The year 2020 will go down as one of the most turbulent years in the history of modern civilisation. The global markets had a free fall, responding to a global shutdown and an uncertain future. While the Indian economy had been languishing for the last 5 years with the business confidence at a real low, the Corona Virus Pandemic was feared as the proverbial last straw. The first quarter of 2020 saw the Indian Economy contract by 23.9 % with the stock markets crashing 17000 points on BSE sensex.
However the velocity of the bounce back has really surprised everyone. The Indian Government’s fiscal and monetary measures to handle the economic collapse were seen as grossly inadequate. But the long term investors have chosen to ride over the domestic pessimism as the Foreign investments are at a record high as we approach the end of 2020. The stock markets are at a life time high (46000 on BSE) and so are the Foreign exchange reserves (537 bn US$). Once more it raises the question if Stock markets reflect the health of an Economy ?
So why are the investors pouring in billions of dollars in the Indian Economy despite the global economic uncertainty induced by Covid Pandemic. For starters there is huge liquidity overhang globally. All the governments are going for expansionary monetary policies as a response to the pandemic shutdown. Developing economies grow at a much faster rate when they receive higher capital inflows. Thus the international liquidity would help India grow at a much faster pace.
Next, India is seen as the next big story as the trust and confidence in China vanes out. While the exodus from China is getting distributed among various countries, India looks to be a formidable economy scoring high on its demographics, market opportunity and a huge upside on the growth and development potential. On the domestic front banks are flush with funds as the economic activity has come to a temporary slowdown, the interest rates have crashed to a historic low. Consumption story is on the runway, expected to take off in the next couple of quarters as the country comes back to normalcy. After a persistently high inflation rate (above 7 percent) in the first 5 years of the last decade mainly on account of high food inflation, the inflation rates cooled of to 2.4% in 2017. Repo rate at 4% CRR at 3% and Bank rate at 4.65% have helped to bring the bank borrowing rates to a more reasonable level, we saw these kind of rates in 2006. At these kind of rates Consumption spending is expected to bounce back. In the given circumstances of easy liquidity and low interest rate regime investment cycle may finally take off.
I would say the last decade was a decade lost for the Indian economy where the business confidence was at a all time low. The RBI governors pursued high interest rate regime trying to control, (mainly food ) supply side induced, high inflation. Indian economy actually started decelerating a little after the Lehman crisis of 2008, though for a brief period Indian economy did well. Policy indecisiveness & inaction started taking its toll as early as 2011. The infrastructure investments, Iron Ore, Coal mining businesses were the worst hit. The speculative Real Estate boom ended with the discovery of major frauds and illegalities. The economic slowdown, corporate bankruptcies and the NPA Banking crisis badly impaired the business confidence. The arrival of BJP at the Centre brought a new economic paradigm causing a further disruption in the interim. The enormity of the economic problems were way beyond an immediate solution. Indian Economy has thus been languishing for the last many years. The GDP growth rate fell to 4.5% in 2019.
Emergence of a new India
While there have been hits and misses on the economic performance in the last 5 years, the country has gone though a quiet transformation. The Modi government has brought in a series of structural changes over the last 6 years, some welcome and some still being debated. Demonetisation and GST being the most debated ! Some of the positive achievements have been the formalisation of the huge parallel economy ( GST and Universal Banking) , Lowering of Income Tax rates, IBC ( Insolvency and Bankruptcy Code),Repealing of many archaic legislations, Decriminalisation of corporate actions, Electronic trading of Farm produce etc, Labour reforms, Digital India, Affordable housing, Income Tax dispute resolutions etc..
Some of the long pending hygiene issues ( Swach Bharat ) have been addressed to bring a better quality of life to the absolute poor segment. Though the rural India is fast getting integrated with the urban India, infrastructure and healthcare needs to catch up with the global standards, thus they are both a challenge and an opportunity.
Digital India initiative is the bright spot for the Indian economy. India is seeing huge amount of FDI investments in Information Technology and IT led start ups.The last 5 years have seen unprecedented investments and activity in digital technology. Digital India is a reality now. Technology has brought its own share of disruption in retailing as well as a host of businesses like education, healthcare, transportation, Hospitality etc. Service sector would clearly be the big winner for the Indian economy in this decade.
Agriculture too has has been the bright spot in the Pandemic as India expects a record crop this season. Going forward the government has a very ambitious blue print of doubling the farm income by 2022 and hitting an export target of US$ 60 billion by 2022. The Government has a very ambitious blue print for the manufacturing and industrial growth. It wants to add 200 Lakh crores of manufacturing turnover by 2030. India will become the 3rd largest automobile manufacturer by 2021. Automobile sector continues to attract huge FDI investments. Insurance , Mutual Funds and Financial services are expanding rapidly. Renewable energy, Electric cars, Defence manufacturing is expected to scale up majorly.
The economy is expected to grow at 9.9 % in the next fiscal i.e 2021. It is expected to be the fastest growing economy in Asia. The economy has responded rather well to the mid term fiscal and monetary relief packages given by the finance minister, though some sections of the economy have been hit really badly especially the retailers and SMEs. The banking NPAs still remain a big challenge. The key challenges would be the inflation rate and the RBI monetary policy in the next 2 years, especially handling the after effects of a huge fiscal deficit on account of the fiscal and monetary measures. I hope the central government pursues a growth oriented monetary policy in the next couple of years even if the inflation rises in the short term. The international capital flows will be the decisive factor going ahead.
Amid all this, the business community in India is grossly disappointed with the Government indifference to their cause. Especially, the retailers, SMEs and MSMEs have seen tough times in the last 5 years. GST compliances, Liquidity issues, Bank Credit and the slowing demand has taken a toll on them. We can see India is going through a churn where large doses of foreign investment continues to pour in on one end while the retailers and SMEs and MSMEs have been seeing an impairment on their financials year after year. E commerce and digitisation has impacted the traditional retailing business, the scales are tilting in favour of Big corporates. Big corporates are consolidating their market share and redefining the retailing business practices. The Multi national Corporations are likely to cause more disruption in the coming decade. Business Consolidation, Innovation and Alliances are going to be the new Mantra in the coming decade. As we see more competition and efficiencies, businesses would be forced to revisit their strategies and would need some serious re-skilling as the business environment is changing rapidly.
I believe India is likely to emerge as a new country in the coming decade. The changing geo political alignments is also an indicator of the growing importance of India in the global scheme of things. India seems to be just ripe to attract huge amounts of international capital given the financial and political alignment with the major economies of the world. Multinational companies are seriously looking at India as a manufacturing hub and international investors are quite excited with the new start ups. The start ups and early stage companies are fast hitting the Unicorn status. The medium term outlook for the economy as well as the stock markets looks very bullish as large investments in Manufacturing, Electronics, IT & Telecommunication, Automobiles, Pharmaceuticals, Chemicals, Retailing and New Start ups are flowing unabated. My own sense is that we are likely to see a level of 55 to 60000 on Sensex by 2022. I wouldn’t be surprised to see Sensex beyond a level of 100000 much before 2030.
Looking forward to the end of Covid and New beginnings in 2021.