India's opportunity in the post Covid-19 world

[Note : Below is the snippet of the monthly PMS newsletter posted to clients on May 4, 2020. Some of the statements were forward looking, impact of which may or may not been the same as of today. No statement in this should be construed as investment advice.Equity investing is risky, kindly consider an investment advisor before taking any positions]

We would like to share some thoughts on what this outbreak of COVID-19 could potentially mean for India, particularly in the short to medium term. 

The present state of affairs

India is in the state of total lock down since the past 5 weeks. In this period about 40-45% of the overall economic activities which are exempted from the lock down stipulations are only working. Presently it is estimated that it may take 3-6 months before the economy could return to the pre March level of activity.

It is important to note that the Indian economy had been consistently slowing down for past 3 years, especially due to the impact of demonetization (November 2016) and GST (July 2017). Unusual weather patterns have resulted in wide divergence in the regional economic performances. The rural stress in the regions that suffered from poor weather (flood, drought, etc) has been elevated; even though the overall farm sector growth recorded decent performance.

It is widely accepted that after discounting for the elevated government sector consumption and fiscal support to the rural sector (loan waivers, cash subsidy payments etc), the GDP growth of India had been significantly below par. The growth rate of almost all key components (savings, investment, private consumption etc.) of the economy has declined.

Besides, the second half of FY20 had witnessed widespread disruptions due to protests against implementation of Citizenship Amendment Act and some related matters. Thus, pre-March situation was not good enough; and here in the best case we are looking at reaching that "not good enough" situation in the next 2-3 quarters, provided the virus is contained soon and lockdown does not need to be extended beyond 3rd May 2020.

The GDP growth estimates of various agencies for FY20 and FY21 now range between 3.5% to 4.7% and 0% to 4.2% respectively.

Challenge to make a fresh start

A large number of businesses, especially MSMEs, are facing serious challenges. For them it is not 40-50days of break. For many of them it would be like starting the business all over again with little capital and poor credit score. These businesses are staring at material discontinuity losses and cash flow problems, besides demand issues. Exporters in particular are in deep trouble as their overseas payments are stuck, future demand outlook is heavily clouded, inventory obsolescence risk is high, and expenses continue.

This would directly reflect on (i) employment conditions, (ii) economic growth, and (iii) asset quality of lenders. Indirectly, it may adversely impact (a) economic factors like discretionary consumption, savings, tax collection, and (b) social factors like number of people below poverty line, socio-economic inequalities, cases of petty crimes and non-compliance, mental health of people due to elevated stress & anxiety levels, physical health of people suffering from diabetes, hypertension, obesity etc.

It is natural to celebrate the fresh air in cities, clean water in rivers, lakes and sea, peacocks on terraces, deer on roads. Many of the children and youth in cities may have never experienced nature like this. But once the lock down is lifted we will have to deal with materially increased population of rodents and insects which are harmful for our health and inventories in shops, godowns, restaurants, etc.

Global challenges

India shall face multiple global challenges in the aftermath of COVID-19 outbreak. Poor export demand for traditional Indian products like textile & leather, automobile, gems & jewelry etc., lesser employment opportunities for young professionals, poor capital flows especially for startups etc are some of the obvious economic challenges.

The worst however could be the change in global outlook for the process of globalization itself. The developed nations which are bearing the worst impact of COVID-19 in terms of human losses, may be inclined towards closing (or narrowing) their borders to international trade and labor movement.

If the belief that COVID-19 spread is a consequence of Chinese irresponsibility or conspiracy, sustains, we may see substantial rise in geopolitical tension and trade & currency conflicts which have already impacted the global economy meaningfully in past three years.

In any case, if all goes well, it would be reasonable to expect travel restrictions and fear amongst travelers also.

The opportunity

Shift of global supply chain away from China

Post COVID-19, it is possible that China may be regarded as an irresponsible power, and may not be accepted as a major global leader or supplier. In particular, the mistrust between US and China may increase manifolds. We may likely see a Sino-China cold war that may last for many years, or may be decades.

The global supply chain presently relies heavily on China for components as well as manufacturing services. There is strong possibility that the businesses in developed economies may seek to establish manufacturing and/or sourcing facilities in other countries to reduce their reliance on China. Japan government for example has already announced incentives for shifting factories from China.

The window of this opportunity shall remain open for only a short while, as the competition is really tough with tens of Asian countries competing with each other to avail this opportunity. We would need to move really fast if we actually want to turn this crisis into a massive opportunity that could support India's economic growth for next couple of decades at least.

Investment in health infrastructure

The outbreak of COVID-19 has exposed gaps in the global healthcare infrastructure and protocols. I am confident that post COVID-19 containment the world will embark on an unprecedented investment mission to improve health infrastructure and protocols.

Many Indian businesses, especially the companies engaged in IT services, CRAM services, telemedicine and diagnostic services etc. shall have opportunity of gigantic proportion knocking on their doors.

Improvement in domestic health infrastructure

Incorporating the learning from efforts to contain COVID-19, and existing programs & schemes for public health, sanitation, personal hygiene, etc., the government has the opportunity to materially improve the healthcare infrastructure in the country.

It may consider merging all such schemes & programs into a mega national mission. to ensure adequate healthcare facilities to all citizens through public and PPP ventures, total sanitation, comprehensive garbage management, preventing littering of all sorts, management of epidemics, seasonal diseases etc.

For accessing previous newsletters, refer to the uploads here on Slideshare.

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