Comment: Covid kickstarts India's reforming economy
India seems to have recovered quickly from Covid, and most citizens have been able to go back to their normal lives free from lockdown restrictions, says Jupiter's Avinash Vazirani.
The country has reported just 12 deaths per 100,000 population, a much lower figure than, for example, the UK's 189 per 100,000. More than 30 million people in India have been vaccinated so far, with the government hoping to cover the most vulnerable 250 million by the end of July.
India is especially well-placed for Covid vaccinations, as the country manufactures around 60% of the world's supply of vaccines.
Covid seems to have kick-started India’s drive for reform, with ongoing reforms in agriculture, land and labour laws expected to have long-term benefits for the country."
We think that India's world class healthcare and pharmaceutical industry will be a beneficiary of long-term trends for the treatment of and vaccination against Covid.
Our outlook is also positive for India's economic growth in general. Economic activity has been trending above pre-Covid levels since January, with Goods & Services Tax (GST) takings up 8% in January, on a year-on-year basis, to a record high.
According to the Federation of Indian Chambers of Commerce & Industry (FICCI) business confidence in March is at a decadal high, with companies not only seeing a recovery in demand, but also the potential for higher investment over the coming quarters.
The government has a track record of surprising positively on policy, including its introduction of a simplified Goods & Services Tax in 2017, its substantially lowering corporation tax in 2019, and its introduction of production-linked incentives for private sector manufacturers, among other initiatives. We think these types of changes benefit companies in the formal, organised economy, with smaller players in the informal economy likely to lose out on market share.
The country's economic revival is expected to be boosted by the government's supportive approach to spending. In the February budget, the Finance Minister announced that there would be increased public spending on infrastructure and healthcare.
While we think revival of capital expenditure investment from companies may take a few more quarters, it is not just the public sector that is expected to benefit from elevated government spending. For instance, private sector engineering company L&T has reported a 76% increase in order inflows for the quarter ended 31 December 2020.
Public spending is not the only opportunity here - Covid seems to have kick-started India's drive for reform, with ongoing reforms in agriculture, land and labour laws expected to have long-term benefits for the country. In a speech in February 2021, Prime Minister Modi reiterated that the government has "no business to be in business", and indeed there are several large public sector companies that are in the process of being privatised, such as Bharat Petroleum and Air India.
In the meantime, Indian households have been keeping their hard-earned cash in reserve. Household savings are close to an all-time high, with a net addition of more than $200bn to financial assets during the pandemic. As a percentage of gross domestic product, household savings are near the level seen after the global financial crisis.6
We think of household savings as deferred consumption, and we believe that improving consumer confidence should lead to households moving from saving to spending, providing an additional boost to the economy. Household debt has also come down over the last few years, which we think means that there is scope for growth in lending to also revive. We think that companies producing food and daily household goods, selected companies producing more expensive, non-essential items, and banks, all stand to benefit from this trend.
India is going through a period of very rapid change. The government has done an excellent job on providing basic facilities to its citizens - now over 99% of Indian households have access to a bank account, and more than 95% of the population has electricity (from less than 60% at the turn of the century).
Electricity generation capacity from renewable, nuclear and hydroelectric sources has already reached 38% of installed capacity, although not all of this has ramped up to full use, and India looks set to smash its Paris target of reducing carbon emissions by 35% by 2030.
Not only does this progress have ESG implications, and we see companies in India making steady progress on ESG metrics, but it also offers new investment opportunities. Covid lockdowns have accelerated India's use of mobile data and the internet. India currently has more than 500 million internet users, but e-commerce and other online opportunities are still nascent. There are more than 100 ‘unicorns' (start-ups with a market cap above $1bn) in India, and we think that many of them will look to list on the stock market during the next few years.
Avinash Vazirani is manager of the Jupiter India Fund
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