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A long hot battle against the pandemic in India

India has suffered a bad economic hit from Covid-19. The government adopted a stringent approach to lockdown, but could reforms now be at risk?

India has suffered a bad economic hit from Covid-19. The government adopted a stringent approach to lockdown to try to contain the spread, but reforms are now at risk.

Charles Stanley

in Let's talk about markets


India is the world's largest democracy. Compared with its great totalitarian rival China, it appears less organised and less thrusting for all the might of having 1.3 billion people. 

Where China hides problems from the world, or simply presents a false favourable picture of itself, India reveals its divisions and arguments – as all good democracies should. Where China claims an unreal perfection in the world, India strives for improvement against a background of an argumentative Parliament, a factious political system and a slow-moving bureaucracy. As China’s President Xi Jinping becomes more authoritarian, China submits. Indian Prime Minister Narendra Modi cancels question hour to ministers each day in the Indian Parliament, preferring written questions and a big row breaks out.

Since 2014 – and the first election of Mr Modi and his BJP party to office – reform has been in the air. He put through a major change to consumption taxes, consolidating a myriad of different charges and taxes amongst the states of the Indian union into a single, though complex, federal General Sales Tax. He has carried out a banknote and currency reform with a view to getting many more Indians to have bank accounts – and to declare their wealth and earnings to the tax authorities. Today, despite having a much-enhanced majority from the 2019 election, he wrestles with trade union and business reluctance to accept his four-pronged wholesale reform of India's chaotic and widely-ranging labour laws and social security systems. Some of this is familiar to the Congress party, which he defeated to gain office. They also found reform difficult. 

Economic slump

India has suffered a bad economic fall from the pandemic. The government adopted a stringent approach to lockdown to try to contain the spread. As testing increased, so cases continued to rise, leaving a long period of damage to output. The second quarter saw a 23.9% fall in GDP as a result.

The curve of new Covid-19 cases and of deaths is levelling out a bit, though India is now gaining headlines as the overall totals are large.  At 2,981 cases per million, India is well below Brazil at 19,396 and Chile at 21,993. The total deaths of 71,642 gives India a death rate well below the worst, given the big size of the population. Peru and Belgium continue to show far more deaths per million. Nonetheless, India takes the disease seriously – and is still enforcing substantial measures to try to limit the spread. 

The Indian Central Bank has eased policy considerably, taking interest rates down by 250 basis points since February 2019 – even though inflation remains above the 4% target. The Bank has allowed monetary growth to accelerate to 12% on M4 in July – and has attempted to keep sufficient liquidity available in the system to avoid undue stress at a time of constrained business cashflows. The rupee has devalued gently over the last year against stronger advanced-country currencies. 

Mr Modi commands a strong majority in the federal Parliament, with 303 of the 542 seats. The pandemic has affected his plans for reform and faster growth. It has reinforced his wish to be a national leader above the day-to-day political clashes, and to spend more time projecting India onto the international stage. His brand of Hindu nationalism has a strong following amongst his supporters but is worrying to some of the Indian minorities that do not form part of his coalition.

Dispute with China

China has helped him re-orient by its aggression towards India, with military challenges to the border.  Recent polls show strong support for Mr Modi's tough response to Chinese interference and give Mr Modi cover for strengthening Indian ties with the US. In total, 67% of the public have told pollsters they would pay extra for goods made in India, and 90% agree to a boycott on certain Chinese goods. 72% also said they thought India could defeat China in military conflict. We trust they said this in the spirit of wanting to show strength to their rival, without wanting to try it out. 

India's much-needed economic recovery will remain slower than desired until there can be a more substantial relaxation of lockdown. The country is still battling the virus as its main preoccupation. The government will use its majority and distance from another election to position itself as an important country on the US side of the China/US cold war but with a distinctive Indian nationalism that appeals to the Hindu  majority behind the Prime Minister. He is attempting to tackle the continuing problem of poverty with a massive free food grain programme for 800 million people, and a free cooking gas programme for 80 million. The Central Bank will offer as much help as it dares given the inflation position. The country is attracting substantial inward investment and has been keen to encourage the US tech giants to commit more to jobs and activity in the sub-continent.

Public finances have been damaged by the sharp fall in GDP. Mr Modi's much-hyped reform of sales taxes was designed to create more of a single market throughout the country in place of the differing taxes and charges on the same goods in different states of the Union. To sell it to reluctant state governments, which feared a loss of power and revenue, he guaranteed substantial payments to them from taxes to be collected by the federal authorities. These have collapsed badly during the worst of the shutdowns, leaving the state angry at the loss of revenue and the centre struggling to work out how to help them when both are short of tax income. This experience will make it even more difficult to persuade states to give up their individual powers over labour laws to secure a  business friendly reform in this important area.

Indian shares are not particularly cheap, and the story of continuous improvement and reduction of poverty has taken a hit thanks to the cruel rule of the pandemic. Those who are holding for the longer term can await recovery. 

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.


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