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Investment Banking | Quarterly Market Views with Ritesh Chandra

Quarterly Market Views with Ritesh Chandra

April 2021

The cycle of hope and despair continues unabated with the pandemic. While the flattening of the active caseload and the onset of vaccination in January was a source for significant optimism, the exponential rise in cases in February/ March coupled with a sluggish vaccination drive has been a cause of concern. However, unlike the last year, there is a strong degree of resilience and pragmatism amongst the central/ state governments and corporates on dealing with the extant situation. Given the possibility of another national lockdown is very bleak, the overall macro-economic impact will be minimal. The outlook for FY22 GDP growth is still at 11-12%.

The global liquidity glut coupled with a benign interest rate regime worldwide continues to drive capital flows to emerging markets like India in the hope of better returns. This is manifest in record FPI and FDI inflows in fiscal 2020-21 (estimated at ~USD 40 bn* and ~USD 80 bn* respectively) leading to a record level of forex reserves (~USD 582 bn). Investment focused central government expenditure (Gross Fixed Capital Expenditure was up 2.6% in Q3FY21) continues to provide the growth impetus at a time when investments by the state governments and the private sector are sluggish. External trade has shown signs of a pullback and the nascent rebound in exports is likely to accelerate on the back of a higher global growth this year (estimated at 5% in 2021). Corporate earnings continue to surprise positively. With the prediction of a normal monsoon and a record high kharif crop procurement, strong rural incomes are likely to support overall consumer demand. Lead indicators like power consumption, mobility indices, GST collections, CV sales all indicate an uptick in demand. The brunt of the pandemic has been borne by the urban poor and small businesses. Loss of incomes and jobs have meant increased reliance on credit. This is evident from the increase in household debt/ GDP ratio (37.1% in Q2FY21 as against 35.4% in the previous quarter) and the dip in savings rate (10.4% in Q2FY21 as against 21% in the previous quarter). Consequently, consumer demand is likely to remain patchy. The services sector (eg tourism, hotels etc), which comprises a bulk of the Indian economy has also been hit harder than the manufacturing sector.

Against this backdrop, there have been certain policy paradigm shifts that can be game changers for the economy and have a multiplier effect on overall economic activity:

  • The fiscal glide path set out by the Government through Budget 2021 which forecasts a fiscal intervention of ~USD 250-350 bn till FY26m, bulk of which is proposed to be capex driven, will have a significant multiplier on the economy.
  • Digitalization of the last mile has been quick and widespread (e.g. DBT, Fastag, UPI). This is likely to lead to significant formalization of the economy and bring in systemic efficiencies.
  • Production-Linked Incentive (PLI) schemes across 14 sectors have a potential of generating incremental revenues of ~USD 400-500 bn over the coming five years along with a capex of ~USD 30 bn in the scheme period.
  • Labour and agricultural reforms, as and when implemented on ground, are likely to lead to a significant boost in employment generation and eventually boost urban and rural incomes.

The growth trajectory can be disrupted by the spread and periodic recurrence of the virus. Other risks to keep an eye on include commodity price inflation, liquidity and fiscal expansion led inflation, and any indication of a reversal of the easy money policy by the Fed. These can lead to higher inflation, pressure on the currency and potentially higher capital costs thereby slowing down incremental investments.

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