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What does Covid-19 mean for India?


Jigar Gandhi

Jigar Gandhi

India Investment Specialist

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While much focus is on the epicentre of coronavirus moving from Europe to the US, other countries are also seeing a gradual pick-up in the number of cases. India, the world’s second most populous country, with more than 1.3 billion people, is no exception.

As investors in Indian equities, we are monitoring the crisis closely, both the investment and humanitarian implications. Responding to the challenges that the virus presents in a country as vast as India will be complex, and overcoming the bureaucracy to provide support will be a test for the government. 

What is the impact of Covid-19 in India and how has the government responded?

The government of India, along with local, state level, authorities, is undertaking steps to control the spread of the virus. A total lockdown was announced on 24 March, and will last at least three weeks, with all non-essential businesses closed.  

There has been strong action by governments and central banks around the world to help people and businesses manage the economic hit of the lockdowns. We are now starting to see similar measures taken in India, with the aim of supporting businesses and cushioning the impact on informal workers.

The central bank, the Reserve Bank of India (RBI), has cut its headline interest rate by 75bps to 4.4% and tabled a package of other monetary stimulus measures. The government has announced fiscal stimulus totalling $22.6 billion, including direct cash transfers and food security measures. The Ministry of Labour has also written to all formal sector companies asking them not to lay off workers. This should provide financial support to the real economy and workers across the board.

Companies are also responding to the crisis. Tata Group has donated close to $200 million and Aditya Birla Group around $70 million to fight the spread of the virus and provide medical supplies. Others are also stepping up. State-owned Indian Railways, which has closed its passenger network, has taken another approach. It is converting 20,000 carriages into medical facilities, with potential capacity for up to 320,000 beds.

What does this mean for economic growth?

In terms of the economic impact for India, demand destruction is equally important as supply chain disruption. The spread of the virus has substantially raised market concerns about demand destruction, owing to the impact from the lockdown, and the prospect of a significant near-term hit to economic growth.

India’s economy was already under pressure due to weak demand and the limited impact of previous monetary policy measures. Slow private sector capital expenditure, challenges to credit growth and non-performing loan issues have been hurting the economy for the last few years. A slowdown in private and household consumption in the last year had already aggravated the pain.

The impact of measures to counter the virus, together with the global slowdown, are likely to further weigh on economic growth. As a result, growth may fall to a multi-decade low this year. However, there is still some expectation that the economy expands modestly.

Indeed, against what is likely to be the weak global backdrop, India, along with China, may be one of the few countries to see an increase in activity this year.

The government had already factored in an increase in the fiscal deficit target to 3.5% for the tax year ending March 2021. This was announced in the 2020 Union budget in February. Meeting this target now looks to be a tall order, considering the scale of slowdown in the economy, the fiscal measures announced and the likelihood that further action will be required.

It’s worth recalling that last year, in an effort to boost the economy and incentivise manufacturing in the country, the Indian government cut corporate tax rates. They are now in line with the those in other countries in the region.

Why the oil price decline is positive news for India

The breakdown of the Organization of the Petroleum Exporting Countries (OPEC) and Russia group, and the resultant fall in crude prices is a big positive for India, as it imports most of its oil requirements. For every $10 per barrel fall in prices, India saves more than 1 trillion rupees ($130 billion), which is equivalent to 0.5% of GDP. Oil prices have declined by more than $40 per barrel year-to-date (as at 31 March 2020).

As in the past, the government has increased the excise duty on petroleum products, thus absorbing a part of the surplus created by the fall in crude prices. This will add to the already strong foreign exchange balance with the RBI.

How have financial markets reacted?

Indian markets have fallen sharply so far this year, down more than 30% in US dollar terms, outpacing declines in global and broader emerging markets (as measured by the MSCI World and MSCI Emerging Markets indices). What has been so devastating is not just the extent, but also the pace, of the declines. March alone has seen a drawdown of 24.8% for the MSCI India Index.

At a company level, first quarter company earnings results may show limited impact, as the country only saw a rise in the number of Covid-19 cases in March. The full impact of cuts in earnings estimates is only likely to be visible from Q2 2020 onwards, and a reassessment will be necessary at that time.

In the immediate term, uncertainty is likely to remain elevated. The impact and duration of the virus is still unclear, and the necessary response will bring much uncertainty to India, as it is elsewhere. To what extent will the virus spread within India? How will the country respond to the health care emergency? What will be the impact on the country’s large informal economy? To what extent will economic growth slow?

At this point there is no clear answer to any of these questions, particularly as India is at an earlier stage in terms of the spread of Covid-19. We continue to closely monitor developments and assess the potential impact on economic growth and the implications for companies.

Could we see a strong rebound in India?

India’s economic growth has the potential to bounce back once the Covid-19 pandemic settles. This is due to the inward looking nature of the economy with low, albeit increasing, linkages with other markets and hence less reliance on global trade.

The falls in Indian stock markets this year have been accentuated by high intensity foreign institutional investor (FII) selling, as can be seen in the chart below.

428773_SC_What_does_covid_19_mean_for_india_FII.png

Historically, Indian equities have seen strong FII interest and flows post large drawdowns. So while Indian equities often tend to experience greater falls, they have in the past outperformed global and emerging market equities in the bounce back, as the below chart illustrates.

428773_SC_What_does_covid19_mean_for_india_performance_India_table.png

Past Performance is not a guide to future performance and may not be repeated. 

Why we believe investors should look through the near-term uncertainty

While stimulus measures may not help growth in the near term, and the shutdown may destroy demand, these will help businesses to survive and aid the recovery. We will see agile businesses reacting to these testing times with innovation and changes to business models.

In our view the Indian economy and equity markets are resilient enough to rebound from this hit, just as soon as we win the fight against the virus.

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