Can India Dodge The Corona-Bullet?

Source: Tavaga Research

In the World Economic Outlook (WEO) June 2020, the International Monetary Fund (IMF) projected global growth at -4.9% in 2020 and 5.4% for 2021 GDP growth rate, which is marginally lower than 5.8% which was expected in April by IMF. 

India’s growth forecast, at -4.5% in 2020, is at an historic low. IMF has also cut down the FY22 recovery to 6% against a stronger 7.4% GDP growth forecast in April 2020. 

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According to the IMF report, there are synchronized deep downturns foreseen in the United States (–8%); Japan (–5.8%); the United Kingdom (–10.2%); Germany (–7.8%); France (–12.5%); Italy and Spain (–12.8%) in terms of GDP growth in 2020. 

WEO Growth Projections in %

WEO growth projections
Source: Tavaga Research

Reasons for Reducing India’s Growth Forecast?

The cut in growth forecast is quite steep, from earlier IMF estimates. Here is a small list of global concerns raised by IMF which applies to India as well:

  • Worsening Pandemic

With more than 400,000 coronavirus cases India stands 5th in the world’s most affected countries with USA being at the 1st position. 

  • Deep Downturn

Globally, first-quarter GDP was generally worse than expected. A few exceptions included India, but with strict lockdown and tepid fiscal support the second-quarter GDP could also be affected severely.

  • Declining consumption

Loss of income, uncertainty of future earnings with voluntary social distancing and lockdowns have consumers digging into their savings. This, in turn, implies huge decline in discretionary spending by consumers.

  • Severe hit on the labour market

The global plunge in work hours in Q1 of 2020 compared to Q4 of 2019 was equal to the loss of 130 million full-time jobs. The decline in Q2 of 2020 is likely to be equal to greater than 300 million full-time jobs, as stated by the International Labour Market (ILO). Labour market in India is not immune to the pandemic and can see significant pressure going forward. 

  • Global trade contraction

Global Trade contracted by near to –3.5% (YoY) in the Q1, mirroring the weak demand, the collapse in cross-border tourism and supply dislocations linked to lockdowns. 

  • Weakening Inflation

Average inflation in advanced economies had plunged about 1.3% points from the end of 2019 to 0.4% as of April 2020, whereas in emerging market economies it had plummeted 1.2% points to 4.2% in the same period.

What Factors Will Determine A Turnaround For India?

From an investment perspective, a shock in 2020 is well discounted by the markets. As India emerges from a deep lockdown, we are positive that a few surprises are in the making.  

  • Pandemic Control 

Even control, not cure, can do the trick for India from a growth recovery perspective. Remember, India has had a deep shock recently in the form of demonetization. Chaos flowed in the months post demonetization hurting the informal economy the most. However, the salience was visible in the year following as the country bounced back to growth, which was similar to levels prior to the year of demonetization.

India’s GDP Growth Rate Trajectory

Indian GDP growth rate trajectory
Source: Tavaga Research 
  • Rural & Small Towns Recovery

While the overall headline number of cases appear bad, the concentration remains in the top 3 zones (New Delhi, Maharashtra, and Tamil Nadu) constituting roughly about 70% of the cases. 

A sharper economic recovery in rural and smaller towns can move the needle. Commentary from consumer companies do suggest green shoots of recovery, though it might be still early to call that a trend. 

The pace of recovery of economic activities after the companies resume their operations once pandemic fades will be a key determinant of recovery in India.

  • Global Supply Chain Reconfigurations

Global supply chain reconfigurations are on the card as countries have announced plans to reduce their dependence on China. India, with a tough competition from South-East Asia, can be a big beneficiary as companies start announcing a massive shift in the production capabilities. 

  • Robust Capital Markets

Though a small impact on net numbers, sharp recovery in Indian markets from March-lows has led to a huge confidence booster for companies. 

Nifty 50, Sensex performance
Source: Trading Economics

A case in light is fundraising done by Reliance Industries to deleverage and move towards a net cash position. This is also a testimony of Global players expressing confidence in the long-term India growth story.

Reliance Industries Limited (RIL) raises INR 1,68,818.15 crores in 58 days

Investor in Jio Platforms LimitedInvestment Amount (INR Crores)% Stake
Facebook, Inc43,573.629.99
Silver Lake Partners5,655.751.15
Additional Investment – Silver Lake Partners11,367.002.32
Vista Equity Partners6,598.381.34
General Atlantic11,367.002.32
KKR9,093.601.85
Mubadala4,546.800.93
Abu Dhabi Investment Authority1,894.501.16
TPG11,367.000.93
L Catterton1,894.500.39
PIF11,367.002.32
Total115693.9524.70
RIL Rights Issue53,124.20
Grand Total1,68,818.15

Source: SEBI, Tavaga Research

  • India’s recovery path

India saw a huge transition in global trade in the past five months, India’s imports were at -0.8% and exports were at -1.7% as of January this year. In April as the global pandemic resulted in a stringent lockdown and ban on transports, imports fell to -58.7% while exports stood at -60.3%. 

Early signs of recovery were seen in May where imports stood at -52.3 and exports at -36.2%, this will be a solid factor in India’s recovery as global trade improves.

Growth of India’s Import & Export % in 2020

Growth of Indian imports and exports
                 Source: Tavaga Research

Even though most of the factors are uncertain in nature right now, India has presented liquidity support (4.5% of GDP) through loans and guarantees for businesses and farmers and equity injections into financial institutions and the electricity sector. 

India is sure to bounce back strongly once the pandemic fades, and we remain confident as ever. 

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