Praveen Jagwani, CFA | July 2020
India’s agricultural sector is blazing a trail of recovery even though the broader economy is still playing catch-up. Much like in the rest of the world, certain macro indicators remain subdued in India but June has witnessed a strong rebound in economic activity. As people have gradually returned to work, power consumption, employment and even tax collection has spiked post the April lows. The jump in government’s Goods & Service Tax collections is the much awaited green shoot of business resurgence.
But it is the rural and agriculture sector that has grabbed everyone’s attention and imagination. Rural unemployment has fallen to 7.6%, which is similar to the pre-lockdown levels.
Rural Economy to Lead Demand
A confluence of factors have led to the blossoming of rural economy: Migration of labour from cities to villages, cash relief on account of the pandemic, a good monsoon and a record crop output. Increased rural demand is already visible and is expected to sharpen thanks to the abundant monsoon rainfall the country received last year, filling reservoirs in most parts of the country.
As an example, the state of Punjab ingeniously enlisted the support of paramilitary forces to execute an unprecedented harvesting exercise. With military precision, the central government deployed special trains, each 2.4 km long, to transfer the harvested wheat to the furthest corners of the country. There’s been a 100% growth in grain transported by Indian Railways in April’20 over Apr’19. This herculean nation-wide effort to ensure food security during the pandemic is assuredly going to hammer down food inflation.
The pent-up demand we forecasted is coming through in vehicle sales, in particular tractors and two-wheelers. The improvement has been across the board including in cars but the tractor industry has witnessed a 22% year-on-year growth in June 2020.
Corporate India: Leaner and Meaner
Another trend that has emerged consequent to the pandemic crisis, is a massive renewed focus on cost control. With topline growth constrained during the lockdown, containing costs to improve the margins seems to be the universal mantra. Tighter supplier credit terms, judicious advertising and effective use of digital marketing will help companies rein in costs. This drive to cut the flab and unlock efficiencies will have the much-needed impact of creating leaner and meaner organizations, capable of competing globally.
Shifting Sands with China
Geopolitical anti-China sentiments have been steadily rising since the second half of 2019 and the recent fracas between India and its largest neighbour China, has spilt over into the area of trade. Various trade bodies have called for a boycott of Chinese goods in favour of local substitutes.
Prime Minister Modi has launched a campaign of Self-Reliance to ingrain a preference for “Be Indian, buy Indian.” China’s strident and abrasive stance towards many of its other trading partners is also expected to drive global corporations to seek alternative locations for their manufacturing and sourcing.
Macro Fundamentals Remain Strong
India’s long-term outlook remains positive. According to FITCH Ratings, after the global crisis, India’s GDP growth is likely to return to higher levels than ‘BBB’ category peers. It has forecast a 9.5% real GDP growth next year, provided India avoids further deterioration in financial sector health as a result of the pandemic.
A key variable in engineering this recovery will be the Modi-led government’s National Infrastructure Plan (NIP). The NIP envisages an ambitious infrastructure investment plan – in construction and non-construction sectors – over the period FY20 to FY25. The key to uplift economic activity and generate sustainable employment is to ensure that the centre undertakes capital expenditure in line with NIP.
India now holds the fifth-largest reserves of foreign exchange globally. With reserves above USD half a trillion, the fundamentals of the country are strong enough to support a credit growth campaign that creates the required infrastructure in a phased manner. In line with the positive developments, the Indian Rupee has also appreciated in recent weeks, pointing to India’s rising geopolitical relevance.
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