India is poised to be an economic superpower, benefiting from structural factors such as business reform, income growth, urbanisation, domestic consumption and demographics. Tipped to be the world’s third largest economy by 2035 (1), India holds appeal from a business and investment perspective. The COVID-19 pandemic has changed the outlook in many global economies but the challenges may only be temporary for India.
As part of ongoing research for our own India-focused ETF (ASX:NDIA) ETF Securities spoke to Kinjal Desai, Fund Manager Overseas – Equity for Nippon India Mutual Fund, on her views about India and the COVID-19 challenge.
With a population of 1.3bn, some commentators may have expected COVID-19 to ravage India but its infection rate has so far remained low compared to its population size.
The Indian government was swift to enact measures (2) including:
- travel ban and quarantine measures for returning travellers
- total lockdown from 24 March 2020
- financial relief package of INR 1.7tr (3)
- monetary relief with interest rate cuts from the Reserve Bank of India (RBI) (4)
Current modelling suggests, if the ongoing lockdown continues to be implemented effectively, by July 2020, less than 0.01% of the Indian population is likely to be infected (5). Further stimulus may be announced to support small and medium sized enterprises, as well as harder hit industries like aviation, hotels and tourism.
Challenges and opportunities in lockdown
While lockdown has created challenges for the economy, Ms Desai notes certain sectors have been able to continue to function.
“There are certain sectors which have functioned, I would say quite well given the circumstances, which I’m looking at FMCGs, staples, telecom, pharma, power and utilities… Over a slightly longer term, I would say that it is the consumer discretionary sectors, which is your auto, durable goods, capital goods sectors which will… perform better but they have taken a very bad hit now,” she says.
Ms Desai suggests focusing on individual players in each sector which may be positioned to gain in this environment.
“The companies which have a strong balance sheet are the ones which are going to gain market share… We’ve seen how telecom have been, and how banking has done better over NBFC ,” she says.
Reliance Jio Infocomm Limited (Jio) is an example of a telecommunications company which was positioned for growth before the pandemic and has apparently continued to benefit. It is the largest telecommunications operator in India with a mobile subscriber base of 370 million and 35% market share (as at December 2019) (7) . Facebook recently announced it has purchased a 9.99% share in Jio, announcing a potential collaboration with WhatsApp (8).
The broader global environment has also created opportunities for India across the pandemic period, with oil prices at extreme lows.
“India is actually the third largest oil consuming economy in the world, just after China and the US, and we are dependent on imports for 80% of our oil needs… we’ve seen come down by almost 60%, this has presented India with an amazing opportunity to store and build reserves. Indian companies have actually procured almost 7 million tons of oil, which is 20% of our annual needs in these low prices,” says Ms Desai.
Has the pandemic changed India’s outlook?
India was on track to be one of the next economic super-powers prior to the COVID-19 pandemic, so investors may wonder how the pandemic has influenced its prospects. Ms Desai views the COVID-19 pandemic as an external event, with the structural factors behind India’s growth prospects still favourable. She points to India’s demographics, low private sector debt, domestic demand orientation and low reliance on foreign demand as a structural advantage over peers like China and other emerging markets.
“There are various factors which have pointed towards a steady recovery in growth. First, there are clear signs that private capex has started to pick up. This was reflected in our domestic credit growth which had remained subdued for quite a few years. But now we are seeing it sustainably growing. Secondly, like I said, the RBI was actually in the midst of a rate-cut cycle in 2019. And apart from this, the central bank has also been very proactively supporting the economy with domestic liquidity this will finally lead to transmission of these policies, lowering of policy rates to real life lending rates,” Ms Desai says.
She also sees an additional opportunity for India from the COVID-19 pandemic.
“This COVID-19 pandemic can actually be a turning point for the global supply chain… which is currently highly concentrated in China, and India can be a huge beneficiary of this shift. Global Investors are definitely looking at India to rise up to this opportunity and take this leap ahead,” she says.
The US-China trade war had seen a number of multinational companies consider moving operations to India. The combination of the COVID-19 pandemic, and resurgence of tension between US and China in a pandemic ‘blame-game’ may see many businesses take a more serious approach to rebasing their operations.
Is now the time to invest in India?
Global uncertainty may be putting off many investors, but for some, now could be the time to revisit their investment strategy around India.
Ms Desai says, “the valuations have become very attractive since good businesses are available at decade low valuations. The current time is very uncertain, but our long-term fundamentals continue to remain intact.”
The longer-term opportunities for India remain.
Ms Desai points to the demographics of India, skewed younger compared to peers, which offers benefits in terms of a large working base easily able to support growth through taxes and consumption. Consumption and income growth are also factors driving India’s growth.
“India is a hugely unpenetrated market compared to global average and that provides enormous opportunity. Again, an example is penetration of video goods has just begun to expand as we come close to that $2,000 per capita mark. Experience from other countries suggests that discretionary consumption, your cars, white goods travel all improve exponentially once you cross the two to $3,000 per capita income mark,” Ms Desai says.
She also notes that financial literacy in India has also been improving as incomes have grown, with a benefit to the financial services industry.
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- NBFC refers to the Non-banking financial crisis in India. You can read more in https://www.etfsecurities.com.au/idea/individual-investors/the-three-key-drivers-of-indian-performance-in-2019-5e5d8ff76d22670017b30dc8