Why India is an at inflection point

Oct 14, 2022

Three leading economists shared insightful perspectives on the Indian economy during the session I moderated at the Morningstar Investment Conference held in Mumbai on September 20 and 21.

One of the panelists was UPASANA CHACHRA, Executive Director and India Economist, Morgan Stanley.

All the economists were unanimous about the fact that India has emerged as a very attractive investment destination, and a very stable economy in a very turbulent external environment. Upasana strongly believed that India was at an inflection point.

These are her views from the discussion.

India has emerged as a beacon of calm and hope in this otherwise very turbulent world.

What makes this time different for India is that the starting point of the macro position has been more solid than what we've seen in similar episodes of changes and commodity prices or the Fed tightening cycle.

The macro balance sheet is better, and there has been an improvement on the corporate balance sheet, the financial sector balance sheet and India's own external balance sheet. Corporate debt to GDP is currently at 15-year lows. Impaired loans are tracking at decadal lows again. Household debt is low versus per capita income.

This has helped ensure that the financial metrics like interest rate, currency, and equity market are responding very differently in a global inflationary environment, challenging external growth environment, and the Fed tightening.

India's growth fundamentals have definitely improved. If you look at where we are today, and where we were pre-pandemic, I think there has been a change in terms of the domestic drivers. We are seeing an improvement in the domestic demand-oriented indicators as well, which is providing some hope against the very weakening and increasingly challenging external environment.

There is a change that has happened versus the last decade that we saw growth being periodically interrupted by a series of exogenous shocks, and the outcome was that we had a very suboptimal sort of growth outcome.

As we start now, most of those shocks should be behind us and balance sheet positions are better. Globally, there is a focus on supply chain diversification, and India is being viewed much more favourably as an investment destination for companies that plan to set up new or incremental capacity.

Overall, India is a very stable and steady economy in a growing externally challenging environment.

A lot of factors are coming together, but we cannot deny the existence of ponderable issues.

Trade shocks and volatile commodity prices are among key concerns.

Given that India is a net commodity importer, what happens to commodity prices matter to us.

We can't wish away the global slowdown. Almost a quarter of India's GDP comes from exports. After the pandemic, exports have been the key driver of the recovery. So a slowdown in global growth will impact India.

There is possibility of financial conditions in the DM world tightening a lot more aggressively and their repercussions into India through the currency channel.

There are obviously risks on the anvil but they are more cyclical or external than domestic and structural. And I think they seem more reasonable or more manageable in this cycle than what we've seen in the past.

India at an inflection point.

The government has been focusing on capex, trying to do as much as they can through their own balance sheet, and creating an environment for private capex to return.

The corporate tax rate reduction that happened in September 2019 was extremely significant. We have not witnessed such a meaningful reduction in taxes probably in a very, very long time because usually the focus is to increase taxes and then redistribute. It was terribly unfortunate that a pandemic followed in close succession to such a landmark decision.

There have been more measures to promote capex through production-linked incentive schemes or a thrust on public infrastructure. This should continue because these are the measures that will help India not only in a cyclically challenging environment, but also from a structural or medium-term perspective. It improves India's growth potential and ensures that the growth path remains more sustained, and we see productive growth.

The government has stepped up on its structural reforms; the corporate tax rate reduction, fiscal incentives through the production-linked incentive schemes, thrust on public infrastructure - all of that indicates that the supply side factors are all coming together.

If we juxtapose the above with the improvement on domestic demand, we're already seeing that capacity utilization for March is at above the 10-year average, it's at 75.3.

So, basically, supply side and demand side factors are coming together after a very long period of weakness that we've seen in the last 10 years where the investment rate has continuously gone down.

Therefore, we think that we are set for an inflection point. And we should be expecting an inflection on the capex cycle because that is how we will attain virtuous and productive growth.

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ninan joseph
Oct 20 2022 12:57 PM
Dont you think, the only, I repeat, the only reason for the market to hold on to its gain is the population which we have and the number of young people started opening demat accounts. During my times, it was opening a bank account, now the same crowd is openeing demat account. Covid and sitting at home also helped all these people to come into the stock market as they thought that it was one of the way to make money as well.

Total FII outflow in 2021 was 10.15 billion and in 2022 until july was huge as well (Not sure of the numbers and you could check it out). When there is so much selling pressure, the market would have tanked to below 7000 (nifty). People saw what happened in mar 2020 and how it rebounded, the FOMO effect on retail participants was a main factor.

Currently we have active demat account of 89.7 million compare it with the population that we have, it is still miniscule. With the constant barrage of media blitz, saying equity is the only way to attain Nirvana, I mean wealth, more young people are coming into the market. The above numbers exclude the number of people who have invested through the Mutual Fund route.

The point I am driving here is, all of the above could be true, but the main and the only factor which has held the Indian Market is the retail investor. The current narrative which is going around is

Say, FII took out 100 and they have just brought back 10 during the year, and now that FII reluctance to invest in China. Think where the indian market will go even if the FII bring in another 40. So be invested. This is the narrative which is going on among young working class but not so financial savvy people.

The statement might be true, not denying but retail investors investing is the main reason for the stock market to hold on to the current levels. Every year if 1% of our population continue to come into equity, people who have already invested will be wealthy. Invest in Index ETF and forget the noise.
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