Covid-19 has spent the last 18 months overturning expectations around the world and India has been no exception. When the pandemic first took hold, there were fears that such a populous country with limited healthcare would be very badly hit. But after an initial wave of cases and a chaotic lockdown that left millions of migrant workers stranded around the country, the worst seemed to be over.
By the end of last year, the economy had reopened, new cases remained relatively low and it looked plausible that India had somehow built up enough immunity to return to normal while keeping coronavirus at bay. Unfortunately, that turned out to be very wrong.
In April, cases soared to record highs. Exactly why remains unclear, as with much about coronavirus. Some put the blame for spreading the virus around the country on a number of crowded events, including election rallies and religious pilgrimages. Others point to the emergence of a more transmissible variant called B.1.617.2, or Delta. (The fact that many other countries that initially coped well, such as Thailand and Vietnam, have now seen large outbreaks, while Indonesia seems to be following a similar trajectory to India, suggests that India’s mass events probably aren’t solely responsible.)
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The healthcare system collapsed, even for relatively affluent patients who would normally be able to get adequate medical care. Hospitals were overwhelmed and oxygen supplies frequently ran out. The official death toll now stands at more than 400,000, but that is known to be a vast underestimate – some estimates suggest the real figure is five to ten times as high. Cases are now declining – they are down around 90% since the peak in May – and vaccines are slowly being rolled out: around 300 million people out of a population of 1.3 billion have received at least one dose. But India is still very much a country recovering from disaster.
Stocks shrug off the crisis
So it probably sounds baffling – and not a little inappropriate – that the stockmarket is at a record high. The MSCI India index, which dropped sharply along with global markets in March 2020, barely wobbled this time. It’s up 15% so far in 2021 and 55% over the past 12 months.
This looks entirely at odds with the state of the economy, which shrank by 7.3% in the year to 31 March. That includes the impact of the first wave of coronavirus and the shutdown that brought much of the economy to a halt, but not the more deadly wave that struck this year. The immediate impact of this outbreak may not be as large, because more of the economy remained open despite soaring cases and deaths, but some analysts fear that the medium-term consequences may be huge: unemployment soared, many who still have a job have suffered pay cuts and household debt rose as people struggled to get by.
Optimists think that when the crisis is past and the immediate rebound is over, growth could settle down at 7% or more, in line with the trend of recent years. Others think that the after-effects could mean a new trend of 5% or lower. These outcomes make a big difference to whether India can catch up on the potential output it lost in the crisis, argues Sudipto Mundle of the National Council of Applied Economic Research, a think tank, in an article last week in financial newspaper Mint. The 7% scenario would see it catch up on lost growth by 2029-2030. That’s around the time when the country’s demographic dividend – meaning a high ratio of young people to older dependents, which can be a powerful force for growth in emerging economies – begins to reverse.
A slower growth rate and a failure to catch up with the pre-pandemic path will mean that some of that demographic dividend is squandered, says Mundle, and extensive reforms will be needed to avoid this happening. These include the healthcare system, whose deficiencies were badly exposed by the pandemic, but also education, the financial system – where bad debts that were a worry before the pandemic will have become worse – and critical infrastructure such as the energy sector.
Modi needs to deliver
Whether the crisis will be a catalyst for these long-overdue changes remains to be seen. It would be unfair to expect the government to have all the answers at this point; policymaking is difficult for many reasons while a pandemic rages and managing the crisis is the immediate priority.
However, sceptics may take the view that while Narendra Modi, the prime minister since 2014, is often described as a pro-business reformist, his record on economic reforms is weaker than one would hope and sometimes overstated by analysts or investors who want to be able to point to progress in India. (Conversely, his energy for pursuing Hindu nationalist policies that increase social tensions or authoritarian flexing that erodes democracy seems to be unbounded and risks taking India down a very unwelcome path.) If he has the desire for big changes, it’s time to deliver.
On the plus side, Modi this month carried out his largest cabinet reshuffle since taking power, with 12 ministers – including the minister for health – being replaced, which implies a significant effort to reinvigorate the government. There are important state elections next year and the next general election will take place in or before 2024, so the need to convince voters that the ruling Bharatiya Janata Party has a better, bigger plan than the opposition for post-pandemic recovery is increasingly pressing.
As well as making reforms more urgent, it may be that the pandemic and other recent events will have accelerated some opportunities. The most obvious are in the manufacturing sector. The disruption to global supply chains, years of trade tensions between the US and China, and growing evidence that China is becoming more closed to the rest of the world, has reinforced something that multinational companies already knew: they need to diversify away from China by sourcing from a wider range of manufacturers or investing in factories in other countries.
A number of emerging markets in Asia are likely to benefit from this – it’s an extremely positive trend for Vietnam, for example, as we’ve previously discussed in MoneyWeek. India is not well-placed to take advantage of it at the moment, but that may change.
At present, manufacturing accounts for around 17% of the economy, compared with a government target of 25% by 2025, and has not greatly increased since Modi launched a “Make In India” initiative in his first year in office. Restrictive labour laws that make it less attractive to hire large manufacturing workforces and difficulties in acquiring land for construction due to unclear or overlapping ownership are among the main issues that have prevented it from building a major export manufacturing sector.
That said, there are areas in which India is already strong (eg, pharmaceuticals, where it is the third largest in the world by volume) and others where there are recent signs of progress (eg, electronics, where major international manufacturers such as Samsung and Foxconn are expanding their factories). The government is now expanding a subsidy scheme (known as the production-linked incentive) aimed at increasing output in some key sectors.
More importantly it has finally pushed through some labour reforms, with four new codes that simplify a tangle of existing laws. The fact that the government is willing to use its majority to push through contentious changes like these is a positive signal, says Capital Economics; it might open the way to further labour and land reforms that would substantially improve growth prospects.
There are few things that would be more bullish for India than a huge expansion in manufacturing, because this would bring many of those in the rural areas (around half the workforce) into a modern industrial economy. Indeed, given that the government has also passed laws to reform the farming sector – by reducing regulations on how produce can be sold and removing guaranteed prices – it looks increasingly vital to deliver this. Over the medium term, these changes are likely to see many small farmers pushed out by larger ones and failure to provide new jobs for younger workers who would otherwise have gone into agriculture could create significant social problems.
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Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.
Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.
He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.
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