The government's Atmanirbhar Bharat plan's stated goal is to make India "self-reliant" but not "self-centered". Unlike MAGA (Make America Great Again) or America First policies, it distinctly seeks to shy away from being perceived as isolationist. This is indicative of the importance of foreign investments—both resources and knowledge—to India's economy.
Prime Minister Narendra Modi is a regular at industry conventions and conferences with overseas businesses—another indicator of how important they are for India. During one of these events, he set a $100-billion foreign direct investment (FDI) target for the next two years. As per the department for promotion of industry and internal trade (DPIIT), even at the peak of the COVID crisis, India received $30 billion in FDI in the first half of FY21 (from April 2020 to September 2020), up 15 percent from the same period last year.
It is undeniable that India is steadily improving the business environment through tax incentives, labour reforms, and general streamlining of the regulatory regime. However, in the short term, this increase in FDI seems to be driven by a surfeit of liquidity from developed economies. Interest rates have crashed to near zero or even negative territory for most of these markets. So, it should not be surprising that the yield-seeking investors are piling into emerging markets like India.
We must acknowledge the fact that the fate of FDI in the short-term will largely lie in the hands of the central bankers in major economies like the US and EU and the status of their quantitative easing (QE) regimes.
However, over the long-term, if India continues to rise on the "ease-of-doing-business" charts, we can capture a larger share of FDI flows to emerging markets, irrespective of the absolute amounts. I want to focus on those factors here.
1 Vaccine rollout, demand revival
Just like it was at the SCG (Sydney Cricket Ground) during the recently concluded Australia-India Test match, a lot is riding on this final session of the COVID era. If India can leverage its experience with vaccine distribution and avoid any material slip-ups, we could see some sustained demand revival in large, battered sections of the economy. This will probably bolster investor confidence and we could see it translate into larger inflows and better asset prices.
On the flip side, investors will be wary in case of supply chain issues, unaddressed new strains, adverse side-effects of existing vaccines or fake news regarding the same.
India is well positioned to benefit from the negative sentiment towards China in the West. To fully exploit the same, the government needs to focus on debottlenecking supply-side constraints and policies like production-linked incentive schemes. Companies in sectors like speciality chemicals, pharma, textiles and the manufacturing sector, in general, could be key beneficiaries. Investors and businesses around the world have their eye on India and we must not squander this opportunity.
3 Budget 2021
The coronavirus outbreak has had a devastating impact on the real economy, which had not fully recovered from the fall-out of demonetisation and somewhat haphazard implementation of the goods and services tax. Small and medium-sized enterprises and micro, small and medium-sized enterprises are in a dire need of policy changes and additional support from the government. Hence, the budget to be presented on February 1 is going to be a key early trigger for the markets.
4 Operating leverage
COVID-19 has forced companies to become more efficient and we could see some of that play out in the form of operating leverage, as demand recovers. Increased digital adoption, both on the revenue and cost side, and other cost rationalisation initiatives could lead to robust profit margins and superior return metrics vis-à-vis the BC (Before Covid) era. This will be especially relevant for small- and mid-cap companies, assuming high-quality large-cap companies already run largely efficient operations.
Also, at the price end, while the Nifty and the Sensex grab all headlines, the MS 400 index (a basket of the 400 largest mid and small-cap companies) has just about crossed the level it achieved in January 2018—nearly three years ago.
Buoyant earnings and sufficient headroom in share prices could make 2021 the year of small- and mid-caps from the point-of-view of investors.
We are believers in India's long-term potential as an investment destination. We trust in an unemotional and disciplined approach to asset allocation and remaining invested despite short-term shocks. If the government follows a similar approach to policy formulation and execution, sky is the limit for India’s economy and its attractiveness as an investment destination.
Atanuu Agarrwal is co-founder of Upside AIDisclaimer: The views and investment tips expressed by experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.