India (part 1): Lives or Livelihoods?

Fri 03 Jul 2020

By Ruairi Dennehy

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Market commentary

As many countries around the world attempt to resume ‘normal’ pre-COVID life, there aren’t many countries, if any, that are in the same boat as India, for better and worse.

As many countries around the world attempt to resume ‘normal’ pre-COVID life, there aren’t many countries, if any, that are in the same boat as India, for better and worse. 
India was going to be the biggest economy in the world by 2050, with huge potential for investors. 
Has that changed in the last 6-12 months? Is India still a star opportunity in this Asian Century? In this first India blog, we look at what has happened to the outlook for India in recent months. In the second blog we will review the fund choices.
Recap – India As THE Great Opportunity Of The Century
The median age of the population is a mere 28.7 years. This contrasts with 46.5 years in Italy, or 40.6 in the UK. Simply put, a 25-year-old working Indian with young children has much greater economic potential than a 70-year-old Italian pensioner.
The potential upside is also illustrated by the size of the economy (GDP) per head of population (Source: CIA World Factbook)
  • for Italy this is $38,200 per person
  • for India it is $7,200 per person
Would you rather invest to into the greying, high income, populations of the West, or the youthful potential of India?
India is set to be the 3rd largest economy in the world by 2030, behind China and the US. But it is not all good news.
That young population needs work, particularly better paid work than now prevails – 50% of the population is still in the agricultural sector.
And there are still bizarre contrasts. For example, they are sending an unmanned rocket to Mars. Yet perhaps half the population do not have access to toilets or will not use them. As a direct result of poor sanitary conditions, over 60,000 children under 5 die from (avoidable) diarrhoea.
The Outlook Pre-Virus
Pre-virus, there were signs of promise for India. After an economic slowdown in 2019 the government announced corporate tax cuts to boost the economy and spur job growth. But the virus hit before these could have a positive impact.
Despite the slowdown in 2019, the main Indian stock market went up 15%. But then it fell sharply in the Spring, by 38%, in common with most world markets in scale. Also, like other markets it then bounced, retracing 55% of the fall in their case.
Are the falls over? Or is there more to come? No one knows. In the short term it is probably all about the progress of the virus, which I will look at next.
Lives Or Livelihoods?
India’s government acted quickly to introduce lockdown measures and close its borders, moves which the WHO commended as “tough and timely actions to stop COVID-19”. However, these seemingly positive measures were not consistent across the whole county - states can set their own rules on containment/lockdown zones until 31st July.
While Bangalore has been lauded for its contact-tracing efforts, Delhi has been criticised for their poor co-ordination and ‘excessive bureaucracy’ leading to many contradictory policies.
Whilst guidance has been given by the central government, implementation has been governed at a regional level. The capital, Delhi, the worst hit region in the country, is still very much amidst the eye of the storm, while southern cities such as Bangalore have been praised for their response.
The chart below, taken from this BBC article, emphasises how drastically different the response has been from the different major cities across the country.
While the lockdown was vital to save lives (however inconsistently it might have been applied) the nature of the Indian economy made it even more important than in most other countries to also announce initiatives to save livelihoods.
About 80% of India’s population is engaged in informal, cash, work – they are daily workers, who eat tomorrow if they earn today. With the economy in lockdown, the risk was a huge humanitarian crisis.
The government announced a $270 billion stimulus package, worth 10% of the country’s GDP, particularly to support small business and the weaker sections of society. Further measures, mentioned above (including national lockdown & border closures) were wholly necessary, in a country whose healthcare system is extremely overstretched. The World Bank reports India had only 0.9 physicians per 1,000 people in 2018, compared to 2.8 in the UK, China 2.0, Cuba 8.4, US 2.6.
The government are already taking small steps to re-open elements of the economy, such as production & manufacturing sectors.  Among other initiatives, they announced a credit guarantee scheme worth $40BN aimed at incentivising banks to lend to smaller business. Although these schemes seem a positive step in the right direction, the government didn’t have an awful lot of choice, given India’s pre-virus economy, at a low ebb.
How close India is to begin an economic recovery is difficult to predict. Amit Goel, fund manager at Fidelity, is fairly optimistic on India’s short-term recovery – “with the country now in an ‘unlock’ mode, the worst of the slowdown may already be behind us and economic activity is expected to normalise going forward.”
But “the outbreak means it will probably linger near the bottom for longer before regaining momentum” This is emphasised by the fall in theIndex of Industrial Production (IIP) in September 2019, which was the steepest in 6 years. This, coupled with the fact that multiple credit rating agencies have cut their outlook on India’s sovereign rating to ‘negative’ from ‘stable’ earlier this month, highlights the economic vulnerabilities that were apparent well before COVID-19, and the subsequent effect of the virus on the Indian economy.
All doom and gloom?
When all said and done, India still has the fundamentals of a remarkably strong economy taking a longer-term view. A large, young educated work force, rapid urbanisation and a government who aren’t afraid to support small businesses, such as the credit guarantee scheme mentioned above.  Furthermore, compared to 2018, low crude oil prices, along with stronger forex reserves and lower interest rates mean India is in a more stable position than it was going into the last global recession.
As a spokesperson at the United Nations Conference on Trade and Development (UNCTAD) said the world economy will go into recession this year with a predicted loss of global income in trillions of dollars. This will spell serious trouble for developing countries, with the likely exception of China and the possible exception of India”.
Fitch, the credit ratings agency, predicts India’s economy will contract by about 5% in the coming year, with a rebound of nearly 10% in 2021/22. In comparison the UK’s economy is expected to contract by over 7% with just a 3% recovery in 2021/22. We must not take these predictions at face value and be done with it, but it does reinforce the above argument that India is far from a ‘doom and gloom’ economy because of the virus.
Turning specifically to the stock market in the short term, Mathews Asia believes the dramatic decline in the Indian market was overly pessimistic. They believe this creates a decent entry point for investors, and they note that smaller companies are very cheap relative to larger companies.
That sets us up for next week when I will review the range of Indian funds, what is driving them, and where might lie the greatest potential.


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