The production-linked incentive scheme launched by the government recently is set to give a much-needed boost to India’s manufacturing, at a time the economy is looking to recover from a slowdown that set in through 2019 and only worsened due to the COVID-19 pandemic.
Investment bank Credit Suisse estimates that the PLI schemes can generate $150 billion in incremental sales by the financial year 2027, adding up to 1.7% to the GDP by FY27.
Last month, the Narendra Modi-led government announced performance-linked incentives worth up to Rs 1.46 trillion for 10 manufacturing sectors.
Electronics, particularly mobile phone manufacturers, could be the biggest beneficiary of the scheme, estimate analysts. Automobile manufacturing, battery production, pharma, food production, textiles and telecom could be the other major beneficiaries.
Credit Suisse estimates that the bulk of this production is likely to be exported and therefore the trade deficit could also shrink by $55 billion.
The PLI scheme apart, easy monetary conditions, a balance of payments surplus, corporate tax cuts and labour reforms will help in improving India’s medium-term growth outlook, feels the investment bank.
“For the last 30 years, India’s real GDP growth rate has averaged 6.5-7 per cent. After a few years of downgrades to India’s medium-term growth outlook, we now have reasons to expect upgrades to this. The easing of monetary conditions reverses the tightness of 2015-18, the large BoP surpluses that have driven this also provide macroeconomic space for a stimulus, the multi-year real estate cycle is no longer a drag, and most importantly, we believe the pro-growth turn in India’s industrial policy can add 1.7 per cent to GDP by FY27, or 0.3-0.5 per cent a year,” said Neelkanth Mishra, co-head of equity strategy, Asia Pacific and India equity strategist at Credit Suisse.
India’s economy shrank for the second straight quarter in July-September, but at -7.5 per cent it was much narrower than the 23.9 per cent contraction seen in April-June. Several ratings agencies have since raised their growth forecasts and expect a narrower contraction in India’s economy in the year ending March. Several other indicators have also suggested a quicker-than-expected rebound. Although, whether this momentum sustains is still uncertain.
Credit Suisse expects the positive growth surprise could continue for a few quarters.
“The restocking-led momentum in manufacturing is likely to boost GDP for a few quarters, which comes on the heels of intense destocking due to financial system stresses between the second quarter of 2019 and fourth quarter of 2020. This replenishment was due in 2020, but got delayed due to the pandemic,” said the investment bank.
Credit Suisse is now “overweight” on industrials. However, it feels India’s equity markets are expensive since the sharp run-up in stocks since the crash in March, despite the weak economy.
On Thursday, the BSE Sensex hit a fresh life high of 46,992.57, and closed at 46,890.34, up 224 points or 0.5 per cent.
“Indian equities are no longer cheap. In fact, they have rarely been more expensive. Market upsides may only come from upgrades to FY23 earnings per share estimates (currently 21 per cent year-on-year) and better medium-term growth prospects,” said Credit Suisse.
Industrials, where valuations relative to the market are at multi-year lows would provide the best opportunity, it added.