5 Key Takeaways from USISPF Briefing with Ridham Desai

On Tuesday, July 21, the U.S.-India Strategic Partnership Forum hosted Ridham Desai, Managing Director of Morgan Stanley India, to talk about Indian equity market outlook for 2021. Mr. Desai’s expertise gave attendants an insight to the various factors at play in determining the Indian economy both pre and post COVID, as well as its potential for recovery.

Here are 5 key takeaways from the session:

1. Equity Market Downturn: While the government elected in 2014 created a lot of optimism, due to its sizeable mandate after decades of fractured coalition governments, the positive impact of this optimism in the equity markets took a downturn a year into their term. India began derailing and its stocks consistently underperformed in comparison to emerging market equities. So, while absolute gains of about 50% were seen in the stock markets since March this year, they mask the downs of the stock market for the preceding five years and do not reveal how Indian equities struggle to compete with emerging market cohorts. It also reveals a broader lack of confidence from the markets in India’s future growth prospects.
2. Policy Environment— Restrictive or Enabling? The downturn in the equity market was attributed to a few policy decisions. First, there was a restrictive policy environment for the previous five years, which may have long term benefits, but caused a near term tax on growth. These include the comprehensive Goods and Services Tax reform, the new bankruptcy code, as well as more restrictive real estate regulations. While sustainable overall, these policies created a near term skepticism in the market about India’s prospects. There were also some policy missteps that compounded the issue. For instance, the 2014 administration inherited public sector banks with balance sheets that were in need of government aid. However, the administration did not believe at first that these loans deserved public taxpayer help, which hurt growth, and it was only in 2017 that the banks were recapitalized following a change in the government’s mind. Another decision was demonetization, which served some overall purpose, but dropped monetary aggregates and currency in circulation to huge lows, which were not recovered for about three years. Additionally, corporate decision making on unviable infrastructure projects that created strain on bank balances through loan-taking had an impact. All these factors, in unison, meant that the Indian economy was experiencing some bumps in the road. The market lost confidence that India’s growth rate was trending at 7-8 percent, pegging it at about 5 percent instead.
3. Covid-19 Hit Economy: Even as the policy environment began stabilizing by early in 2020, COVID unfortunately hit and stalled their effects. India’s financial sector was not yet out of the woods, with banks just exiting one non-performing loan cycle and now at risk of another. It is thus important that this does not lead to risk aversion in the banks, leading to low impact loans that slow growth. While COVID has not had the outrageous impact predicted for India, the near-term risk factor remains until the vaccine is available. Prior to the lockdown, India’s PMIs had hit all-time highs in February, offering a glimpse at India’s growth potential sans COVID and reflected changes in corporate tax rates and other government reforms.
4. What can speed up recovery? Externally, there is a push to diversify the supply chain by multinational corporations, and India is being considered a viable option by many. This creates an impetus for Indian governments, and both at the state and central level, to create more investor-friendly reforms. We’re already seeing a surge in services investments, from banks to tech companies who have vested interests in India as a marketplace & India offers strong growth potential to various aspects of tech value chain. Additionally, it was suggested that the government make strategic sales of its assets, through a transparent and confidence-boosting process following the example set in the early 2000s.This has already begun with the government’s announcement of privatizing 5 percent of the railways — a small percentage change representing a huge shift in thinking. Other suggested avenues would be the healthcare sector, where private-public partnerships have been seen to work well in the past. Finally, other reforms updating labor laws and liberating the farmer economy from middlemen will have domino impacts on the economy, boding well for a strong Indian recovery from the current economic crisis.
5. Optimism in India’s growth story: While the session offered insight into the policy background behind India’s equity market underperformance, and pathways for its emergence from this crisis, there was also a great confidence in India’s ability to emerge from the crisis stronger. This optimism was driven from a world-wide V shaped recovery thanks to enormous stimulus, which would certainly buoy India’s recovery as well. Without risk aversion on the part of Indian banks, India’s strong demographics and growth prior to the lockdown created a positive vision for its future.