Over the last year, when the S&P 500 index is up 40% and the Eurostoxx Index up 35%, the Indian Sensex has gained an impressive 65%. The Indian market recovered well from the first onset of the Covid-19 pandemic. The first wave in India was not too bad and subsided. Last year, Indians retained their confidence in the reform programme of Prime Minister Narendra Modi, recently strengthened by his big win in the election of 2019.
This year there has been some slowing of stock-market progress. The S&P 500 and the Eurostoxx Index are both up around 13% year-to-date, whilst the Indian index has managed a less inspiring 6%, having been up 9% in mid-February.
The market has since been volatile at slightly lower levels. This has reflected both the strong second wave of Covid-19 infections that have plagued the country and some doubts surrounding the popularity and political skills of Mr Modi.
Indian health services have, in places, been overwhelmed by the number of virus cases and have made headline news around the world. India has substantial vaccine manufacturing capacity but has so far only achieved a low level of vaccinations for its own population, with just over 12% having received at least one dose. It is now directing more of the domestic capacity to home use but is also suffering from the US decision to prioritise domestic needs for US capacity.
The rate of new cases is now declining from a high level, with the death rate remaining elevated. So far, India has recorded 26 million cases and 307,000 deaths. Its total deaths are now the fourth largest in the world after the EU, US and Brazil. The recorded case and death rates remain low compared to Europe or the US, given the large size of the population. There is likely to be under-recording in India. Gradually, it is assumed the virus will come under more control as more people gain immunity from exposure and others acquire it from vaccination.
The bad images of people unable to get a hospital bed or to be given life-saving oxygen when they need have been compounded by pictures of bodies floating in the River that people fear died of Covid-19. Mr Modi was blamed for continuing his energetic in-person campaigning, with large rallies in the recent five state elections, and for not banning other large events. His critics claimed these had become super-spreader occasions that had made the pandemic worse.
Since his 2019 election win, Mr Modi has been used to approval ratings over 80%, reinforced by the relatively good experience of the first pandemic wave. This April he lost 22 points of support in polls and his party performed well below his expectations in the five states.
The standing of Mr Modi matters. His is a very personal government where reform and success are linked to his image and actions in the public mind. In his first parliament, he got through the controversial reform of sales and luxury taxes, imposing the new General Sales Tax to simplify and reduce burdens on trading between states within the Indian Federation. He also commenced bankruptcy reform, started to roll back controls on foreign investment in India and claimed he was making India much more business-friendly.
This parliament, armed with a new mandate, is seeking to speed the process of fundamental reform. He wishes to rid India of many of the rules and controls the state imposes on business, wants to privatise or close many state-owned enterprises, and remodel the labour laws. The aim is to promote a fast rise in Indian living standards. The idea is to do what China did over the last three decades, moving large numbers of workers off the land into industrial or service sector jobs that are more productive and better paid. This requires very contentious agricultural reforms as well as new labour laws.
He has now passed the new federal labour laws, substituting four streamlined ones for the 29 he inherited. They await implementation state by state. Employees will have to give 60 days’ notification of a plan to strike. There are minimum numbers of members of a union in a workplace before the employer must recognise it. There are new provisions on conditions of employment, social security and wages.
The agricultural reforms have included the abolition of state government wholesale market monopolies, the liberalisation of inter-state wholesale and of contract farming and agricultural logistics businesses. The aim is to give farmers more choices over the sale of their product and to inject more of the market into these businesses. It is assumed that new contracts and supply arrangements will lead to investment and productivity gains, with labour shedding. There are still many casual badly-paid jobs on Indian farms.
There has been resistance to some of the farm reforms with protests and delays in implementation. Mr Modi is impatient, saying in a recent broadcast that “In every aspect of life, modernization is essential”. His frustrations at reform delayed have spilled over into an authoritarian approach to dissent, arresting some people and placing some of them on sedition charges for opposing reforms. In the world’s largest democracy this can lead to lower ratings and more objections to the reforms he wishes to push.
Since 2014, he has cut Corporation Tax from 30% to 25%, put in a simplified sales tax, cut government controls over the major ports, relaxed rules over foreign permitted investment in areas such as insurance and defence, reformed bankruptcy and allowed companies with less than 300 employees freedom to hire and fire without government control. He has a lot to do to privatise or shut down the 367 identified state enterprises, which include banks and insurance companies, cycle and scooter makers and much more. He has more to do to make it easier to set up and expand a business in India, and to sort out a range of issues with energy supply.
Despite the pandemic, India should strongly grow this year and Mr Modi will make some progress with his economic reforms. He has still to achieve sufficient to make a material difference to attitudes and the scope for improved business success and now needs to ponder his falling popularity which has been an important ally in bringing about the change so far.
The central bank expects 10.5% growth though some other forecasters have shaded it to nearer 9% on fears of the continuing impact of the virus measures. Inflation is pressing up to the top of the 2%-6% target band and rates are at 4.25%. India’s stock market is not cheap, has had a good year but remains a longer-term hope for substantial growth. Per capita income still averages only a little over $2,000 compared to China at $10,000 and the US at around $65,000.
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