India's dream period of growth was between 1991 and 2011 where we averaged +7% real GDP growth. Since then, we have averaged below 6.5%. While global reasonsaccount partially for it but in India's case it is more self-inflicted. This was the reality before Covid:
- Banks NPA (non-performing assets) problems, which surfaced in 2015 remained unresolved; NBFC and real estate crisis added to it since 2018. Thus corporate India and the financial system was in trouble
- Demonetization and GST affected small firms, individual business owners, unorganized enterprises which showed its impact as higher unemployment, slower consumption and lower investments
- The government's balance sheet (known from the fiscal situation) had been deteriorating as lower GDP growth led to lower taxes and thus higher government debt
- Covid, on top of all this is the perfect storm. The lockdown due to Covidhas affected companies, banks/ NBFCs, small business and the government. Most importantly, it has impacted the self-entrepreneur, the migrant labourer and to an extent the salaried class as well. Now, the individual balance sheet is also under stress
In future, real GDP growth will be lower than 6% for the next 3-5 years.
Atmanirbhar package
The package has been disappointing. The provision of free food and increase in MNREGA were the two notable aspects of the package. The liquidity support to SMEs through banks was required but the amount of Rs.3 lakh crore remains under-utilized, suggesting banks are not implementing it as well.
Further, Covidand lock-down took away people's incomes. The labourer did not get his work, the street vendor was not allowed to sell, the taxi driver was not allowed to ply and the shop owner had to keep his store shut.
The real need was to provide people with their lost income. That still hasn't happened. The government is trying to time the roll out of an income stimulus with the opening up, but it is already too late.
Outlook on asset classes
Debt: For debt markets, it has been good and bad. Good for the government, corporates, banks and those invested in bond funds as low interest rates reduced the cost of borrowing and also resulted in higher bond prices.Bad for the saver - fixed deposit rates, returns on liquid funds have dropped sharply as RBI cut interest rates and infused liquidity.
We expect interest rates to remain low for some more time and it will be prudent for investors to lower their return expectations from liquid, debt funds and bank deposits. We will caution against chasing the extra returns by taking on extra risk.
Equities: In the short term, markets can deviate from macros. As you see it now, we are in the midst of India's worst economic crisis but stock markets are near all-time highs.
Over the long term, stock markets reflect corporate sales and profit growth which depends on the macro GDP growth. Certain large, strong and well managed companies will benefit due to Covidand gain market share but on a broader level one needs to be cautious.
The crisis has also brought to attention corporate social behaviour. Investors will eventually reward companies who took care of its employees, supported the societal efforts and acted responsibly during the pandemic. Covid-19 will hasten the trend towards greater adoption of ESG in investing.
Gold: The beneficiary of uncertainty is gold. We recommend 10-20% allocation to gold in investment portfolio at all times. When times are good and gold price underperforms, as an investor you should be happy! As then your job/business is doing well and so is your equity portfolio. It is when things turn bad, does gold shine. Gold is India's most liquid asset and can be easily leveraged by households/small businesses when its prices rise.
Key sectors that will drive the growth of the GDP in the next 1-2 years
We should be hopeful on agriculture. Although as a share of GDP it is very low, so it won't have too much of an impact on the numbers. But, given the large population dependent on it, it will be the main sector to drive India out of this mess. Recent reforms announced if implemented well by the states should have a long term impact.
The government's share of GDP will rise. Given that the private sector and individuals would have lesser resources to invest, the government would need to continue to have a higher spend over the next 1-3 years. It is crucial on how governments use this resource and direct their spending. For the long term, India needs higher spending on infrastructure, health and skill building.
IV Subramaniam is the Director of Quantum AMC. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.