India looks forward to a better year

India has experienced a less widespread attack of Covid-19 than the advanced countries of the West. India remains an interesting growth prospect within Asia, a continent we favour.

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  1. Charles Stanley

The death rate in India of 113 per million is less than 10% of the rate of the US and most European countries. Because India is such a huge country, it is still understandably shocked and affected by the headline figure of 157,000 dead so far. The actions the government has taken to stop the spread of the virus caused a large drop in Indian output in 2020 of more than 7%. Many have lost income and small business activity, and many have lost their jobs.

None of this seems to have damaged Mr Modi, India's popular Prime Minister. Despite the loss of employment and income, people think he has done a decent job combatting the pandemic so far.

The IMF thinks India will bounce back rapidly this year. They have pencilled the country in for the fastest growth of the larger economies, at 11.5%. India's own Central Bank puts it a little lower but also thinks it could be in double figures. There are no early elections on the horizon, but recent polling about Mr Modi and his own standing showed him retaining high levels of support – near to 80% – which also happens to represent the share of the Hindu majority in the total population.

One of the defining characteristics of the Modi government is the espousal of Hindu nationalism, though this by no means guarantees that most Hindu people will vote for him. The Congress, India's old governing party, is still finding it very difficult to resonate with the public despite the various mistakes and difficult issues that Mr Modi has raised which have caused wobbles in his support.

Reform not easy

The biggest controversy in Indian economics and politics today is over the reform Bills Mr Modi put through Parliament last autumn to liberalise the agricultural sector. India has many smallholdings and small farms, and a high proportion of the total workforce in agriculture relative to output. Mr Modi is seeking to offer more freedoms to farmers, allowing them to sell directly to supermarkets and food processors instead of going through the state-controlled markets with managed prices – the mardis.

Small farmers are worried they may lose the guarantee of the state to buy their crop and to pay a minimum price so they will have some income. Mr Modi stresses that the reform legislation leaves the mardis there for those who want them and will continue to hold reserve powers for the state to intervene to prevent damaging changes in markets.

Some worry that the private sector will start stockpiling and driving prices higher to make more profits. The government has promised that it will intervene to stop excessive stockholding or price manipulation. The government sees it as a positive reform for farmers, offering them new freedoms and a new way to sell if they wish. The farmers fear the ending of a state-supported and controlled system, which they both understand and find comforting against extreme adversity. 

Farm consolidation?

The Modi government may well wish to see a consolidation of smallholdings and larger farms to stand up to the bigger food enterprises and store groups but needs to show sympathy for the many smallholders who only have a hectare or two of land to till. The government has offered a delay in implementation to calm things down, but the protests against the new laws continue.

The laws are part of wider economic reforms to dismember the different rules and regulations in different states of the Indian Union, which impedes trade across state borders. Mr Modi after all amalgamated individual state purchase and luxury taxes in a common federal-wide VAT system.

The central bank is holding interest rates at 4% in pursuit of its 4% inflation target. Inflation is currently close to the target. The Bank notes upwards pressure on commodities and certain items in poor supply but does not foresee a major surge in prices. 

Debt as a proportion of GDP has risen sharply along with many other countries, from 70% to 90% of GDP, but is affordable at that level. The Sensex index of 30 leading shares has recovered well from pandemic-related falls. As so often, it looks expensive at 35 times earnings, which holders usually justify by pointing to the prospects for considerably faster growth than in the advanced world.

The Index this year has been helped by having more banks and energy in it to benefit from the recovery trade. India remains an interesting growth prospect within Asia, a continent we continue to favour. 

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