The actions that the Indian government has taken to weather the covid-19 storm, alongside factors such as India's favourable demographics, has given the country a remarkable and exciting opportunity to come out of lockdown in a stronger position globally, argues David Cornell.
"The biggest economic and social crisis that we have ever seen." Speaking with investment professionals last week, Sanjeev Sanyal, principal economic adviser in the Indian Ministry of Finance, summarised the impact of covid-19. His opening statement captures the severity of the situation, and reminds us that there is no playbook that governments can follow to lead us through.
In India, with a population of 1.3bn and the threat of community spread having potentially disastrous results, the government's response has focused on containment, prioritising health over economic issues.
This would not be the first time that India weathered a storm and emerged stronger."
On 24 March, Prime Minister Modi announced a nationwide 21-day lockdown with immediate effect (since extended by an additional four weeks). The government's mission has been clear: to minimise spread by introducing some of the most stringent lockdown measures globally.
It appears that infection rates, so far, are not ballooning, with 42,670 cases and 1,395 deaths reported as of 4 May. Across India's 720 districts, 284 have reported zero cases of the virus, and close to 50% of all cases come from just 8 districts (all of which are urban centres) indicating that the spread is being contained.
While there has been some speculation over the ability to capture the extent of the spread in India, it is worth noting the resilience of the country from a demographic perspective. With 50% of the population under the age of 25, India's demographic dividend may offer some protection as statistics show that symptoms of covid-19 are generally more pronounced in elderly individuals.
It is interesting to note that in Africa, where 60% of the continent's population are below the age of 25, we are seeing similar trends with relatively low reported cases at 44,398, and 1,797 deaths.
Figures are encouraging, but nonetheless the lockdown and the rapidity of its enforcement have caused disruption, in particular to migrant labourers unable to return to their hometowns as transport links closed.
Alongside measures aimed at controlling the disease's spread, initial relief packages from the government have been launched and targeted at the nation's neediest. On 26 March, a $19bn stimulus was announced, and although policy responses across the globe have dwarfed this package, the government has suggested that there is more to come, hinting at an incremental approach that would draw upon feedback and data from state governments and businesses to identify where relief is needed the most.
As plans to exit the lockdown come to fruition, this will be particularly important. Whilst the lockdown was further extended as of 3 May, there has been some easing with ‘green zones' (districts with no new confirmed cases in the past three weeks) starting to open up.
On the monetary side, the Central Bank has cut rates by an additional 0.75%, but the effects of this will be muted whilst monetary transmission into the real economy is weak. Liquidity measures to the tune of US$50bn should support the financial markets and help to ease volatility. However, whilst the RBI's policies will help to avoid economic collapse, they are unlikely to boost growth in the current environment.
India's place in post covid-19 world
There has been tacit recognition from all corners that the way we live is fundamentally going to change as a result of Covid-19. Social and economic systems will be subject to overhaul as nations seek to rectify the supply chain vulnerabilities that left many government's scrambling for vital supplies at the outset of the pandemic. Such reforms will likely disadvantage India's natural competitor, China, which has faced extensive criticism for seeking to cover up the extent of the outbreak and for exporting shoddy personal protective equipment.
This would not be the first time that India weathered a storm and emerged stronger. The 1991 Indian Economic Crisis paved the way for significant structural reform with liberalisation policies significantly improving quality of life, and strengthening India's position globally.
India's government now have similar opportunities to enact serious reform. As the supply chain shifts away from China, a healthy risk appetite will be essential amongst Indian corporates and the government initiatives may be necessary to ensure that companies are prepared. There have been encouraging noises of intent, but we await to see what action follows.
The recent reduction in oil prices could further act to India's benefit. Importing almost 80% of its oil, estimates are suggesting that India could save close to $45bn if prices continue around the $35 per barrel mark in FY21 (a $1 fall in oil price reduces the country's import bill by approximately $1.5bn), offering a welcome narrowing of the current account deficit. These savings will offer additional reserves to ease the economic fallout, as well as lowering costs for businesses and consumers across a wide spectrum:
Fast-moving consumer goods should see a reduction in the cost of raw materials and packaging; the auto ancillary industry, if supply chain disruption can be avoided, can expect to see an increase in auto ownership due to a lower cost of fuel; cement companies' expenses will reduce as the cost of petcoke and freight come down.
Whilst India, along with the rest of the world, is suffering, there are opportunities here. The government's navigation of the next stages will be crucial in determining the country's recovery, but as the global order faces significant disruption there is an opening for India to emerge as a leader.
David Cornell is chief investment officer at Ocean Dial, in London. Read his earlier article on India in International Investment here