A second wave of Covid-19 has hit India hard. Initially it appeared the world’s second largest country by population had coped well with the pandemic. But a devastating second wave has left more than 22 million infected, with thousands dying every day. The leadership of prime minister Narendra Modi is not surprisingly coming under even greater scrutiny.
“There is no strategic plan, everything is done on the hoof,” says Amin Rajan, CEO of the Create-Research consultancy, who visits India regularly. “Having repeatedly misled the public, the government finds it hard to make big bold moves. Currently, its credibility is on the wrong side of zero.”
The government is struggling with vaccinations, oxygen distribution, lack of cohesion on lockdown implementation and huge daily infection numbers, subject to under reporting, says Udit Garg, managing director of multi-family office start-up WealthFusion, which manages close to $500m.
Although these problems are expected to peak during May, key challenges will lie in vaccinating inhabitants of rural areas, struggling with electricity supply and poor refrigeration in government-owned hospitals. Both private sector involvement and international support, already promised by more than 40 countries, will be vital to solving the public health crisis, says Mr Garg, who has worked with wealthy Indians in the UK since 2009.
Blame game
The prime minister is roundly blamed by commentators for the current deficiencies to the pandemic response, with “brand Modi” taking a major hit. “The Indian public see Mr Modi as the biggest culprit,” believes Mr Rajan. “Like Trump, he has remained in denial. This is a colossal failure of leadership as well as statecraft.”
While sectors of the economy such as banking, consumer goods and metals and minerals continue to look attractive to investors due to the scale of the country’s consumption and extent of natural resources, the pandemic appears to have put paid to any pretensions to superpower status, long harboured by Indian elites. Economists say previous forecasts for 7.5 per cent GDP growth for 2021 look decidedly optimistic, as infections spiral out of control.
“Under Mr Modi, there is no chance that India can catch up with China,” admits Mr Rajan. “The rise of Hindu nationalism has sidelined the reform agenda. Its transition to an economic superpower will be a warped one, driven more by the inherent dynamism of Indian society than its sectarian politics.”
Most economists no longer even mention China and India in the same breath. “To be seen as a global power that the world acknowledges, India needs to showcase many more attributes like health, infrastructure and the legal system, among others,” says Mr Garg. “A lot of work has been done on some of these in the last 10 years, but as is evident, much, much more is required.”
Barriers to investment
While India is likely to remain a key source of funds for the next decade and the easing of regulatory barriers has done much work to encourage foreign money flows, there are three inherent barriers which must be overcome in order to make the country a serious investment destination, believes Mr Rajan.
The first is corporate governance, with no clear current separation between owners and managers of Indian listed companies, which tend to have large family holdings. Second is cronyism, demonstrated by the high-handed tactics deployed by officials to settle political scores. The suicide note written by entrepreneur V.G. Siddhartha, founder of India’s largest chain of coffee shops, Café Coffee Day, before his death in 2019, cited “unbearable” pressure from the government’s income tax department.
The third limiting factor is alleged politicisation of national statistics. A 2019 paper by Arvind Subramanian, a former chief economic adviser to Mr Modi, contends that growth in India’s GDP since 2011 has averaged 4.5 per cent, not the 7 per cent shown by official data. Before that year’s general election, there was raging controversy about unemployment figures being massaged. Official data, just like in China, should be taken with a pinch of salt, according to Timothy Ash, senior emerging market strategist at BlueBay Asset Management, describing Indian numbers as “finger in the air stuff”.
A key message is that India’s state apparatus needs to become more effective and efficient, and probably significantly less politicised and more technocratic. It must distance itself not only from the current “Modi era”, but also the dynastic Gandhi /Congress Party era that preceded it.
Brighter future
But other voices, although acknowledging the seriousness of India’s problems, see brighter times on the horizon. “After the virus is contained again, another rebound seems likely,” says Arnab Das, global market strategist at Invesco. “Recovery could be supported by temporarily loose monetary and fiscal policy. But these are stop gaps, beyond which the government needs a plan to restore high-trend growth as well as a plan to restore fiscal balance. In time, the pandemic could recede into the past as a major setback, but one which was overcome – if the government takes concerted action on key growth challenges.”
The “twin balance sheet” problem of bank non-performing loans and corporate bad debt needs to be cleaned up, he says. The resumption of key structural reforms, including labour market and acquisition liberalisation, plus continued removal of barriers to commerce and investment across the states of India, jump started by the national Goods and Services Tax, would simplify the tax system to benefit small and medium-sized enterprises.
“The government had moved to reform, but resistance and protests had slowed the process. It now clearly needs to restore reform to raise economic momentum,” says Mr Das.
“How India learns from this crisis and reforms, adapts and evolves could make a major difference to managing future challenges and by extension to future economic and financial performance.”
Invesco expects India to continue to represent a core position across stocks and bonds, with currency exposure managed in a more tactical fashion as a hedge, in a globally diversified emerging markets allocation for many institutional, family office and high net worth investors. Furthermore, as China increasingly moves into a class of its own, as the world’s largest or second largest economy (as opposed the largest emerging market economy), India stands to become the most important mainstream developing economy.
“Despite the challenges posed by the pandemic and underlying structural restraints, the prospects for the economy as a whole as well as specific sectors are good,” predicts Mr Das. “The population is growing, young and dynamic, as well as large and entrepreneurial and some sectors are highly competitive,” he says, citing consumer goods, electronics, technology and professional services as growing sectors. “Some firms in these sectors are profitable and well managed. These account for strong valuations in equity markets, which seem likely to persist and yet remain attractive for exposure to national economic performance as well as sector- and firm-level performance.”
