Third wave of COVID may not harm medium-term growth outlook, sectoral recovery will be uneven


For now, the RBI is sticking to its 9.5% growth projection for the current financial year and said it is supportive of growth although it has already started sucking excess money out of the system. .

By Narayan Shroff

Once promising, now less so: At the turn of the year, India seemed well placed in its handling of the COVID-19 pandemic. The new year has slightly upset the assumptions. An explosion in the transmissibility of a new variant – broader, deeper but gentler in its infectious potency – has raised new concerns about the quality and magnitude of the economic recovery.

There is, however, comfort in India’s general readiness for a third wave, with merit. Over 60% of the adult population has been vaccinated and vaccinations have now been extended to adolescents aged 15-18. The medical community is also of the opinion that the speed of the new Omicron variant may be faster, but its impact is mild. Finally, within the government and probably also among the public, the arguments in favor of a total containment are not defensible. The costs far outweigh the gains.

The sum of these factors has therefore led economists and financial institutions to stick to past growth projections for now, although some, such as ICRA Ratings, believe that if the current wave persists for an extended period, the growth could be about 40 basis points lower in the fourth quarter, which could lead to lower growth figures for the whole of FY22.

That is why it is almost eagerly expected that when the Minister of Finance presents the budget on February 1, she will provide the necessary fiscal and investment measures for an economy that is still struggling stubbornly to attract domestic private investment. . Advance estimates of nominal GDP growth of around 17.4% per cent, albeit on a pandemic-induced weak base, give the government additional room for stimulus without overinflating an already high fiscal deficit. .

Watching all of this will be the RBI, which has done its part in recent months by keeping interest rates on a tight leash, or in market parlance by maintaining “accommodative” monetary policy. This is not an open position: inflation is up and the Fed is more hawkish. The proverbial man of Mint Street asks the right question again: is a rate hike on the near horizon?

For now, the RBI is sticking to its 9.5% growth projection for the current financial year and said it is supportive of growth although it has already started sucking excess money out of the system. , a move that generally signals a tightening of rates as indicated. by rising bond yields. According to Barclays Investment Bank research, the forecast is for nominal GDP growth of 19.6% in FY21-22 and 13.6% in FY22-23. Our optimism stems from industry trends that underpin a recovering economy.

Sectoral recovery will be uneven – real estate will recover strongly


Technology is an outlier. The pandemic has accelerated digital adoption in consumer and learning sectors, as well as government-funded services such as welfare and other out-of-pocket payments. In general, technology will be a big theme in capital markets (IPOs) as well as in the real economy where consumers are rushing headlong to embrace digital delivery. A host of business sectors led by e-commerce, fin-tech, ed-tech and health-tech have strengthened during the pandemic, bolstering India’s credibility as a hotbed of innovation proprietary technology to consumers. In the demands of the pandemic, the business models of these platform-based companies have been a triumph of ingenuity overcoming adversity. It is the network effect of the Internet that explains the dizzying valuations of certain start-ups. And it is now a fundamental systemic change in the way people in high and low income groups buy dinner, book flights and pay their bills.

The pandemic has not only confined people to their homes, but employers have seen the value of working from home. And while the third wave has many employers asking and sometimes insisting that employees work from home again, it’s likely the workplace will never be the same. Flexible working, the hybrid model and remote hiring could not only define the workplace of tomorrow, but also shape the business models of tomorrow.

Real estate

Allied to this theme is the impact on real estate. It’s a languishing sector as a pile of issues crush demand and development: demonetization, the IL&FS crisis that has weighed on cash, the establishment of a tough real estate regulator, the regulatory law and real estate development (RERA), and finally the pandemic, which has pushed commercial and real estate prices to an all-time low. While commercial real estate will take time to recover from the work-from-home trend, the pressure to construct low-carbon buildings and pent-up demand for new and larger homes will ensure that residential real estate offers more immediate reasons to optimism. This, coupled with historically low interest rates, suggests a five to six year bull cycle in the sector.

Infrastructure, manufacturing and capital goods

The government’s multi-billion dollar manufacturing incentive program will inevitably attract investment in manufacturing new sites. This, combined with the potential recovery in private investment and real estate, will strengthen momentum in the infrastructure, manufacturing and capital goods sectors, supported by strong public investment in infrastructure, especially roads.

Banking and financial services

Banks and large non-banks will benefit from a resumption of credit growth through a cycle of deleveraging, the resumption of private investment spending, rising corporate profits and real asset values. Lenders will be encouraged by a proven bankruptcy model, fewer non-performing assets and better capital adequacy ratios. Large enterprises will benefit from the lower cost of funds, the ability to fund larger loans, digitization and process efficiencies. The growing financialization of the economy is expected to benefit businesses such as insurance, asset management, wealth management and transaction processing.

Intensive laggards and consumers

Laggards may be in direct contact with consumers and contact-intensive sectors. Just as things were looking up in the travel, tourism and leisure industries, the third wave hit hard. Shopping malls would rush to landlords for rent concessions given low footfall, while hospitality and aviation (where prospects looked brighter during the October-December holiday season) could again look to an uncertain future. The omens are that travel and leisure will remain under pressure heading into FY22 as countries open up, but hesitantly, amid fears of another wave. The momentum of recovery here will directly depend on the pace of vaccinations and the easing of travel restrictions around the world, which in turn depends on the spread of Omicron. Other consumer industries such as FMCG and automotive are expected to remain subdued as input costs rise (forcing higher car prices) and household incomes remain under pressure.

The new year is therefore likely to be volatile. But I continue to believe that the Indian economy can adapt to these winds of change partly because businesses, households and investors have learned to live with the risks induced by COVID.

(The author is Chief Investment Officer, Barclays India. Opinions are personal and not necessarily those of

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