While the Covid-19 pandemic has driven a sharp near-term economic contraction, recent corporate commentary suggests that India is recovering rapidly. Consumer demand has recovered close to 90 per cent of the pre-Covid levels and though the number of virus cases in India remain high, the recovery rate has been positive, with the fatality rate below the world average. 
Economic revival continues to be the government’s top priority, with large sectors of the economy now reopened for business. Intent on using Covid-19 as an opportunity to accelerate change, India’s government has pushed through market reforms that can help further redefine the nation’s economy and structural competitiveness for years to come.
The Indian government’s headline policy initiatives are focused around four key areas: rationalisation of labour codes; deregulation of agricultural commodity markets; attracting investment in manufacturing; and outright privatisation of state-owned enterprises (SOEs).
First, the passage of three new labour-code bills by parliament – replacing 24 labour laws – can be a major driver of future impetus around domestic manufacturing. The government sees these labour reforms as a major step towards moving India into the top-10 countries for 'ease of doing business', increasing manufacturing FDI (foreign direct investment) and helping create opportunities to realign surplus labour from the agricultural sector.
Second, legislation has also been passed to deregulate agricultural markets. Historically, India’s agricultural sector has been impacted by low productivity, due to small farm sizes and lower levels of investment in technology. This set of reforms has the potential to drive improved efficiency and increased investment within the agricultural sector, resulting in higher per-capita GDP overall. The surplus labour can also be absorbed on the manufacturing side.
Third, the government has announced a raft of measures aimed at encouraging economic self-reliance including import disincentives, production-linked incentives, tax benefits and digitisation in an attempt to increase the share of manufacturing in GDP from 17 per cent currently to 25 per cent over the next few years. While this is expected to create 100 million new jobs, the knock-on impacts could also see India better develop its consumption potential and boost earnings for domestic companies over time.
The government has granted approvals to 16 applicants under the Production Linked Incentives Scheme (PLI) for manufacturing mobile phones and other consumer electronic products within India. These firms plan to manufacture phones worth $153bn cumulatively over the next five years and up 2.5 times over the last five years. Over 60 per cent of this value (circa $92bn) is aimed for exports – a significant step up from $4bn of exports achieved in full-year 2020. Under government estimates, this is likely to create around 300,000 direct jobs and over 900,000 indirect jobs.
The government has announced plans alongside this to localise manufacturing of 53 critical APIs (active pharmaceutical ingredients) – key material for medicines, set to be enacted via a combination of incentives for incremental sales and the establishment of three mega drug parks to drive sustainable cost competitiveness. It has recently approved an additional $20bn PLI package for 10 sectors including air conditioners, autos, auto parts, textiles and food products. Back calculating as per the PLI scheme, over the next five-to-six years, this could lead to $300-400bn worth of goods being manufactured/processed within the country. As part of the ongoing initiatives, more than 550 products are being targeted for manufacturing in India.
We believe India is set to benefit from broader efforts to decouple from China as companies diversify their supply chains. Japan, for example, has added India as one of the destinations in its $221m extended subsidy scheme – part of the $2bn overall package – announced to help companies unwind from China. We have already seen this trend play out for some specialty chemical Indian companies, which have gained market share due to regulatory tightening in China. We believe this trend could appear in other sub-sectors, to the benefit of small- and mid-cap firms.
Finally, the Indian government’s unambiguous policy towards privatisation of SOEs is recalibrating productivity across traditionally state-owned sectors – a key shift in the context of a fiscally constrained economy.
In a fiscally constrained economy like India, resources blocked within less productive SOEs – especially in businesses where the private sector could do a much better job – should be utilised effectively. Savings from these areas can then be allocated for better healthcare, education, and infrastructure for all citizens. In the past few months alone, we have seen a significant policy shift – where the government is looking for an outright sale of at least three large SOEs, opening the door to privatisation across a much broader range of sectors.
Against a backdrop of major progress in policy reform, the pandemic has further accelerated adoption of e-commerce, mobile and internet payments, online education and telemedicine, thereby creating attractive investment opportunities. Long-term secular tailwinds, headlined by India’s demographic dividend (almost a third of India’s 1.3bn population are millennials), fuelling India’s domestic consumption growth more than any previous generation, infrastructure-driven growth and robust democracy, have the potential to position the economy on a high-growth trajectory for the coming decade.
We believe India is at the cusp of a multi-year growth cycle, which could also underpin sustained double-digit corporate earnings growth. Muted returns of Indian equities, coupled with their underperformance to global equities over the past five years, mean valuations are attractive, in our view, providing investors with an entry point into a once-in-a-lifetime structural growth story.
Hiren Dasani is co-head of global emerging market equity and lead portfolio manager of the GS India Equity Portfolio. The views expressed above are his own and should not be taken as investment advice.