In the last three months, India has struggled with a second pandemic wave that has overwhelmed its healthcare system and reduced its economy to a crawl.
But the world’s largest democracy is gradually rebounding and should still turn in a 2021 growth rate that is among the best in the global economy. India’s government is sticking with a gross domestic product (GDP) forecast of 10.5 per cent growth in the fiscal year that started on April 1. The State Bank of India, the country’s largest lender, sees a less optimistic 7.9 per cent.
SBI’s prediction fits with the view of Christine Tan, portfolio manager and emerging market specialist, at SLGI Asset Management Inc. in Toronto. She sees 7-to-8 per cent growth and thinks while India’s medium term is challenging its long term energizers are still firmly in place.
“The last time we saw such a large country with similar long-term growth potential was when China was growing at double digits,” says Ms. Tan.
In a recent interview, Ms. Tan offered a closer look at India’s outlook. She says its prospects are a function of lower interest rates, focused government spending and initiatives like ‘Made in India,” an incentive program that has encouraged Apple Inc. and The Samsung Group, to make smartphones in India. Other manufacturers are joining them.
Sunlife has two emerging market funds. The Sunlife Excel Emerging Markets Fund is sub advised by Schroder Investment Management North America Inc. The Sun Life Excel India Fund is sub advised by Birla Sun Life AMC Ltd. in Mumbai.
How should Canadian investors look at India?
It is the largest democracy and the second largest country in the world with 1.4 billion people. Incomes are growing from a comparatively low base and it is home to a young demographic where the median age is 28. Canada’s median age, by comparison, is 42.
So, in a world where many countries are aging and face challenges in income growth, India stands out.
How have Indian stocks performed in the past year?
The MSCI India Index covers about 85 per cent of the Indian equity universe. From December 31, 2019 to the worst levels of the pandemic in March, 2020 it was down about 33 per cent in Canadian dollar terms. Since then, India has rallied. Through the end of May, MSCI India is up almost 82% from last year’s lows.
The government plays a big role in the economy, does it not?
Yes, that’s true. In the recent budget, as part of the pandemic recovery plan, the government increased infrastructure spending. The spending provides needed services, but the economic multiplier also creates jobs.
There will be heightened spending on rail and roads. There will also be an increase in healthcare spending. That is partly related to COVID but also a recognition of the need to enhance healthcare infrastructure. The Reserve Bank of India is playing its part with accommodative monetary policy.
What is the Made in India initiative?
It encourages global companies to invest in manufacturing in India. A majority of the goods produced are intended for sale in India and manufacturers are rewarded for annual increases in production.
Manufacturing as a percentage of India’s GDP is less than 2 per cent, which is phenomenally low. So even an increase to 3½ per cent represents significant growth.
Who has the program attracted?
India is the second largest global market for cellphones. Apple will be making the iPhone12 in India. Samsung has built its largest factory for smartphones in India. Other manufacturers like Foxconn Technology Group, Wistron Corp. and Pegatron Corp. have also been approved.
Based on the success of the smartphone initiative, the program has been expanded to 10 more industries including food processing, battery storage, auto parts, pharma, 5G equipment and specialty steel.
Where are India’s areas of growth?
The financial sector has potential because the penetration of basic banking products is low. As incomes rise, more consumers will want mortgages, auto loans and credit cards, as well as financial services like investments and mutual funds.
Auto sales were weak before the pandemic, but similar to Canada and the US, there has been a resurgence. One reason is a reluctance to take public transportation. Consumer staple companies continues to benefit from growing incomes.
What about IT, where India has an international presence?
Technology is an interesting sector. India graduates about 1.5 million engineers every year versus about 200,000 in the US. India’s population is much larger, but it is mind boggling. Most people don’t think of India as a highly educated country.
Indian publicly listed technology companies tend to be consultants or in outsourcing. Companies like Infosys (NYSE:INFS) and Wipro (NYSE: WIT). They have done well because of the work from home trend.
So the outlook is positive?
Yes. The second wave slowed India’s recovery but has not affected long term growth drivers.
If I were to be optimistic, perhaps the pandemic triggers a prioritization of social, education and healthcare investments in India as it has in many countries, including Canada. This would improve the quality of life while creating millions of high-quality jobs.
Another positive is the vaccine rollout. Until now only those 45 and older have been getting free vaccines. The Modi government has announced that starting June 21 all Indians over 18 will be vaccinated for free.
That gives me reason to be optimistic that India is in the early stages of a recovery from what has been an unprecedented difficult and heart wrenching health crisis.
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