“If you were to look out of your office window in Mumbai, you'd see the traffic jams as busy as ever. If you were to catch an internal flight from Mumbai to Delhi, it would be full. Movie theatres are open, restaurants are open, and I even think in the next England-India Test match, they are expecting spectators,” David Cornell, chief investment officer at Ocean Dial Asset Management and portfolio manager of the India Capital Growth Fund, told fundeye.
It appears that life in India has reached a level of normality already, whereas much of Europe remains in various states of lockdown and social distancing.
Crucially, the gradual re-opening of key sections of the marketplace has not been greeted with the anticipated second wave, along the lines of those that have stalled attempts in developed economies to reignite growth.
Daily cases in India have dropped to below 11,000 a day, despite recent increases in states such as Karnataka, Maharashtra and Kerala. Even if they were to become new hotspots, the sustained decline in daily cases from the 100,000 peak last October has been established, and continues to perplex experts. Not even the festival season of Diwali two months ago initiated a new wave of cases, despite the social mixing and mass gatherings associated with it.
One possibility is the potential increased antibody levels in the Indian population, alongside an underestimated number of infections, which has brought the country closer herd immunity than initially predicted.
After all, it is highly likely that the officially reported level of Covid infections, which currently sits at approximately 10.8 million, is a significant underestimation of the spread of the virus during the past 11 months. With 203 million Covid-19 tests since March 2020, India has struggled to keep track of total cases across its 1.37 billion population, and it is plausible that a lot more people have contracted the virus than have been tested.
Another theory is the benefit of a young population, with the median age being 28 in contrast to 43 in the European Union, and its exceptionally low obesity rates – with only 3.9 percent of its population estimated to have a BMI over 30 compared to 27.8 percent in the UK. It is also worth noting that considerably more people in India work outside, and in a warmer climate.
Essentially, all of these factors appear to be a highly positive development for investors with India proving to be highly resilient to the virus, and its economy is well placed to take advantage of this.
Modi’s market reforms
Protests and civil unrest in Delhi are dominating international media coverage of India, with farmers opposing agricultural reforms that will radically overhaul the industry. The government is aiming to deregulate the sector, by easing rules around the sale and pricing of farm produce, allowing them to sell to private buyers, but losing the minimum price guarantee from the government. Around two-thirds of Indian farmers across the country own less than one hectare of land meaning that an open market place could easily put them out of pocket. Collective farming would swallow up individual holdings, while market demand as the only adjudicator of crop value could cause regional inequalities and leave farmers exposed.
While the recent arrest of a 22-year-old climate activist, Disha Ravi, for distributing supportive documents about the farmers’ protests on social media is a novel development that reflects an increasingly online culture, the government’s motivation is far more long-standing.
Urbanisation and the country’s inferior economic status compared to China are two of the driving forces behind these reforms, and those issues are decades old when it comes to discussing India’s investment trends.
Currently, 20 percent of India’s GDP is derived from agriculture, yet as an industry it consumes 50 percent of the country's workforce, scattered across villages and towns. It generates less than one tenth of the output of the United States’ equivalent industry, and is highly resistant to change, with the government only managing to succeed in revoking the mandatory state purchase of grain last year. When you factor in that approximately one million people are entering the work force every month from demographics less attracted to rural lifestyles and farm work, and more interested in opportunities in cities, desiring to become part of the countries burgeoning middle classes, reform is inevitable.
Mr Cornell argues that only two states in India – Haryana and Punjab – maintain mass opposition to the moves, with the majority of the country accepting it. He believes that the policy is crucial to making the economy more organised, and to maximising the possibilities from urbanisation, a trend that cannot be pushed back.
Acknowledging the downside to local farmers from the removal of minimum pricing, he said: “I think the government is quite rightly remaining robust in its determination to push this through. Even though, it will have a disproportionately bad effect on parts of the economy, it has to become more efficient. This is a very important reform for the marketplace.”
He added: “From an investor's perspective this disintermediation of the state in the procurement of agricultural products, is a very important step for Modi, and for the future, productive growth of the economy.”
Comparing China to India, Mr Cornell observed that the reforms of former paramount leader Deng Xiaoping significantly increased foreign investment. He noted that China abolished the mandatory state purchase of grain in 1985, and that this was quickly followed by a “huge spike” in foreign direct investment. Prior to China’s entry into the World Trade Organisation in 2001, India represented 7.5 percent of the MSCI Emerging Market (MSCI EM) Index, which placed it 1 percentage point above China. Since then, China has grown to represent over 40 percent of the index, while India has essentially flatlined to 8.7 percent. Essentially, the country needs to enhance its efficiency and liberalise its economy, if it is to maintain key economic growth, and compete in any meaningful way with China for investment. This could be done through reform and encouraging essential demographic trends such as urbanisation.
The chief investment officer concluded: “The urbanisation of India is key to the unlocking of its productivity and its future enhancement of people’s incomes and wealth. India has a trillion-dollar infrastructure plan over the next five years to invest in the urbanisation of the country, and to absorb that shift from rural to urban as agriculture starts to shed the workforce.”
Time for investors to turn to technology?
While the looming presence of China and the growing pains around urbanisation remain established factors for investors, an encouraging shift as India begins its post-pandemic cycle is the growth of manufacturing capacity in India. This now represents 15 percent of the nation’s GDP with the government aiming to increase that to 20 percent. Amazon, Apple, and Samsung have all recently shifted capacity to India, and rather than being the consequence of trade wars or Covid-19, it is more to do with the increased ease of business in the country.
According to the World Bank's ‘ease of doing business’ index, India has ascended from 132nd in the list in 2013 to 63rd, which is just behind Italy. On specific issues, such as protecting minority investors, the country has raised its position to 30th from 49th, while the overall recovery rate of creditors has gone from 25 cents to 70 cents on the dollar. Its labour costs are a third cheaper than China’s too.
This increased level of multinational interest, alongside the shift to manufacturing and technology, could reap serious dividends for investors, especially as so much untapped potential remains. So far e-commerce as a percentage of total sales is only three percent in India.
The question is whether India can create the kind of names that populate US and China indexes and pull international investors to the marketplace
Mr Cornell said: “We don't have an Alibaba or Tencent or a Baidu or a Google or an Apple in our index. It's quite a UK style index with a lot of old sector economy stuff with banks, oil and gas, and aluminium smelters. It doesn't have the big sexy tech stocks to drive it forward.”
One possibility is the conglomerate Reliance Industries, the largest publicly traded company in India. In a sign of the times, it is looking to shift from oil and gas to being a digitally-based consumer platform. A key cornerstone of this transition plan is its mobile telephone unit Jio, which is expected to provide an initial public offering this year. Its total assets equate to $34 billion.
“Now as an initially public offering on NASDAQ that would be a great shame but in India, I think it would wake up a lot of people. It would really help bring alive the kind of excitement around this market,” said Mr Cornell.
Regardless of whether Reliance becomes the next Tencent, this shift towards technology seems inevitable, and even if investors can’t find a large multi-cap to rally behind, there is a huge consumer market to pay attention to. India’s data-cost is nine cents per gigabyte per minute, which is the cheapest in the world. This is particularly notable when the country has 650 million smartphone users and 47 percent of its population under the age of 25.
Mr Cornell said: “There’s really a bank branch in everybody's pocket. So, we would expect that sort of the penetration of internet shopping and digital shopping and consumer activity online to move much faster in India than it has done anywhere else because the architecture is already in place for it to happen. It’s a really exciting part of the equation that hasn't really been factored in.”
As the pandemic hopefully draws to a close later this year, it is unclear what the long-term consequences will be for global markets. Nevertheless, there is every reason to anticipate that India's measured approach to the virus, followed by its intelligent deployment of stimulus, will provide investors with great opportunities. Even if volatility characterises the investment landscape for some time to come, there are so many key variables that make India attractive, from its technologically savvy young population to the sweep of it government's reforms. Perhaps this level of possibility will be reflected by equal enthusiasm from investors in the years to come?