Praveen Jagwani, CFA | Dec 2020
In 2020, despite the severity of the pandemic related disruption, Indian equity market is among the top performers.
For 2021, India is slated to be the fastest growing economy according to the IMF. India’s GDP is expected to grow at 8.8% and China at 8.2%. The primary reason for such a sharp rebound in India’s fortunes is the buoyancy of domestic consumption. With declining global trade, the animal spirits of India’s youthful middle class have led recovery, particularly in rural India. Solid compounding businesses have gained market share through the pandemic and delivered stellar returns even as the broader index has delivered a tepid 10%.
Rising Income of the Indian Farmer
The agriculture sector of India represents about 16% of India’s GDP but has an impact on more than 55% of the total workforce. Unlike developed economies that rely on mechanized farming, India’s farmers depend upon the sweat of their brow and the rain gods. Abundant rainfall means a life of plenty.
The generous monsoons of the past two years have resulted in bountiful harvests leading to rising rural incomes. Consequently, rural demand for not just tractors and household appliances but also coffee and chocolate has skyrocketed. Rural demand has been the core driver of India’s V-shaped recovery.
Recognizing the economic might of rural India, the Indian government has launched an App (approx. 100 million registered users already) that provides farmers with crucial information on weather, market prices, dealers, agro advisories, and plant protection. Financial inclusion programs of the government have increased banking penetration from 54% in 2014 to 84% in 2019. This has enabled rapid electronic transmission of the fiscal stimulus to the vulnerable segment. Digital transformation of rural India will prove to be the backbone of India’s resilience.
Impact of Pandemic
The Indian healthcare system has proven to be reasonably robust in handling the pandemic. Apart from imposing the lockdown, educating the diverse population about hygiene and social distancing in local languages was a daunting task, but it did flatten the curve. The country continues to witness a declining trend of infections and mortality. India has
registered one of the lowest ratios of deaths per million even as the economy opened. While the GDP contracted by nearly 24% in the Apr-Jun quarter, the recovery in the July-Sep quarter has been equally swift. Both macro and micro indicators are signalling sustainable growth ahead.
The World’s Pharmacy
The Indian pharmaceuticals market is the third-largest globally in terms of volume and the 13th largest in terms of value. India has long established itself as a global leader in the manufacture of generics given its skilled scientific workforce and extremely low cost of manufacturing. As a result of the pandemic, India now has the largest share of global generic exports (20–22%).
Global pharma majors have been securing their supply chains to reduce dependence on China. In response, the Indian government has launched a USD 1.3 Billion program to set up bulk drug park and incentivize production of 53 key APIs (Active Pharmaceutical Ingredients) which were historically imported from China. The outlook for Indian pharma as a manufacturing hub for the world appears very bright.
Structural Growth Trends
India’s growth will be unlocked by its potential for catch-up. India’s urbanization is just 34% compared with 60% in China. India’s productivity (output per worker) is only 66% that of China and its manufacturing share of GDP is less than 50% that of China. Harnessing this potential for catch-up through systematic reforms will be a true test of the Modi government.
Of all large economies, India has the most significant capacity for growth, given its low systemic debt. All developed countries in their evolutionary journey have relied on credit for growth. Now it is India’s turn. Low household and corporate debt levels mean that India is best positioned it for a credit led consumption boom.
The Rupee at present is cheap, considering India’s export market share, FX reserves or Balance of Payments (BoP). The past few months have seen a surge in Indian exports leading to a BoP surplus. At USD 570 Billion, India has the fifth largest FX reserves in the world, which underpin the Rupee’s stability
After peaking out in Apr’20, the Dollar index has lost nearly 11% this year, and the outlook for the trade-weighted dollar is weak vis-à-vis most EM currencies. As global trade gathers steam in the post-vaccine scenario, India is likely to increase exports, attract more investment flows. Consequently the Indian Rupee is expected to remain stable, which is positive for global investors.
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