecast. The first advance estimate places food grain production at 140 MMT. An example is sugarcane, which saw a bumper crop of 465 million tonnes being produced in October 2021-September 2022. Likewise, the production of oilseeds, cotton and other crops has been good.

  • The removal of 15 per cent export duty on steel augurs well for the sector

A good monsoon has ensured that the rabi crop will also be good and the government’s estimate of total food grains for the year 2022-23, at 328 MT, will be met. The growth in the income of farmers will ensure a better rural demand to supplement the rising urban demand. Inflation may hurt, but not really dent, overall demand. Against this background it is safe to assume corporate India will cater to a robust domestic demand in 2023. FMCG companies are expected to do better in 2023 compared to 2022. 

The best part is that given the diversity in the manufacturing sector, while there could be a few sectors which may not do as well as anticipated, some may do better and others will more than compensate. Manufacturing companies will continue to do well. Automobiles have seen record sales of 3.55 million units. The resumption of supplies of semiconductors has added further impetus.

Sales in December normally lag as consumers tend to wait for the new year’s registration; sales normally tend to move up in January ahead of the budget. Electric cars could see a pickup if the auto industry tries to balance prices. Ultimately, price will be a big determinant in influencing the consumer’s buying behaviour. As will the 5G rollout. While companies will prefer 5G for faster data movement, retail consumers will weigh the price of 4G with 5G offerings.

Like the automobiles industry, housing demand will determine the prices of steel, cement and aluminium. Normally, good rural demand should push up the prices of cement. Steel will be more dependent on when and how China, the largest producer of steel and cement, will operate in 2024. IT demand should logically go up as offshoring will be a less expensive initiative. IT companies may probably do well, recession or no recession.

  • More expressways and National Highways will all add up to the investment demand

Infrastructure will revive investment demand 

Assuming that the domestic consumption demand maintains even a status quo, the revival of investment demand will be a big boost for the corporate sector in 2024. The government’s initiative, Atma Nirbhar Bharat and the PLI scheme initiated by the government will start bearing fruit in 2024 and 2025. The PLI scheme initiated by the government in 2020 to give a boost to 14 sectors, offered incentives of Rs1.97 lakh crore to various sectors including automobiles and auto components, white goods, pharma, textiles, food products, high efficiency solar PV modules, advanced chemistry cells and specialty steel.

Recently, 50 per cent of fiscal incentives were given for semiconductor fabrication units. Besides these, the government’s spending on the creation of more expressways and the national highway network will all add up to investment demand. Private sector investments have lagged behind the government which has till now been doing the heavy lifting in terms of new projects.

One is hopeful the private sector will also follow the government as far as new projects are concerned. ProjectsToday.com has indicated a neat 47 per cent rise in new infrastructure projects being announced in the first half (April-September) of the current fiscal year.  The overall increase in new projects announced has gone up by 36.6 per cent, indicating a revival in the project environment. 

Several states have been holding investment summits, following in the footsteps of Gujarat. These summits, held in key cities, have evoked a good response. Sectors which have attracted funds in new projects include manufacturing, green energy, solar railways, civil airports and defence, amongst others. Overall, the corporate sector will be the biggest beneficiary, with investment flows likely to accentuate in 2023.

India Inc, which has been on a belt-tightening drive since Covid, is setting its house in order and could probably be more aggressive in taking over assets overseas, especially in Europe. Like in 2008, Indian companies could look at attractive overseas targets; a revival in M&A activities will also keep investment bankers active in 2023.

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