Under Narendra Modi, India will lead global economic recovery

The COVID-19 pandemic has not just been devastating when it comes to the health of the people but it has also dealt a severe blow to the economies of multiple nations across the globe.

However, as many reports and analyses now confirm, India has emerged as the nation which has not only dealt with the health implication of the pandemic relatively well but has also successfully managed its economic fallout.

On the health side, India has now administered more than 1.03 billion doses out of which more than 723 million are first doses while more than 313 million are second dose.

Consider this statistic for a moment. India has now double vaccinated almost the equivalent entire population of the United States — the third most populous country in the world, while the US itself is struggling to double vaccinate just its entire adult population. This despite the fact that US started vaccinating a month before India!

On the economic front, various recent reports sum up the strong economic management by Indian government.

Ruchir Sharma, chief global strategist of Morgan Stanley, recently published a report which analysed countries that were heavy spenders during the peak of the pandemic and compared them with light spenders.

The unambiguous conclusion — countries which were reckless in spending have fared very poorly in economic recovery as compared to countries that spent wisely and spread their efforts in managing the pandemic.

Despite pressure from many celebrity economists, in India and abroad, the Indian government led by Prime Minister Narendra Modi, held firm, did not randomly spend or distribute cash, but rather spread its efforts in reaching the poorest through targeted cash and food, in developing vaccines, ramping up health infrastructure and finally in vaccinating the population.

The result — India has seen the sharpest economic recovery while the heavy spenders have, without exception, floundered. The factors on which Sharma based his analysis are Inflation, Interest Rate, Government Deficit, and Currency.

On inflation, India’s latest retail inflation for September is 4.35%, which is almost a percentage point lower than average of heavy spenders with some of them recording inflation close to double digits.

On interest rate, the average lending rate has come down by approximately 1% as of September 2021 as compared to January 2020. This follows the pattern of long-term trend in India of lending rates coming down by average 4% since 2014.

Strong economic recovery

On government deficit, the economic recovery has been so strong in India that the central government is expected to overshoot its already ambitious budgeted tax collection targets by almost 10% in the current financial year. This would be a first in many years and is driven by strong GST collections and overall economic growth.

On currency, the government announced the first lockdown on 24 March 2020. Pegged against the dollar, the Indian Rupee has since then actually held steady around the 75.2 to a dollar. This again is opposite of the heavy spenders where the currency has drifted down.

The Indian GDP growth rate has rebounded in the first quarter of current financial year with a record growth of 20.1%. For the entire financial year, the growth rate estimates by various agencies like World Bank, IMF and others is ranging between 9-10%. This will be almost double the global GDP growth, double that of USA growth and between 1.5-2 percentage points more than that of China.

One of the reasons for strong recovery by India is that the lockdown during the pandemic was very smartly calibrated and the rural economy, which is a feeder to much of urban India, was never shut down. This well thought out approach kept the urban centers going even during the lockdown phases while at the same time giving a fillip to rural economy.

The result — agriculture sector has witnessed strong growth and high gross capital formation even during the pandemic. Food grain production is at an all time high and driven by record Minimum Support Prices (MSP), the procurement is at an all time high as well. Total Kharif crop production is 12.71 million tonnes higher than average of last five years while Kharif pulses production is 17.2% higher than last five years average.

Tractor and two-wheeler sales — high frequency indicators of rural demand — have both exhibited strong demand, even more than the pre-pandemic levels, pointing out to strong rural incomes.

The Index of Industrial Production (IIP) in August 2021 was more than 100% of the index in August 2019, indicating strong industrial activity, at a level even higher than the pre-pandemic. Electricity demand, another high frequency indicator for industrial activity, was the highest ever in the first half (April — September, 2021) of the current financial year and 3.6% higher than pre-pandemic level.

The overall index of 8 core sectors has reached the same level as pre-lockdown with electricity, fertiliser, steel, crude oil and natural gas being significantly higher than pre-pandemic level.

The Purchasing Managers Index (PMI) Services has been consistently recording values above 50 (56.7 in August 2021) pointing to strong recovery in services sector as well.

The Google Mobility Report which measures mobility across retail, recreation, grocery, pharmacy, parks, transit stations, places of work and residence and benchmarks them with Jan3-Feb6 2020 data (pre-pandemic) has turned positive for the first time, confirming that on an average these sectors are back to pre-pandemic levels.

Rail freight, port cargo traffic, and exports of services has crossed pre-pandemic levels.

The unemployment frate, as per CMIE, in September 2021 was 6.9% which is lower than pre-pandemic levels.

Fall in unemployment rate

Among a host of factors, this fall in unemployment rate has been driven by a hiring spree across a range of industries, but primarily driven by India’s IT sector. According to latest Naukri-JobSpeak report, the hiring index in September was at an all-time high, higher than September 2019 by 21%.

The index, which is calculated monthly, has been breaking records for three consecutive months. IT sector hiring is up 138% while hospitality is up 82%. Retail, which was hit hardest by pandemic, has also registered 70% growth in hiring indicating robust growth in sectors that employ the largest number of Indian workforces. Education sector is up 53%, banking and financial sector is up 43% and telecom is up 37%.

The government mandated Employee Provided Fund (EPFO), a social security net for workers, has also witnessed robust growth with almost 1.5 million new additions in July 21, following 1.1 million additions in June 2021. EPFO registrations are an indicator that large number of jobs being created are formal jobs with all the necessary benefits that accrue.

Digital Payments, a made in India success story, has skyrocketed during the pandemic and the growth story has not abated. September 2021 recorded more than Rs. 6 trillion (almost $90 billion) transaction in value and over 3.75 billion transactions in volume. This is the highest in the world, and surpasses other digitised economies like USA and China by substantial margins.

But as the recent study by US firm Jefferies pointed out, the most gladdening aspect pf this recovery is the major uptick in the housing and reality sector. Driven by low and affordable interest rates, the strong and sustained demand in reality sector has come after almost 7 years and combined with other factors, it points to a long-term phenomenon.

Jefferies analysed six key components of economic cycle — Demand for housing, drop in bank NPAs, corporate profitability, interest rates, corporate leverage and capex revival.

On housing, Jefferies notes that a “historical analysis since 1996/97 suggests that Indian housing up-cycles and down-cycles typically last for 6-8 years. The period between 2012/13 and 2020 was a prolonged down-cycle and 2021 is the first year of an up cycle, with a visible uptick in volumes and pricing. Housing construction is a large job creator and has multiple economic linkages capable of driving an economic upturn.”

On Bank NPAs the firm notes that “Between 1997 and 2004, bank gross NPA ratio moved down from 16% to 8%. Similarly, the Indian banking system’s gross NPA has moved down from 12% in March 2018 to 7% now and alongside a provisioning jump, the net NPAs are down 59%. The fall in bank NPAs is a significant success of the reforms under Prime Minister Modi government and such moves as the Insolvency and Bankruptcy Code (IBC) have immensely helped.

On corporate profitability, Jefferies notes that annual corporate profit growth was a poor 0.4% between FY11 and FY20, but has increased to 51% between FY20 and FY22. Jefferies expects profit growth to increase further to 15% between FY22 and FY24, led by the financials and other cyclical sectors.

On interest rates, the average drop in lending rates by almost 4% between 2014 and 2021 will spur consumption, boost demand across sectors like automobiles, housing and overall, positively impact the economy.

On corporate leverage, the form notes that Companies have used the last six years to deleverage as a result of which the debt-to-equity ratio for 600-plus non-financial companies has come off from 1 times to 0.7 times, creating space for the next economic up cycle.

And, finally on Capex, Jefferies observes that all the above factors will push the capex cycle in the short term to medium term as well. The big budget schemes announced by the government — almost $1.4 trillion in infrastructure in the next five years with Gati Shakti being the anchor scheme and about $9 billion in creating health infrastructure under Ayushamn Bharat Health Infra Mission will push the capex cycle as well.

Sustained growth

Overall, Jefferies estimates that India is entering a phase of at least a decade or more of 9.5-10% of sustained growth.

In the financial markets the benchmark BSE Index has performed most spectacularly and the index has doubled from around 29,000 in June 2020 to over 61,000 in just over a year. Annual FPI investment into Indian equity markets has bee the best in comparable emerging markets with high volumes both in 2020 and 2021 totalling to up to approximately $34 billion.

The trade performance has been robust as well with exports in September 2021 at approximately $34 billion which is higher than both September 2019 and 2020. The top export commodities are engineering goods, petroleum products and cotton yarn and handloom products indicating an across the segment revival, especially in MSME sector which accounts for the bulk of industries and employment.

In the start-up sector, 2021 has been a year unlike ever before. 33 Indian start-ups have become unicorns (more than $1 billion in valuation), which is the highest in the world. In the overall international venture funding, India has attracted the maximum funds ever in 2021 while the year is still not complete.

In the meanwhile, Prime Minister Modi’s government has been hyperactive on the policy and reforms front to give a further fillip to the economic activity. The privatisation of Air India, stuck for almost two decades, is finally done. The new drone policy, reforms in the space sector, record FDI investments in India due to liberalised FDI policy and the labour reforms have created a platform for high trajectory growth offtake.

Overall, the Indian economic story during the peak of the pandemic and afterwards, has been rather remarkable given the challenge of once-in-a-century pandemic.

As Prime Minister Modi pointed out in his recent address to the nation, the fact that India has produced more than billion doses of vaccines, in the fastest time in any open and transparent society, will itself place India in new light in the world of manufacturing and economic landscape.

Given India’s market size, a young demographic, skilled and trained workforce, and a very business friendly policy paradigm, India is well placed to lead the global economic recovery and indeed the next economic cycle.