With COVID-19 still rife across the sub-continent, and Prime Minister Narendra Modi adjusting his foreign policy to a post-Trump era, investment management consultant MATTHEW FEARGRIEVE considers whether India is a viable investment proposition for 2021. 

India has been hit hard by the Covid-19 pandemic. And after Trump's defeat by Joe Biden in the US elections in November, Prime Minister Narendra Modi is scrambling to recalibrate the India's foreign policy in a way that both preserves the independence of the country's industrial sector in a region increasingly dominated by cheap exports from China, and make India attractive to foreign investment.

In this blog we consider the challenges that lie ahead for India and ask whether the country is a viable proposition for direct or indirect investment in 2021.

Covid-19 in India

The country is emerging from the stringent lockdown implemented in March this year, and daily new cases are decreasing, but with much of the developed world now tackling second waves, India must proceed with caution. 

A relatively low fatality rate of around 1.5% of all confirmed cases is reassuring but high population density in India’s cities and poorer hygiene standards contribute to high transmission rates.

The government’s decision to prioritise the health of the population over the health of the economy when cases were still relatively low saw GDP contract 24 per cent in the April to June quarter of this year. 

Regional Trade Developments

On 3 November 2020 Joe Biden won the US Presidential election. On 15 November the Regional Comprehensive Economic Partnership (RCEP), a fifteen-nation Asia-Pacific trade deal, was signed. The signing ceremony was done remotely, of course, in these days of plague. But a key regional protagonist - India - was notably absent, both virtually and spiritually.

Prime Minister of India, Narendra Modi, finds himself at a critical crossroads. His bromance with Donald Trump ended on 3 November. As omens proliferate about the new President’s desire to reformulate US trade and foreign policy in a values-based way, in a departure from Trump’s ‘business is business’, strictly transactional, approach, Modi has now to recalibrate India’s relationship with the US.

Since 2018, increased political pressure from China has undoubtedly exposed the fault lines in Modi’s personal world-view of India, resulting in a distinctly muddled foreign trade policy. In addition to the advancing tide of container loads of rupee-stretching goods made in China, there has been the ominous threat of amassed Chinese troops at the border. Not to mention the twenty Indian soldiers killed in the Galwan Valley.

It is against this backdrop of covid lockdown and regional trade pressures that Prime Minister Narendra Modi must reflate and build India's industrial and technology sector, and make them attractive to overseas investment.

Technology

Technology is one such area, with the acceleration of digitalisation forcing change across the whole economy. 

Office and school closures saw business and education move online, tele-consultations and availability of medicine online have improved healthcare efficiency. 

Organisations are spending more on cloud technology, allocating funds to platform as a service and software as a service to boost operational agility. 

With 654 million mobile internet users and data costs amongst the lowest globally - at US$0.10/GB - the opportunity for businesses and sectors embracing technology is huge.

These changing patterns in consumer behaviour have piqued investor attention and leaders in e-commerce, online education and fintech are announcing IPO plans for 2021 to 2022 as they look to fund future growth. 

Consumer spending post-covid

The lead up to Diwali traditionally welcomes a surge in consumer demand, with shopping and gift giving very much a part of the celebration. 

This year appears to be no different with macro indicators showing a steady recovery; India’s PMI for services entered expansionary territory for the first time in eight months in October, while its PMI for manufacturing continued to exhibit strong performance. 

As Covid-conscious shoppers shy away from bricks-and-mortar retail, e-commerce appears to be a big driving force here - although still a relatively small fraction of total retail at 3 per cent in 2019 compared with China’s 27 per cent - and is growing rapidly. 

Global tech companies are competing over the Indian consumer with Amazon and Flipkart upping their investments in Indian operations. Both companies have raced to acquire stakes in Indian retail firms to expand operations and leverage strategic partnerships.

Well-capitalised private sector banks are another area of the economy emerging strongly from the crisis. 

Having steadily gained market share over the past five years, this seems set to accelerate in a post-Covid world as state-owned banks continue to suffer from non-performing loans. 

Investments in fintech are helping private sector lenders to build strong digital infrastructures and improve customer journeys for loan approval, identity verification and so on. 

Industrials

Insurance companies are similarly benefitting from increased investment in their digital platforms. ICICI Lombard General Insurance, India’s largest private sector general insurance company, with a market cap of £6billion, is gaining market share with the development of its online claims process; 98 per cent of the insurer’s policies are now issued electronically. 

Still a relatively under-penetrated industry, India’s 230 million vehicles and around 1,200 daily accidents provide substantial scope for growth. The removal of paperwork and time spent queuing are helping to build customer loyalty amongst progressive financial institutions.

There is a possibility of retail stress in private sector lending books but the major clean-up in the banking sector following the IL&FS default in September 2018 has already removed a lot of this risk - something which valuations are not yet reflecting. 

A decrease in unemployment will help here with recent labour reforms significantly simplifying labour laws in order to be more effective for employees and incentivise organisations to add jobs. 

This is particularly pertinent as India rolls out its China+1 strategy, encouraging global manufacturers to consider it as a viable alternative; corporate tax rate cuts, the Production Linked Incentive scheme, and an improvement in the World Bank’s Ease of Doing Business ranking - now 63rd compared with 142nd five years ago - should all fuel India’s case. 

Sino-Indian Relations

On top of this, India’s labour costs are around one-third of China’s, it holds the benefit of conducting business in English and boasts a steady, political reform-driven government. 

The macro-economic environment remains stable in spite of Covid disruption with low inflation, forex reserves at all-time highs and a more resilient Rupee.

With a huge domestic market opportunity and the PLI scheme supporting mobile phone production, the company is well-positioned to benefit.

Whilst a full recovery from the crisis may take some time, the outlook for India is encouraging. 

Economic activity is starting to exceed pre-Covid levels, the government are once again focused on growth and enacting reform, and necessary diversification away from China is opening up exciting opportunities for Indian manufacturers. 

While accessing individual stocks can be a complicated process, long-term investors should look to single country funds in order to capture the full upside potential.

India's Advantages
Investors would do well to keep in mind the unassailable advantages that India enjoys as a receptacle for foreign investment, the primary ones being as follows:

1. her population of 1.4 billion, which accounts for 18% of the world’s total population;

2. her young population with its median age standing at just 28; the relative youth of the Indian people being one reason why the spread of COVID has not ravaged the country in quite the way that many health officials (and, admittedly, this writer, as his earlier blog testifies) had predicted; and

3. her workforce being the second largest in the world, after China’s, with growth predictions in the region of 200 million over the next 30 years so that, by 2050, it will have far surpassed China’s workforce in sheer size.

Complementing these advantages is the likely trajectory of education and urbanisation across the Indian subcontinent, both of which are trending upwards with a momentum that is expected to be sustained over the coming decade, dragging up average income and consumption levels too.
MATTHEW FEARGRIEVE is an investment funds consultant. You can read more of his blogs here.