India could experience a resurgence in demand if adequate vaccinations have been administered by the October-November festive season, as consumers preserve cash and accumulate savings. Discretionary demand has been hardest-hit amid health concerns and lockdowns. More support is needed for small and midsize enterprises, notably in the travel, tourism and restaurant sectors. However, agricultural production has been robust, and the government's recent hikes in minimum support prices may cushion rural demand. Manufacturing and capital-goods companies are seeing a revival in order books after almost a decade, partly due to the surge in exports.
Companies have restructured costs during Covid-19, supporting margin and preventing them from fully passing on higher input costs at this stage of recovery.
Source: Bloomberg Intelligence
Cyclicals, exporters and digital, including fintech companies, offer a secular growth runway in India, according to our panel. Exporters may benefit from the geostrategic realignment of supply chains as companies adopt a China Plus One strategy (investing elsewhere to avoid overconcentration). India has already proven its manufacturing prowess with leadership in auto components, agro-chemicals and pharmaceuticals. Digital infrastructure can help companies benefit from the shift to the cloud. Tech also offers a hedge to currency depreciation. The evolving startup culture has been aided by venture capital; soon, about 100 startups may go public.
The logistics sector could see strong tailwinds as the delivery economy accelerates. Cyclicals have been massively underinvested and may grow as capacity utilization inches up.
Source: Bloomberg Intelligence
According to our panelists, India should strive to lessen personal tax rates and improve compliance, as opposed to our radical proposal to abolish income taxes. High rates deter economic growth and put a damper on investment. Tax compliance can be aided by the formalization and digitalization of the economy. The National Rural Employment Guarantee scheme is ineffective at providing rural employment; rapid industrialization and manufacturing growth are required to generate adequate jobs. Taxpayers need to be rewarded with some form of social security.
In our view, India should consider slashing income taxes, which could add $150 billion to consumption. Eliminating personal taxes would cost 2.5% of GDP, but the payback from greater demand, savings and associated activity could be substantial and recurring.
Source: Bloomberg Intelligence
The CIOs on BI's panel believe the Reserve Bank of India should remain dovish, despite inflationary pressures, until growth accelerates. They say it's too early to tell whether the pickup in inflation is structural, as demand remains weak and supply chains have seen disruptions. India's huge borrowing program and fiscal-spending needs supportive monetary policies and reasonable liquidity. Operation Twist and Targeted Long-Term Repo Operations (TLTRO) are some of the steps undertaken by the central bank to contain yields.
India's corporate sector doesn't have much leverage, so rising rates shouldn't disturb equities as long as the economy sustains momentum and small and midsize businesses are taken care of.
Source: Bloomberg Intelligence
Privatization and unlocking the value in India's public-sector enterprises are critical to supporting capital spending in infrastructure. Return on capital for state-owned enterprises remains poor; faster divestiture can yield rich dividends. Infrastructure investments have strong multiplier effects on the economy. According to our panelists, the government needs to step up spending on infrastructure, as India doesn't have long-term funding sources or a deep bond market. Banks can't lend to infrastructure projects due to the asset/liability mismatch. The National Investment and Infrastructure Fund and the Sovereign Wealth Fund can help bridge the funding gap.
Labor reforms and production-linked incentives could boost the manufacturing sector.
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Source: DIPAM, Bloomberg Intelligence