Just as the industry was starting to show positive signs of demand growth, fear persists about the third wave of COVID-19 in India. The government has confirmed the entry of the Omicron variant into the country. Unlike the second wave, when economic activity in the developed world was relatively better, the new variant is likely to spread to most countries, leading to moderate growth in the world economy.
So what impact will this have on the domestic and export performance of Indian industry? Outlook Business spoke with Vineet Agarwal, President of Associated Chambers of Commerce and Industry of India (ASSOCHAM) to understand how prepared Indian businesses are to face the new challenges.
Edited excerpts from the interview:
What are the growth prospects for the industry in the context of the third wave looming in the country during this fiscal year?
Agarwal: For the whole year, we estimate around 9.5-10.5% in terms of our GDP figures. The second half is the better half of the year so if something like a third wave doesn’t happen then even with some disruption I think we’re looking at 9.5-10% GDP growth.
The house is divided on how to deal with Omicron. Some say there is no need to panic, others ask to be too careful to avoid a situation like the second wave. What’s your point of view and do you think a third wave will be as devastating as the first two waves for businesses?
Agarwal: We have learned a lot from the first two waves of the pandemic. Obviously, some things are disrupted more dramatically. For example, the service sector is immediately impacted. Hospitality, tourism and other sectors will be affected if there is a third wave despite the lessons of previous waves. The other thing that is affected is demand in the short to medium term, because then consumers tend to pull back a bit and try to save a bit or the spending goes to medical expenses and so on. Thus, the proportion and the basket of expenses tend to change. This will happen regardless of the learnings. But what we have learned is that by keeping the industry going, the containment management systems and the vaccination program have significantly reduced the risk factor. All of this will help if there is a successive wave.
Lately we have seen the price of crude oil rise in the international market and inflation is on the rise all over the world, even the United States is struggling. The Indian economy has always been held to ransom by crude oil prices, whether in the 1970s, 1990s or even 2008. If prices exceed $ 100 a barrel in the future, what is the industry’s coverage? Indian against that?
Agarwal: There are two related issues. One is the price of oil and the other is inflation. Even if profits rise, margins fall because inflation eats away at margins. Inflation also has an impact on commodity prices. So if the prices of other commodities like palm oil or cement go up, this also has an impact on inflation. Over the last few decades, I think our Indian economy has become much more resilient, much bigger than in the 70s and 80s to absorb this kind of shock.
As to what happens if the price of crude oil exceeds $ 100 per barrel, I would say that the high price of crude oil has an impact on the industry because high fuel prices have an impact on freight and on consumer prices. But we see that prices have already started to moderate and food inflation has also declined. Non-food inflation is slightly higher, however, but I think it is starting to moderate globally and commodity prices have started to flatten. However, it will be a bit of a challenge for the next few quarters.
Is there a way for an economy to protect itself against rising crude prices over the next few quarters?
Agarwal: Well, the hedge itself is not a straight hedge. The speed of the economy automatically becomes a cover because with an increase in business happening and the movement that is happening with the money, in turn, helps to beat that inflation. To some extent, high fuel prices create automatic hedging, as evidenced by the shift to renewables. So I think that the dynamic is strong and that we will make up for it. It is only a matter of time for renewables or alternative energies – be it methanol, bioethanol, electric vehicles or, at some point, hydrogen – to start delivering on average. and long term.
India has set itself very ambitious targets for reducing carbon emissions. Its impact will also be felt by the industry as there will be many rules and regulations that come into effect to reduce the intensity of carbon emissions. How prepared is Indian industry for this?
Agarwal: The fact that climate change is a reality is known to all. I think the awareness of businesses, businesses, industries and businesses across the country is very important and it has come a long way. So I think it’s a matter of time that we are all going to have to embrace electric vehicles. If you are a very polluting industry, then there must be a mechanism to support climate finance. Concentrated and comprehensive action between government and industry would be necessary, as some industries could be negatively affected. So we need to balance this impact.
Have you made any proactive presentations to the government on this subject?
Agarwal: We have various committees that work with various government agencies because it impacts every type of industry. It’s an ongoing process with the government, but with the country pursuing the goal of net zero carbon emissions by 2070, all industries will now begin to align with that goal. And I guess the action plans will now start to take shape and integrate more and more deeply.
Exports are doing well after two years now, but it is largely the demand for raw materials that has increased for India. Why are we lagging behind in promoting our manufacturing sector?
Agarwal: Merchandise exports have increased, so it is not necessarily just commodities that are exported. We’re also seeing good traction for engineered products. Pharmaceuticals are also doing very well. Merchandise exports have moved away from commodities, which in my opinion is a good sign and should continue. There is a lot of action on the ground related to exports because there is a clear change starting to happen with China plus a strategy for a lot of companies of which India is a direct beneficiary.
We are also seeing some types of industries in which India is becoming more and more proficient and competitive on a global scale. The PLI (production-linked incentive) system is there and will start to strengthen export competitiveness. So overall it looks pretty good for exports for the next few quarters, that’s for sure. And of course, we need to keep recalibrating our policies based on how other countries operate. So if we are working on some Free Trade Agreements (FTAs), I think these will definitely help Indian exporters.
But in the past, the FTAs India has negotiated with other countries have turned out to be one-sided and the country has not taken advantage of them.
Agarwal: I think the way we negotiate these FTAs needs to be looked at and we need to negotiate from a position of strength versus a position of weakness. If we have made mistakes in the past, we need to be careful not to make the same mistakes again. I think selective FTAs with certain nations will be beneficial and we as ASSOCHAM believe that will be very important.
China is giving up its export market and becoming more introverted as an economy. The market that is expected to arrive in India is actually occupied by countries like Bangladesh, Vietnam, Indonesia, and Thailand. How can India meet the challenge of these smaller but more competitive nations in exports?
Agarwal: Our government has launched the PLI program which aims to resolve these competitiveness problems. We are still a big call center hub in the world, we are still in the top five countries in terms of textile exports and we are definitely increasing our capacity in all these areas. The trend towards added value is such that it is no longer just a question of call centers but of very high levels of exports linked to services. Of course, we know that our IT exports are doing very well and as a result, the added value of our exports has started to increase. The fact that we have been able to take market share from Chinese companies is very evident, as the volume of imports from China has decreased. All of this gives a lot of confidence that the advantages outweigh the disadvantages in the export business.
If we are competitive, why has Ford Motor, the only company exporting to the United States from the Indian market, shut down operations in India?
Agarwal: Ford India had a very small capacity. If you see Hyundai and other players, they’re exporting in droves. Look at the two-wheeler market, the three-wheeler market, and the tractor segment — these are doing extremely well in terms of exports. Some earth moving equipment companies are doing very well. So I think the overall ecosystem has a lot of potential to develop and we are moving towards high value added exports.