Resilient India: Earning during the tough times

While the current times are going tough, people have been worrying about the bear market and the tough times that we are facing because of the war going on and CPI inflation roaring beyond our control.

I am writing this article as I have constantly been reading news and various articles and listening to the experts who showcased the way ahead.

The majority of the news channels and the newspapers are also saying that the FED rate hike and the increase in the cost of capital are becoming worrisome to the Indian businesses and would create a market selloff because of FIIs. As well as there is a recession coming soon which is quoted by many economists and there have been laying off in the companies in the USA which we might see soon. If you follow Elon musk, even he tweeted that there are tough times coming and might lay off 10% of the workforce in Tesla.

What does it mean for India?

India has been through tough times a lot, it is not the first time that we are seeing a bear market coming. Let me just expand your time horizon and you will understand what I am trying to say. If we look at the BJP government which came into power in 2014, there have been a few drastic changes in the policies which were made by the government and some after-effects which we felt because of the decisions. Even though we all might think that "acche din" are nowhere near, let me take you through a timeline which might change your view.

• It was during 2014 that where BJP came into power and then we saw the order of Jan Dhan accounts which were done keeping the lower-income citizens in mind, which enabled the transfer of subsidies more efficiently as well as removing the middleman.
• In 2016 we had Demonitisation wherein we faced a liquidity crunch for a certain amount of time but it enabled the growth of digital currency, wallets such as Paytm, PhonePe, and Gpay and we saw an enormous rise in UPI transactions.
• In 2017 we had GST implementation mostly in June which changes the whole scenario for doing business, the tax mechanism changing and the impact of demonetisation, as well as the implementation of the eway bill, was a huge task which impacted multiple businesses and there was a slow down in the economy.
• In 2018 we had an economic slowdown and were on the verge of going into recession, for a few months the slowdown was so much that we went into recession for a few months technically. It was times when people or I can say consumers started feeling a pinch on their pockets as businesses were not picking up in the retail segment.
• In 2019, as you all know, we faced a pandemic which we know as COVID-19 and soon the whole country was in lockdown for a few months. It was not just the Indian scenario but all over the world, the world came to still.
• Currently, even though the Covid is there, we have shrugged it off and are in a stage of recovery.

How is India Resilient towards all these?

Currently, there are few things happening all over the world.

1. Inflation
2. Supply chain disruption
3. Increase in Oil price

Inflation

As the above things are happening in parallel the developed nations are falling the pinch in their pockets as well as there are chances that they may fall into recession. If you remember the 2008 financial crisis then you will understand that the USA and other developed nations have the habit of brutally laying off employees in order to reduce costs as well as there is Great Resignation going on which is making it difficult for companies to hire new employees at lower wage rate. Currently, the USA is having a CPI inflation of 8.3% and we will soon see more rate hikes by the Fed, why because if the government wants to control its inflation i.e. reducing the demand, it needs to increase interest rates which will eventually reduce demand as the cost of capital is going to increase.

Currently, the Fed interest rate is just 1% wherein the inflation is 8.30%, in order to close this gap there are chances that the US might soon go into recession. If I compare it with India, the current Repo rate set by RBI is 4.40% which soon RBI is going to hike it to 5.65% and the inflation rate is 7.79%. So the gap between the interest rate and inflation would soon be around 2-2.5% and that would be manageable but currently, the gap between US interest rates and inflation is almost 7%.

Impact of Inflation

As we might see the USA going into recession soon and them finding it difficult to bring new employees at a lower rate their service sector business is likely to come to India. The reason is, earlier while we had software, we needed to install servers for the same, then came the SAAS model and now we have everything stored on the cloud. Looking at China's data transparency I don't think the USA will be looking to outsource its non-core activities to China, so the immediate choice is India, as our service sector contribution to GDP is 53% showcasing that we are very much more efficient than others when it comes to handling services.

Our current service sector market is roughly 0.21 trillion dollars and that of the USA is 14.76 trillion dollars. Considering a rough estimate of 10% of work which will be outsourced, this is a conservative side over the next 5-6 years which would be around 1.5 trillion dollars of work. This would be like 6-7 times the current service sector contribution we have to our GDP. So companies like TCS, Infosys, Larsen & Toubro Infotech as well as HCL and Wipro would be the major beneficiaries of receiving the chunk of the revenue from it.

How is India fighting inflation?

The answer is quite simple, you might have read in the news that the government has banned export of wheat and sugar which are basically essential commodities in India and as we have population of more than 121Cr people, banning the food will increase the supply in the domestic market and this would cool down the prices reducing inflationary pressure.

China + 1

During Covid-19 I wrote some blogs about how the world would be thinking about shifting their manufacturing capacities from China to some strategically placed countries so that in case of another pandemic, the companies' total production won't stop.

Recently while I was watching a webinar, I came to know that this strategy is known as China + 1 strategy. As there is the pressure of ESG and the current relations of the Chinese government with other nations, currently China is restricting itself from the production of certain chemicals as well as pharmaceuticals. But, the shortage of semiconductors increased the implementation of this strategy and as a result, we can see that the government has introduced PLI schemes to lure the MNCs to set up their manufacturing plant in India and avail the benefits mentioned in the scheme.

Impact

As we have seen the PLI scheme coming into play there are many private players who have entered into the manufacturing of electronic items such as Tatas, Hero motocorp, Suzuki, Motherson Sumi, and Toyota, which are basically into cyclical nature of the industry, but majorly automobile and ancillary have invested into various parts of India.

Financialisation of the economy

Since 2014, we have seen a drastic increment in the financialization of the economy.

We have seen that as the smartphones have increased (read my previous blog to understand the increase in financialization) the UPI from 2018 has increased drastically as well as the Pandemic became a boon to the financial markets because it was during the lockdown, the Demat accounts were opened and there is a recent phenomenon going on because of the crypto adoption of the Indian consumers. Currently, there are approximate 9Cr accounts for Demat as well as for crypto. Though crypto might bring in new consumers to investing but I will talk about it some other day.

Because there is an increase in financialization and acceptance of UPI in retail banking, such types of facilities are not available in the USA or many other countries, they still use the traditional methods of making payments to the consumers. Here in India, even if you go to a street vendor you will find that he is accepting UPI and indirectly telling you that you can make payments from your bank to mine within a few seconds.

As the financialization is increasing, the standard of living and the access to credit is increasing amongst the Indian consumers, we can see that new fintech companies, as well as old banking companies, are providing credit to the majority of the Indian consumers on regular basis, also UPI coming to daily use has made the private companies reach rural areas that were earlier costly and only PSBs used to invest into it, but now the private players are also gaining market share.

Thus, companies like Bajaj Finance, Muthoot Finance, HDFC Bank, Axis Bank etc are going to get the benefit from all these.

Remaining Invested

So if you had been remained invested in such companies which I mentioned earlier, you would have got a return somewhere between 15-18% CAGR but if you are taking less risk and even if you invested in a low-cost index mutual fund, you would still earn a return of 10.64% CAGR

So if you invested during the start of 2014 in Sensex, it has grown 171% since then, meaning you would have made 1.71 times the money by investing into Sensex, but if you would have panicked in between then the returns would be totally different.

Conclusion

In my next article, I will be showcasing the returns for the companies I have selected and the reasons behind them by comparing them with the Nifty 50 or Sensex, while looking at the above graph it is clear that investing in equities would have given you better returns than investing in Bonds, PPF or some other type of instruments.