India has struggled mightily with a second wave of the COVID-19 pandemic that has overwhelmed its health care system and reduced its economy to a crawl in the past few months. 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 growth rate 7.9 per cent, which fits with the view of Christine Tan, assistant vice president, portfolio management, and emerging-markets specialist at SLGI Asset Management Inc. in Toronto. She sees growth of 7 per cent to 8 per cent. While she believes India’s medium-term prospects are 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,” Ms. Tan says.
Ms. Tan provided a closer look at India’s economic prospects in a recent interview with Globe Advisor. She says India’s economy is benefiting from lower interest rates, focused government spending and initiatives like “Made in India,” a program that has encouraged companies like Apple Inc. and The Samsung Group to make smartphones in India. Other manufacturers are joining them.
SLGI Asset Management has two emerging-markets mutual funds: Sun Life Excel Emerging Markets Fund, subadvised by Schroder Investment Management North America Inc., and Sun Life Excel India Fund, subadvised by Mumbai-based Birla Sun Life AMC Ltd. In Mumbai.
How should Canadian investors look at India?
It’s the largest democracy and the second-largest country in the world with 1.4-billion people. Incomes are growing from a comparatively low base. It’s home to a young demographic in which the median age is 28, versus Canada’s median age of 42.
So, in a world in which 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 follows large- and mid-cap companies that cover about 85 per cent of India’s equity universe. From Dec. 31, 2019 to the worst levels of the pandemic, around the third week of March, it was down about 33 per cent in Canadian dollar terms. Since then, India has rallied. Through the end of May, the index was up almost 82 per cent from last year’s lows.
The government plays a big role in India’s economy, correct?
Yes, that’s true. As part of the pandemic recovery plan, the government announced an increase in infrastructure spending. It provides needed services, but also creates jobs. So, it has a big multiplier.
Specifically, there will be increased spending on railways and roads. There will also be an increase in health care spending. That’s partly related to COVID-19, but also a recognition of the need to enhance health care infrastructure. The Reserve Bank of India is playing a role in the recovery 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 through this program 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 if increases to 3.5 per cent, it would represent significant growth.
Who has the program attracted?
India is the second-largest global market for cellphones. Samsung and Apple have won approvals to build plants. Apple started 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 been approved.
Based on the success of the smartphone initiative, the government has expanded the program to 10 more industries, including food processing, battery storage, auto parts, pharmaceuticals, 5G wireless equipment, and specialty steel.
Where are India’s areas of growth?
The financial services sector has potential because the penetration of basic banking products is low. As incomes rise, more consumers will take on mortgages, auto loans and credit cards, as well as investments and mutual funds. The adoption of digital payments has been accelerated, benefiting platforms like Paytm and Flipkart.
Auto sales were weak before the pandemic, but, similar to North America, there has been a resurgence. One reason is a reluctance to take public transportation. Consumer staple companies also continue to benefit from growing incomes.
What about information technology, where India has an international presence?
Technology is an interesting sector. India graduates 1.5-million engineers every year versus about 200,000 in the U.S. Although India’s population is much larger, this statistic is mind-boggling considering most people don’t think of India as a highly educated country.
India-based publicly traded technology companies tend to be either in consulting or in outsourcing. Companies like Infosys Ltd. INFS-N and Wipro Ltd. WIT-N. They have done well because of the work-from-home trend.
So, the outlook is positive?
Yes. The second wave of the pandemic slowed India’s economic recovery but has not affected long-term growth drivers.
Looking at things from an optimistic perspective, perhaps the pandemic will trigger a prioritization of social, education, and health care investments in India as it has in many countries, including Canada. That would improve 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. Starting June 21, all Indians over the age of 18 will be vaccinated for free.
That gives me reason to be optimistic that India is in the early stages of recovery from what has been an unprecedented difficult and heart-wrenching health crisis.
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.