Silver Linings on Dark Clouds

18 June, 2020

In the first few weeks post lockdown, the bad news on the Indian economy seemed unstoppable. Economic activity came to a standstill with the strictest of lockdowns seen anywhere. No new cars or two wheelers were bought, consumer durable sales reached a nadir, fuel and power consumption collapsed and vast number of jobs were lost.

The Recovery

Power Demand Growth

But as India slowly crawls its way out of the lockdown, the picture that emerges is less grim than expected. S&P has reaffirmed India’s credit rating as BBB with a Stable Outlook and Fitch Ratings expects India’s GDP to grow by 9.5% next year. The revival is being led by Essential Consumption which forms almost 35% of GDP. Over the next few quarters, we hope to see a restoration of Discretionary Consumption and eventually Capital formation in the Investment cycle. Latest data reflects a slow but definite recovery of economic activity, of which power demand is a lead indicator. Power demand is now down by only 2 per cent year on year (by end May 2020) as opposed to 28% down in early April.

Digital payments have soared, a dynamic triggered by the Demonetization reform of 2016 and accelerated by this Lockdown. At $81 Billion, India is now the 8th largest global player in digital payments, just behind France.

With only 25% of India’s population owning a smartphone, it is already the 2nd largest smartphone using country. With rising per capita income and improving infrastructure, there is significant potential for growth.

The Stimulus

India, like most other countries has undertaken a combination of Monetary & Fiscal measures to revive the economy. A total package of US $ 265 billion, amounting to 9.8% of FY21 estimated GDP, has been announced. The monetary element comprised Reserve Bank of India’s liquidity augmenting initiatives amounting to approximately US $ 106 billion as well as a reduction in the repo rate by 40 basis points, taking it to a historically low level of 4%. The fiscal part was multi-pronged. It focused on supporting the small enterprises in the country – the lifeblood of middle class entrepreneurship. It covered the poorer segments of the society including migrant labor, small and marginal farmers and urban poor. These measures included a mix of short-term relief provisions and a scheme for affordable rental housing for migrant workers and urban poor. There was also a component of supply-side agricultural reforms long overdue in India. With meteorologists signaling monsoon at 102% of normal this year, a bumper summer crop is expected which typically catalyzes agriculture and rural consumption. Increased income in the hands of returned migrants and direct cash relief paid to vulnerable families in rural areas, is expected to keep rural demand high.

Favourable Geopolitics

With a rising anti-China sentiment globally, there has been a clear shift in the power dynamic over the past two years. Initially it was the mistrust on Belt Road Initiative, followed by Trade Wars and allegations of theft of Intellectual Property. More recently it has been the backlash on Coronavirus and the militarization of the South China sea. The final straw has been the impairment of human rights in Hong Kong. All of these factors have contributed to projecting India as a credible Plan B – a dependable democracy with the potential to be the world’s manufacturing hub and trade partner. Although India had walked away last year from the multilateral regional trade pact, the Regional Comprehensive Economic Partnership (RCEP), this group of 15 nations has now invited India back to the table. They are willing to accept India’s deferral in opening up its market to them. All of this points to India’s growing Economic & Geopolitical relevance.

Rising Foreign Investment

Not surprisingly, Foreign Direct Investment in India has been growing smartly for the past 5 years, to have reached USD 50 Billion in the financial year ending March’20. India’s rank on the Ease of Doing Business index, published by the World Bank, jumped to 63 last year. As such, India joined the list of 10 most improved economies for the third year in a row. India is preparing a land pool five times the size of Hong Kong to offer companies that want to move manufacturing out of China, and it has already invited over 1,000 multinationals. In the last two months, despite the lockdown, the digital arm of Reliance Industries, known as Jio Platforms, has raised a formidable equity of $11.2 billion from global investors like Facebook, Mubadala and KKR.

In conclusion, like in the rest of the world, the macro economic situation in India remains serious although recovery in India is likely to be faster. The present Covid crisis is more in the nature of a hiccup than a structural shift. The actual outcome will depend on not only the pace of reopening the country but efficient transmission of monetary & fiscal stimulus. The long term India growth story predicated on consumption and entrepreneurship of a youthful nation, remains intact. If anything the rising anti-China sentiment may prove to be an inflection point for India’s rise.


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