Indian equity markets continued their upward trend in Q3 following the sharp recovery in Q2 from March-end lows.
During the third quarter, MSCI India IMI index was up 15.9% in USD terms outperforming global, developed and emerging markets.
The Indian equity indices are now within touching distance of their pre-covid peaks, writes Ramesh Mantri, investment adviser to the Ashoka India Equity investment trust.
Still hope
Earlier in the year, India imposed one of the strictest lockdowns globally followed by a gradual lifting of restrictions.
The country now has the second highest reported total case count after the United States. While this might paint a bleak picture, recent trends do provide some hope.
Positivity rate peaked in July (at circa 12%, five-day rolling average) and has trended down since then (c.7% at present) even as daily testing continues to rise, indicating that the rate of spread might be slowing.
On the other hand, Indian Council of Medical Research’s (ICMR) antibody surveys done across the country suggest that the actual case count may be more than 20x of the reported cases.
Consequently, the reported infection fatality rate (IFR) which has been falling since June and now stands at 1.3% could be overstating the actual IFR by a similar 20x magnitude since mortality data is captured more accurately.
The implied mortality rate of less than one-in-a-thousand appears to be lower than that in other parts of the world, quite likely due to the lower median age in India.
For example, the median age of 29 years in India compares to 38 years in the US and 47 years in Italy.
No further lockdowns?
While the uncertainty is still high, the relatively lower mortality and the high economic costs of lockdowns might mean that restrictions are unlikely to come back.
In fact, we expect to see further easing as we move forward.
Our loosely-defined base case scenario continues to build a reasonable likelihood of mass vaccinations in the latter part of next year.
The economic activity on the ground has continued to strengthen sequentially throughout Q3 with several high frequency indicators displaying strong trends.
Recent data on GST (goods and services tax) collections, e-way bill generation (+19% YoY), rail freight (+19% YoY), electricity (+14% YoY) & petrol (+3% YoY) consumption indicates good recovery across sectors.
A healthy monsoon has resulted in a strong sowing season compared to last year, which should be supportive of rural demand.
India’s full year GDP is now estimated to contract by 7-10% in FY21 followed by high single digit growth in FY22. This means that exit GDP run rate of FY22 might resemble that of FY20.
Politics and reform
The Central Bank kept benchmark policy rates steady at 4% post a cumulative 115 bps cut since the start of the pandemic. Headline inflation has averaged at 6.5%, slightly above the targeted inflation range of 2-6%.
This leaves room for further rate cuts later in FY21 to support growth once inflation moderates.
With Crude at $40/bbl, the Current Account has turned surplus over the past two quarters and is expected to stay positive in the near term.
On a geo-political front, tensions between Indian and Chinese troops along the northern border appear to be de-escalating in the backdrop of ongoing high-level talks on disengagement.
Labour and land
Parliament passed landmark bills on labour and agriculture reforms.
The labour reforms mark a watershed moment for India, a culmination of years of background work of untangling a highly complex and restrictive set of rules, many of which were written pre-independence about a century ago.
We believe these reforms will significantly reduce compliance burden for businesses and will go a long way in improving the ease of doing business. The reforms would mitigate the regulatory hurdles for small businesses that have historically restricted them from scaling up.
Another impact of these reforms would be an increase in the pace of formalisation of the economy.
The agriculture reforms are aimed at deregulation of production and pricing. It would also help to attract private investments for building critical supply chain infrastructure such as warehouses, cold storage chains and logistics.
The reforms would facilitate the creation of a single common market for agri-produce, improving the ease of doing business in India, while eliminating intermediaries and reducing the role of inefficient, state-sponsored monopolies.
Global manufacturing hub
The government has continued to take various steps to boost the domestic manufacturing sector. The Cabinet recently approved an incentive program aimed at creating a global manufacturing hub for mobile phones.
Five international companies including Foxconn, Rising Star and Samsung will be manufacturing Apple and Samsung phones over the price point of $200.
Further, a newly proposed production-linked incentive (PLI) program of $40bn over five years could cover multiple industries including auto components, pharmaceuticals, electronics, and food processing amongst others.
While this new program is still at a proposal stage, it signals a clear impetus to develop India as a global manufacturing hub and accelerate market share gains on the back of a visible diversification of manufacturing from China.
This article was written for International Adviser by Ramesh Mantri, investment adviser to the Ashoka India Equity investment trust.
