Vijay Kumar Gaba

In past couple of months a number of research reports have expressed concerns over the rural demand in the wake intense second wave of pandemic and subsequent lockdown of economic activities. Some consumer facing corporates have also expressed similar sentiment in their interaction with analysts and investors. The popular views seems to be that unlike last summer, when the rural demand remained resilient despite a wider and stringent lockdown, this year the demand may not show similar resilience. Wider and deeper spread of infection this time is one of the primary reasons behind these concerns. Rising stress in household and unorganized sector is also expected the discretionary spending in check.

In this context, there are few points that need to be noted by investors before forming a negative view on consumption theme.

Record production in crop year 2020-2021

Firstly, as per the third advance estimates for the 2020-2021 crop year, the agriculture ministry has expected record foodgrain production for 5^th consecutive year. India's foodgrain production is estimated to rise 2.66 per cent to a new record of 305.43 million tonnes in the current crop year 2020-21, on better output of rice, wheat and pulses amid good monsoon rains last year.

In the non-foodgrain category, the production of oilseeds is estimated at 36.56 million tonnes in 2020-21 as against 33.21 million tonnes in the previous year. Sugarcane production is pegged at 392.79 million tonnes from 370.50 million tonnes in the previous year, while cotton output is expected to be higher at 36.49 million bales (170 kg each) from 36.07 million bales in the previous year.

Given the remunerative pricing and higher volume of crop conventionally augur well for the overall rural income.

Normal monsoon forecast for 2021

The India Meteorological Department (IMD) has forecasted a normal monsoon for 2021. As per IMD’s latest forecast, Southwest monsoon, starting in June, is expected to be normal at 98 per cent of the Long Period Average (LPA).

This week, the widely-respected Australian Bureau of Meteorology (BOM) has also ruled out the likelihood of the rain-disrupting El Nino phenomenon over the next six months. Meteorologists say that a low probability of El Nino is certainly good news for the monsoon, although the complex weather system depends on many other factors.

A good monsoon usually means another year of good bumper farm production and consequent positive impact on the rural economy and consumption demand.

Second wave weakening and economy unlocking

In past one week, the second wave of pandemic has shown a clear tendency to decline. Further improvement is expected over next couple of weeks. It is likely that the mobility restrictions may begin to ease as the Kharif sowing season approaches. It is therefore likely that the income loss and spending curbs (due to mobility restrictions, health concerns, curtailed marriage spending etc.) seen in 1QFY22 may not spill over fully to the next quarter.

Indubitably, full reopening of economy and normalization of household spending may take at least 3 to 4 more quarter, till a significant proportion of the population is inoculated. Consequently, the economic growth for FY22 earlier projected to be in the range of 11-12%, may get constricted to 7-8%. This implies that Indian economy will attain the FY20 level of economic activity only in 2F2022 only.

My personal assessment of the rural and some semi urban areas in UP, MP, Punjab, Haryana, and Chhattisgarh is as follows:

·         Household finances have been damaged across the state, especially in the lower income group families. Lower income and medical expenses have eaten up savings and overall debt level has risen (most of it informal or friendly). The expenses on education and health have risen for a common household. For 5% households these trends may be structural due to loss of life or permanent employment. Lenders (formal or informal) will have to share some burden of this in near term.

·         The consumer confidence for discretionary spending is materially lower. However, two wheeler and smart phone/tablet may not be discretionary in most cases. Clothing, jewellery, home renovation, wedding, etc are some of the discretionary items that may cut material cuts. Down-trading in staples, personal care, shoes, home appliances, personal vehicles is also clearly visible.

·         The credit worthiness of an average household has diminished. The personal loan segment has been witnessing maximum growth in past few years. A slowdown in this segment may be inevitable.

·         The demand for farm input remains robust. Farm credit disbursement however may have slowed. The worst impact is from contraction in farm credit from informal sources. How efficiently this conundrum is resolved, may have material impact on the growth of rural economy. Implementation of farm laws in letter and spirit would be critical in resolving this situation.

·         The loss of life is unfortunate in any case and under any circumstance. In rural area, the Covid fatality rate is materially more in second wave as compared to the first wave. However, given the disguised unemployment and underemployment, the economic impact may not be as severe as many analysts might be anticipating. Not more than 5% households in rural areas have borrowed money to get treated at private facility in towns.

·         Pandemic has actually resulted in upgrade of healthcare facilities in many tier2/3 towns and villages. Hopefully much of this improvement will stay post pandemic also which will be a major positive for rural economy of India.

·         In rural and semi urban areas there is resistance to vaccines. Much of this resistance is result of misleading propaganda by ignorant, mischievous and/or malevolent elements. So far the institutional effort to counter this misinformation campaign in grossly inadequate. Recover would largely depend on how fast we convince people to get vaccinated and actually vaccinate them.

Based on my assessment I would not be too worried about consumer staples beyond couple of quarters. A material correction post 1QFY22 results could actually be a good entry opportunity. I would be extremely cautious about retail lenders, especially unsecured loans, and sale of premium vehicles. Appliances sales may miss this summer season, but might see a near normal festival season post monsoon.

In July 2007, investment bank Bear Stern announced that couple of its hedge funds have gone bust. These funds were primarily investing in derivative securities with home mortgages as their underlying. It was later unfolded that the underlying for these derivatives were actually a web of complex financially engineered instruments where actual underlying security was of very poor credit quality. This was the first time when “sub-prime” entered the popular market jargon; which essentially meant that though a derivative financial instrument is rated of investment grade, the actual security underlying that derivative is of sub-standard quality.

The market briefly took note of this event correcting sharply. However, the event was soon forgotten as a standalone instance that could not have impacted the overall markets. Subsequent months witnessed one of the sharpest global markets rallies.

In January of 2008 it was realized that Bear Stern was just a tip of the iceberg. The malaise of sub-prime was all pervasive and had impacted trillions of dollars in derivative instruments. What started with Bear Stern, soon engulfed the entire world. Many large banks and hedge funds were found to be infested with this termite. Not only banks, it has hollowed finances of many sovereign governments like Portugal, Iceland, Italy, Greece, and Spain (PIGS) etc.

What followed was total chaos. The global market froze. Trade and commerce was hit as banking channels were shut and credit frozen. The giants like AIG, CITI Bank, The Federal National Mortgage Association (commonly known as Fannie Mae) and Federal Home Loan Mortgage Corp (commonly known as Freddie Mac) etc came to the brink of disaster. Some of the top US investment banks like Lehman Bros, Countrywide and Merrill Lynch etc. could not survive.

To mitigate the disaster, the central banks and governments devised some innovative monetary policies (commonly known as Modern Monetary Theory or MMT). Under these large central bankers started an unprecedented quantitative easing (QE) program, which is nothing but an euphemism for printing new money and buying stressed assets with that money to support the market from collapsing. US Treasury also unveiled a US$800bn Troubled Asset Relief Program (TARP), under which it financed the stressed lenders by infusing equity or extending liberal credit. TARP was unwound in 2014 with US Treasury actually earning some money out of this.

The QE program has been extremely successful in at least one of its stated objective, viz, ensuring financial stability. The sovereign default crisis in peripheral Europe was totally averted. Global markets reopened immediately and credit flow restored. The asset prices were not only normalized but exceeded their fair value in couple of years. The other objective of faster sustainable growth is however yet to be achieved.

The Central Banks, primarily US Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE) and Bank of Japan (BoJ), however continued their QE program, though the extent of printing money has been tapered. To mitigate the impact of pandemic, central bankers have again started to expand their balance sheets (printing money).

Back at home, RBI had resisted any QE in the wake of global financial crisis. The stimulus given by the government of India was also very limited, as Indian economy was not directly impacted by the crisis. None of our institutions were meaningfully involved in global Ponzy schemes of sub-prime mortgages and credit default swaps (CDS). Overseas branches of few banks lost some money in forward forex contracts and underwriting sub-prime papers, but nothing to threaten their existence or impact the domestic financial system meaningfully.

The economic crisis due to pandemic is however very different. It has directly impacted our economy and financial system. Besides, the financial system was also struggling with the lingering impact of the large credit defaults of IL&FS etc. RBI therefore has to step in along with the central government. While the central government has done multiple tranches of fiscal stimulus, RBI on its part has started its own version of QE program, with the hindsight gained from the global experience of past one decade.

Through this program, it has successfully managed to keep bonds and currency market stable; supporting the government’s expanded borrowing program, improving the current account and comforting the foreign investors who could be panicked if INR exchange rates fluctuated wildly.

The collateral benefit of RBI’s QE program to the government has been huge interim dividend of Rs911bn for FY21. The RBI would have made huge profit in trading of (a) government bonds (LTRO, Twister etc.) in which it buys bonds of shorter maturities and sells bonds of longer maturities and (b) trading of INRUSD by selling spot USD (to keep INR stable) and buying longer term swaps, or the other way round.

Given that RBI usually buys the asset under some stress (bond or currency), has the ability to print money, and need not bother about the MTM losses on its positions, the chances of it losing money on its trades are remote. It is therefore reasonable to assume that RBI shall continue (and even increase) its trading activities in years to come. It is too easy and lucrative source of income and managing markets to give up easily.

There will be no surprises to see (a) the finance ministers providing higher dividend from RBI in years to come; and (b) senior bankers with rich experience in managing treasuries being at the helm of RBI.

In past few weeks we have seen some very interesting debates over the prospects of inflation forcing central bankers to change the course of ultra-loose monetary policy and thus derailing the global recovery. There have been strong arguments on both the sides. However, the debate seems to be still inconclusive. There are many reasons for strong disagreements. For one, the debate suffers from historical prejudices and does not completely factors in the fast changing demographic and technological factors. It may also not be fully accounting for the fast evolving sustainability concerns and consequent changes in the global trade and commerce.

Nonetheless, I still find it pertinent to take note of divergent views on the expected trajectory of inflation. Recently, two reputable experts Martin Wolf (Financial Times) and David Rosenberg (Rosenberg Research) published their views on inflation expectations. Both the experts are widely recognized for their biases, and these mutually divergent views do suffer from these biases. Regardless, these views are significantly educating and worth taking note of.

David Rosenberg

The argument that Money supply against money velocity is not leading right now to an inflationary conclusion may not be well founded. Look at wages. Look at all these companies announcing wage increases. After Trump cut taxes on the corporate side and allowed companies to repatriate tax free their earnings from abroad back home and all these companies, 4% of the corporate sector announced wage and bonus increases back in early 2018, some bellwether companies too. So where was the big inflation coming out of that?

Rosenberg essentially agrees with Fed Chairman Jerome Powell that the recent acceleration in inflation seen in April will be temporary. He opines that “What's going on isn't a fundamental "regime shift", but rather a "pendulum" swinging back to the opposite extreme following the sudden deflationary demand shock caused by the pandemic.”

The factors that contributed to this surge in prices are already starting to fade. Commodity prices are falling back to earth, supply chain shortages are slowly being addressed, and leading indicators already show a dramatic increase in exports out of Korea and Taiwan, critical sources of semiconductors. Meanwhile, container ships that are "filled to the brim" are lingering outside the ports of LA and Long Beach, the two busiest ports in the country, as COVID concerns continue to delay the unloading of these ships. With all these signs that supply chain snarls are quickly being worked out, to suggest that the supply will not come back to me is ridiculous.

On the demand side of the equation, federal stimulus has created a sugar high that will wear off by the fall. Around that time, all the workers being kept out of the labor pool by generous government benefits will be forced to look for work again, and the "fiscal withdrawal" will emerge to suppress aggregate demand just as supply levels are normalizing. The fiscal policy and the short term nature of the stimulus has just accentuated the volatility in the data. So, come the fall, we will start to see the re-openings having a positive impact on aggregate supply at a time when we shall see fiscal withdrawal having a downward impact on demand. And so a lot of the inflation seen today is going to reverse course either by late summer or early fall.

Last week, data indicated that productivity is running over a 4% annual rate. Not clear if it is a secular or structural change. But one thing is clear that in the weakest year for the US economy since 1946, it was the best year for productivity in a decade. The corporate sector actually had its best productivity performance in a decade in the same year that we had the worst year for employment since the 1930s.

The TIPS market shows that most inflation expectations being priced in are still "very near term", and that spreads between twos and fives, fives and tens, and twos and 30s shows there's been "no big outbreak of longer term inflation expectations.

They're just telling you that right now we have a tremendous dislocation. And yes, it's going to probably gonna last a few more months. It's not just your base effects. There is some real price increases coming into the fore. But what would you expect? We just had a 10% increase in airfares and the CPI index, they're still down 20% from where they were pre-COVID. You know, the sports tickets and the like that were up 10% in April. You know they're down significantly for where they were pre-COVID. And so there's still tremendous amount of distortions.

(With inputs from www.zerohedge.com . Read the full interview of David Rosenberg here)

Martin Wolf

Milton Friedman said that “inflation is always and everywhere a monetary phenomenon”. This is wrong: inflation is always and everywhere a political phenomenon. The question is whether societies want low inflation. It is reasonable to doubt this today. It is also reasonable to doubt whether the disinflationary forces of the past three decades are now at work so strongly. It is hard to believe these emergency monetary policies should continue for years, as many at the Fed think. I doubt whether they should continue even now.

The jump in US annual consumer price inflation to 4.2 per cent reported last week was a shock. But was it a good reason to panic?

Goldman Sachs notes that the proximate causes of that jump lie in travel and related services, where prices are rebounding from depressed levels, and in some goods, where a post-pandemic surge in demand has run into temporary shortages and bottlenecks.

The Commodity prices have jumped upwards. But prices are not that high by historical standards and are well below past peaks.

Meanwhile, the “break-even rate” — the difference between the yield on conventional and inflation-indexed US Treasuries — has risen sharply, though still to only 2.5 per cent over 10 years. This indicates a rise in inflation expectations and concern over the risks of inflation. Bloomberg’s John Authers notes that forecasts by consumers and professional forecasters have also risen, with the former expecting close to 6 per cent inflation and the latter 3 per cent over the next year.

Both monetary and fiscal policy settings are, by historical standards, wildly expansionary, with near-zero interest rates, exceptional monetary growth and huge fiscal deficits, even though the IMF suggests that the US economy will be operating above potential this year.

There is a large overhang of private savings waiting to be spent and surely a great desire to get back to normal life. Maybe, these will not be the “roaring 2020s”. But they might be far more economically dynamic than most suppose.

While I understand why the Fed changed its monetary framework, I am unpersuaded it was a good idea. It means driving while looking into the rear-view mirror. It would surely be better to learn from past experience how the economy works than to try to compensate directly for historic failures. In particular, the new framework creates uncertainty over how the Fed intends to make up for the past shortfalls.

The politics have changed. One would have to be at least 60 years old to have experienced high inflation and subsequent disinflation as an adult. The government and substantial swaths of the private sector have huge debt liabilities and borrowing plans. Joe Biden’s administration is determined to ensure that this recovery does not repeat the disappointment of the previous one. The stock market is more than generously priced by historical standards, with bubble phenomena everywhere. The doctrines of “modern monetary theory” are highly influential, as well. All this together has strengthened lobbies for cheap money and big fiscal deficits, and weakened ones for prudence.

Given all this, doubts about the Fed are reasonable. We know that it is politically easier to loosen than tighten monetary policy. Right now, the latter is going to be particularly unpopular. Yet if a central bank does not take away the punch bowl before the party gets going, it has to take it away from people who have become addicted to it. That is painful: it takes a Paul Volcker.

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 The strong rally in global metal prices, and consequently metal producers, appear to be faltering. Chinese authorities have taken a number of measures to calm down the steel and iron ore market. Iron futures have fallen sharply in past couple of weeks. Besides, steel and base metals like copper and aluminium have also corrected sharply from their recent high levels.

A few brokerages who were extremely bullish on metals from midterm viewpoint have also turned little cautious. For example, in a recent research note JM Financial stated that

“The recent spike in the headline inflation in several countries, including in the US, has been led by steep rise in global commodity prices, including metals, soft commodities and crude oil prices….”.

“For us the rally over the past 12 months was fairly predictable. But things are not as clear looking forward. We believe that market indicators have run far ahead given the context of the underlying strength of the economic recovery that is still nascent and significant supply side factors including production cuts by China in case of steel, by OPEC in case of crude oil production, and bottlenecks across various input items. Given our assessment of still weak pricing power in the manufacturing sector despite the recovery, the rising cost and inflation pressures can slow growth and consumption. There can also be supply responses to steep rise in commodity or input prices. Both these will cool off the commodity rally. Indeed the recent news indicates that the supply-demand equation for Chinese steel is now weighing on the other side.”

The note concludes that the historic low pricing power of manufacturers is incongruent with the high commodity inflation and therefore unsustainable. It is felt that “The probability of pick up in output prices in response to rising cost is lower than decline in commodity prices.”

But there are other brokerages like (Kotak on Aluminium and Nomura & CLAS on Steel) which have not yet considered revising their outlook.

A recent note by Kotak Research emphasized that “Chinese aluminum smelters are facing environment-led production restrictions whereas capacity cap is limiting future additions. With strong sequential demand recovery, global utilization has reached a decade high, has limited spare capacity and thin pipeline of fresh additions.” The brokerage accordingly forecasts “a deficit market from CY2022E to keep aluminum prices elevated and upgraded our price assumptions by 30%/19% for FY2022/23E.”

The rating agency CARE, expressed a balanced view in a recent note. It highlighted that “The demand for base metals looks strong as more countries emerge from the pandemic with strong recovery anticipated in the global economy. Economic data from US and European market have improved since April and the US dollar trended lower which is also giving supporting metal prices. The current demand fundamentals for copper, aluminium and tin are robust and future supply will need to respond to increased demand.” The bullish view was however qualified by risk from Chinese action. It read, “, on the downside risk Chinese authorities have announced that they will track commodities prices more closely, and are prepared to take measures to steady raw materials prices. High commodity prices will also increase the project cost of infrastructure development activities announced by the major economies to tide over the pandemic driven slowdown. High commodity prices of copper and aluminium will also increase the cost of transitioning to green energy and may lengthen the time taken to reach the climate goals.”

The market however seems to be embracing the idea of peak commodity inflation with Nifty Bank outperforming Nifty Metal by 7-8% in past 3days. It is to seen whether this divergence is beginning of a new trend or just a minor correction in a midterm trend.

The present trends indicate that the Second wave of Covid19 pandemic in India may have peaked in most of the states. In the rest of the country, it is expected to peak in next 4-6 weeks. This should ease the pressure on healthcare ecosystem and bring some relief to the panicked citizens.

The government sources have indicated that India will have enough supply of Covid19 vaccines by end of 2021, and most of the population will be inoculated by the end of FY22. Various scientists have cautioned that we may see another wave of pandemic. However, the global experience so far is that any further spurts in the intensity of the pandemic may not be as devastating as the second wave due to better immunity and preparation of citizens against the virus; and improved healthcare ecosystem. This immunity could develop due to vaccination, infection in earlier waves and/or life style improvements induced by pandemic itself. The greater awareness amongst citizens and healthcare professionals may also help in containing the impact of futures spurts in the intensity of pandemic.

Notwithstanding the uncertainties and skepticism (or cynicism in many cases) witnessed in past 15 months, the thought of a victory over pandemic is definitely comforting.

However, this by no means implies that impact of first couple of waves will be fully mitigated by end of this financial year. I feel the devastation caused by pandemic will take many years, may be a decade, to mitigate. The damage caused to businesses, families, personal finances & health is overwhelming and would require mammoth effort at government, community and personal levels to heal. In particular, the rehabilitation of the impacted families may require mission level effort.

Loss of livelihood

Many families have lost their livelihood. Most of these families are from the bottom half of the pyramid who have lost jobs or their self-owned enterprises are no longer relevant. However, a significant part of these families could be from lower half of the middle class. Some families have lost their single bread earner. Some businesses have become redundant for good. Some families had to incur substantial debt for Covid19 treatment. Some families are left with members with severe disabilities or complications that will take long time and/or significant money to manage/cure.

It is pertinent to note that the pandemic has happened when the economy was already stressed for some years. Numerous smaller businesses were becoming redundant due to twin shocks of demonetization & GST. Bank credit had squeezed and margins dwindled. The larger businesses were gaining market share from them. Banks were reluctant to lend money to them. Besides, growth of ecommerce also led to consolidation of markets and hence lower margins for smaller players. Pandemic just hit the final nail for many of them.

Many street vendors, tutors, trainers, mechanics, etc have permanently lost their jobs as customers have shifted to digital platform for delivery of goods and services. Of course some smarter once have adapted digital methods for delivery, but a large number is facing redundancy for now.

Damage to psyche

The pandemic has caused psychological disorders to a large number of people. Severe illness, loss of close family member, prolonged lockdown, loss of livelihood etc are causing a variety of disorders like anxiety, depression etc., amongst children, young and old alike.

Many unprivileged children who were brought to schools with great effort are out of school again because either their parents have been displaced or cannot afford digital access. Many of these children are showing behavioral changes.

A number of health workers who have worked tirelessly for past one year are also mostly stressed and seen suffering from behavioral issues.

Cynicism and disbelief in system

The behavior of some unscrupulous elements during the pandemic has raised the level of cynicism and disbelief in system in common man. The viral news of people hoarding and black marketing lifesaving drugs, medical appliances and apparatus is broken the confidence of many hardcore nationalists. Exponential propagation of few instances of overcharging by ambulance operators and cremation priests etc has further dented the confidence of people.

The murky war of words between various politicians and their supporters on social media and mainstream media to safeguard their political turf during this extremely sensitive period is further strengthening the cynicism and disbelief.

Covid has indeed triggered a strong community bonding. Exemplary community effort is being made to help fellow citizens. Millions of volunteers and health workers working tirelessly and selflessly. Unfortunately have not received prominent coverage in media and damage has been caused to the social belief system.

Not comparable situation, but post 1984 riots similar conditions had developed for about 1500-2000 Sikh families in Delhi. It took more than two decades to bring their life to near normalization, though many scare still remain.

Given the pan India impact of the pandemic, it would definitely require a decade of mammoth mission scale effort to bring life to near normal.

For investors, discretionary consumption and financial are the sectors that need to be watched carefully.

It would be fair expect that the rehabilitation effort (a) will keep fiscal pressures high and will not let yields fall much from these levels; (b) will not let tax rates ease (could rise) anytime soon.

A recent report published by The Indian Private Equity and Venture Capital Association (IVCA) and Ernst & Young (EV) gives a fairly detailed view of Indian Ecommerce and Consumer Internet Sector in India. The report highlights how rapidly this sector has been growing in India in past few years. It also indicates towards the future of business and direction of growth. Obviously, the trend in India are part of a larger global trend and is greatly influenced by the global patterns.

The key highlights of the report could be noted as follows:

·         In 2020, E-commerce and Consumer Internet companies raised over US$8 billion in PE / VC capital spread over 400 deals, giving rise to 9 new unicorns. Edtech and hyperlocal segments led the investment activity, together accounting for over 40% of 2020 investments and witnessing 5x and 2x growth in funding value respectively over 2019. Fintech and social commerce continued to witness traction by investors as the pandemic significantly increased online transactions and interactions.

·         The Indian e-commerce segment is witnessing increased activity in small size investments, giving impetus to young start-ups. Over 75% of the PE/VC deals over the past two years have been small-ticket investments, indicating an increase in early stage investments year-on-year.

·         Majority of funding is towards building supply chain; expanding into new segments; global expansion; acquisition or consolidation; bring innovative product offerings to the market.

·         There is also a new class of angel investors comprising experienced professionals and successful entrepreneurs who are investing alongside institutional investors, which helps investee companies source talent, gain operational and strategic benefits.

EdTech – bridging the accessibility gap

·         Education industry in India has developed significantly over the last few years. Now, however, it faces challenges such as shortfall of 1 million teachers and unequal distribution of current teaching staff. Nearly 0.4 million schools have less than 50 students each and a maximum of only 2 teachers. The EdTech sector, equipped with technology and innovative models, is creating new learning methods and extending the accessibility and reach of education system via online channels.

·         Increase in digitization, rapid growth in the start-up ecosystem, the ever evolving consumer base and the COVID-19 situation has given the EdTech sector a huge growth opportunity. With millions of students made to sit at home, their urgency in shifting towards online education was obvious and this is what led to the required boost for this sector. The impact is visible not only from the rise in EdTech adoption but also from the positive investor thrust foreseeing a huge market opportunity in the sector.

·         EdTech vernacular language learning continues to be one of the biggest trends in the market as only 10%ofIndia'spopulationcanspeakEnglish

·         Startups are now providing platforms to teach, train and engage the working population.

·         Th EdTech market is expected to grow to US$3.5bn in 2022. The funding in this pace has increased from US$742mn in 2018 to US$1.8bn in 2020.

FinTech – Future of finance

·         As of March 2020, India and China accounted for the highest fintech adoption rate in the world's emerging market. India stood at an 87% adoption rate compared to the 64% global average.

·         UPI payments have skyrocketed with online banking becoming the new convention in the country. Around 1,000+ fintech start-ups in India spread across diverse areas such as digital lending, digital payments and wealth management are offering impressive emerging tech-based solutions. Investments industry category is also getting traction from users as retail investors are opting the new discount brokers for investments in IPOs, mutual funds and ETFs, etc.

·         Total investments in India’s FinTech sector crossed the US$10 billion mark over the last four and half years (CY16 to 1H20). Out of total 21 unicorns in India, around one-third are fintech companies.

Gaming – the world leader

·         India's gaming industry is valued at US$930 million and is ranked number one in the world. According to the All India Gaming Federation, online gaming grew 12% during the lockdown period, with a remarkable growth in online card games and digital sports.

·         Mobile gaming makes the largest share of the gaming market because of access to affordable smartphones growing at 15% YoY for the past five years in India, high-speed 4G internet penetration and the world’s lowest data tariffs. Together with the rise of mobile games, these factors feed into India’s youth having a growing appetite for content.

·         The online gaming boom triggered by the coronavirus pandemic has channelled hundreds of millions of dollars into Indian gaming startups. There is equal interest from financial institutions as well as strategic capital looking for partnerships and acquisitions in India.

·         Many home grown game developers are introducing made-in-India localized games such as Teen Patti and Rummy, leading to a rise of home grown games. Online gaming platform announced a launchpad to Indian gaming studios and developers who develop content with a special focus on Indian culture and folk tales.

B2C ecommerce – new retailing paradigm

·         The rapid increase in the number of internet users has attracted a number of new budding entrepreneurs to set up establishments by flooding the market with innovative pricing and stocking practices (marketplace vs inventory) while traditional players (brick and mortar stores) are catching up. Availability of numerous choices in terms of brands, discount offers, reduced delivery time, personalization, cash on delivery, digital payment infrastructure and easy returns have been major factors for development of the B2C e-commerce.

·         Companies are creating an omni-channel presence, blending online shopping and offline retail to overcome trust issues of customers. Leading e-tailers in India are planning to open brick-and-mortar stores. Digital B2C companies have also invested in creation of brands which attract young millennial crowd comprising of a majority of the online shoppers who tend to be more brand conscious. These companies are forming innovative product bundles aligned with the needs of customers and thus ensuring greater customer engagement.

·         Through its Digital India campaign, the Government of India is aiming to create a trillion-dollar online economy by 2025. India e-commerce is expected to reach US$99 billion by 2024, growing at a 27% CAGR over 2019-24, with grocery and fashion/apparel likely to be the key drivers of incremental growth. Online penetration of retail is expected to reach 10.7% by 2024, versus 4.7% in 2019, while online shoppers in India are expected to reach 220 million by 2025.

·         Pandemic has accelerated the e-commerce industry in India by a decade, revolutionizing the way brands operate, run, and grow their businesses, as well as how consumers choose to shop and pay. As per Nielsen India’s E-commerce consumer panel, there was a double rapid increase in average spend of online shoppers for various categories.

·         As per survey, 73% of Indian respondents are willing to spend more on convenience.29This is also evidenced by a rise in adoption of online shopping, especially in non-traditional categories such as groceries/medicines.

·         Ecommerce companies are collaborating with Fintech players to provide credit access to consumers for seamless shopping experience.

B2B ecommerce – adding efficiencies to supply chain

·         The traditional B2B commerce faces various challenges such as a long chain of intermediaries disrupting the supplychain capabilities and end-user experience, shortage of supply chain financing and lack of credit facility for online deals. This is leading to rise of eB2B which offers higher capital efficiencies and effective digital supply chains.

·         Rise in B2B startups has been attributed to the digital transformation of businesses including enterprises, financial institutions, hospitals, small businesses, government, etc. Brings to front the opportunity to bring efficiencies into the B2B supply chain via richer data and automated processes (payments, logistics).

·         Companies are adopting AI, Big Data and Blockchain technologies for real time tracking of orders and reduce the overall cost of operations.

LogiTech – optimizing supply chain

·         With growing retail and e-commerce sales, last-mile delivery is an especially attractive and underserved opportunity. B2B logistics startups are offering technologies and solutions to meet the needs of large supply chain and logistics organisations, from warehousing operations to demand forecasting, highlighting a wide scope for technological disruption.

·         Leading e-commerce companies are adopting third-party logistics to simplify supply chain solutions, ensure timely delivery of products and monitor issues regarding tracking, shipping, warehousing, and inventory worldwide.

·         Start-ups in this segment are developing solutions aimed at improving multiple facets such as productivity, transparency, visibility and operational and cost effectiveness. While majority of the start-ups in this space are aggregators of third-party truckers that provide full stack solutions to customers, a few of them own a portion of their fleet also.

·         Logistics tech start-ups found more customers as well as investors as a result of the COVID-19 pandemic. These startups have helped the companies to reach out to customers even during the lockdowns.

·         As logistics tech grows, supply chain and logistics security is a top priority for enterprises. Few Indian startups are also working to promote blockchain adaption in the Indian logistics sector.

AgriTech – The new frontier

·         Contributing 16% to the GDP of India and offering employment to almost half the population, the agriculture sector continues to be loss-making for majority of farmers due to small landholdings and limited access to technology, credit and the market. In recent years, Agritech start-ups have come up aiming to fix these issues, leveraging technology and innovative models. In the last five years, India’s Agritech start-ups have been mushrooming in spaces such as crop advisory solutions, B2B Agri marketplaces, rural fintech enterprises and farm-to-fork platforms.

·         Agritech players are looking to own the end-to-end relationship with the farmer, right from input selection and delivery to crop management using precision agriculture to quality grading and procurement of produce. Players can also leverage data across these stages of the value chain to offer financial services to farmers. Agritech firms are also exploring integration with e-commerce platforms.

Hyperlocal –on demand delivery

·         The hyperlocal market in India has been driven by rising number of start-ups and on-demand delivery preference of the consumers. Collaboration with merchants and customers through a flexible application acts a business model for Hyperlocal firms. The market has witnessed significant competition in terms of emergence of various firms such as Dunzo, Grofers, Ubereats and others.

·         At present, only ~10% of the 700+ million internet users in India use online marketplaces.39This indicates a lack of trust and serves as a launchpad for hyperlocal e-commerce that encourages purchases from neighbourhood stroes. Technologies such as Geolocation and contextual targeting tools have effectively driven the e-commerce sector into hyper-localism. Hyperlocal players continue to use AI/ML capabilities to focus on solving key issues like route planning, estimating optimum time slots and overall servicing costs.

·         2020 witnessed US$1.6bn investment in hyperlocal sector.

·         E-commerce firms are focusing on a hyperlocal strategy, leveraging a network of thousands of small stores for faster deliveries across cities and extending their reach into smaller towns.

·         Start-ups in the hyperlocal space are increasingly leveraging digital technologies such as data science and machine learning to enhance customer experience, improve delivery logistics, managing inventory and forecasting demand.

Health Tech – Pandemic accelerates the adoption

·         In India, the doctor-to-patient ratio in the healthcare sector stands at 1:1596 (1:1400 WHO standard), which shows the enormous potential lying in front of HealthTech start-ups in the country.40 Currently, the healthcare situation comprises hospitals operating in its full capacity and overworked doctors. This is making it difficult for people to get primary care when needed. In this scenario, utilizing technology-based solutions such as telemedicine, AI/ML-based predictive and diagnostic analysis and digital health records can play a crucial role in speeding up India ‘s fragmented public healthcare system.

·         Home grown health tech start-ups led the development in Indian healthcare infrastructure in the telemedicine and online pharmacy wave. In terms of outlook, telemedicine is expected to remain at the top with a CAGR of 31% to reach a market of US$5.5b by 2025.

·         An increasing number of people are consulting with doctors remotely through consumer-facing solutions. Online Indian healthcare platform recorded 600% growth in online consultations between March and August 2020, and in December 2020 reported a 250% increase over a period of six months in its telemedicine subscription plans. Many physicians, including specialists have started to offer remote consultations.

·         The healthcare culture has started to transform from reactive to proactive or preventive wellness, as consumers become more aware. This has resulted in the growth of segments such as wearables, fitness at home, and health and wellness solutions.

·         India is in the nascent stage of adoption of digitizing patient records. Some large and specialty hospitals have also adopted the practice. Big data closely works on addressing multitude of challenges once patient health records are digitized, offering better patient care.

Social commerce – new rules of engagement

·         Rising penetration of smartphones and internet has brought millions of Indians online in recent years, turning social platforms into powerful distribution channels for many businesses, who are leapfrogging web and going digital with social-first models. E-commerce has been dominated by a few large players over the years, but the rise of social commerce is now paving the way for a more distributed model that is built on community, connection and trust. Social-led models will help redefine the landscape for smaller players over the next few years.

·         Social commerce platforms are emerging as facilitators to ease the process of transition and growth for India’s offline retail businesses amid the coronavirus lockdown.

·         Companies are leveraging reselling model where the user can browse products listed by sellers on the app, and market them in their community as resellers, using WhatsApp or other platforms, adding their profit margin to the product.

·         Facebook Shops are free to setup. When setting up a Shop, businesses can choose the products they want to feature from their catalogue, and can customise the look of their shop with a cover image and accent colours. As consumers, Shops can be found on businesses’ Facebook pages and Instagram profiles.

·         There is an increasing trend of leveraging messaging apps such as WhatsApp for e-commerce. Over 1 million sellers are using WhatsApp for business in the country.

Travel & hospitality – local global

·         With the rise in technology, travel and hospitality industry has embraced e-commerce. Companies are increasingly leveraging digital technologies such as AI, ML, AR/VR, IoT and Big Data analytics to enhance customer experience by providing personalised and customised travel services.

·         The global travel and tourism industry is estimated to lose US$2.7 tn in 2020 with 100 million jobs at risk. While India travel and tourism industry is facing an overall loss of US$16.7 B with up to 50 million jobs at risk. India’s aviation sector is anticipating at an estimated loss of US$11.2 B and its hotel industry has estimated loss of US$6.3 B for 2020. But with domestic flights resuming in a staggered manner, online travel aggregators (OTA) in India are seeing a 30-40% rise in demand with some selling more than 5,000 tickets a day. However, flight cancellations are affecting revenues of OTAs.

Travel & hospitality providers are venturing into other segments to cope with the changing market dynamics and almost non-existent demand for their traditional services to maintain their revenue stream.

Chartered flights (MakeMyTrip), Covid beds (Oyo rooms), Covid testing of passengers (Thomos Cook) are some examples.

·         Contactless check-in has become the new norm of hospitality and guests are willing to skip front desk for check-in and other room related queries. These contactless technologies are not only offering ease and safety to consumers but also helping hoteliers' weather operational disruptions.

Payments and wallets – banks in pocket

·         While India has traditionally been a cash-driven economy, increasing digital penetration, consistent growth in retail electronic payment systems, such as National Electronic Fund Transfer (NEFT), mobile banking, and development of payment acceptance infrastructure have resulted in a significant uptick in digital payment transactions.

·         Leading digital wallet providers are transforming into integrated financial services solution providers by adding services such as lending, insurtech, wealthtech along with EDC terminals and more.

·         With the success of Alexa, financial institutions and FinTechsare in the process of making voice payment the next big thing. Already, many financial institutions in lending are using voice technology through bots to serve the customers.

·         Until now most of the payment technologies were weaved around smartphone. But face recognition payment technology is designed to make payments without mobile phones.

·         As digital payments go mainstream, financial institutions are straining hard to continuously reduce their exposure to financial crimes. Robotic Process Automation (RPA) will continue to impact migration activities, data security & governance, and compliance management, especially in the wake of the recent and ensuing PSU bank consolidations

From small investors view point, many of these startups that have attained reasonable scale may be getting ready for their IPOs. Retail investors may get a chance to participate in this sunrise sector that has so far been limited to large private equity players and venture capitalists. This would obviously be a high risk high reward investment product. Since the businesses are primarily technology driven, the chances of redundancy would always be present.

May 2021 Bulletin of the Reserve Bank of India, carries some useful insights about the performance of NBFCs during the pandemic. Being a critical source of consumer and MSME finance, performance of NBFCs is usually a broad indicator of the consumption demand, and consumer and business sentiments.

The key highlights of the NBFCs performance, especially during 2H2020, are noted as follows:

·         Pandemic has hit NBFCs hard. “The impact of the pandemic can be seen on both asset quality and liquidity, although the latter was addressed to a considerable extent through timely policy measures.”

·         An unfavourable mix of COVID-19, sell-offs in financial markets and the abrupt winding-up of specific schemes by a mutual fund contributed to NBFCs facing record spike in yields on their debt in Q1: 2020-21. The sharp market differentiation continued between the highly rated and other NBFCs, notwithstanding the surplus liquidity and aggressive policy rate cuts.

·         Retail participation in the NBFC debenture issuances, notwithstanding their small share in overall subscription, witnessed an upswing since June 2020, whereas Mutual funds reduced their exposure to NBFC CPs between March and September 2020 However, Q3:2020-21 witnessed a renewed interest of mutual funds in NBFC CPs. Banks’ subscription of CPs has also increased at a steady pace after Q1:2020-21.

·         The number of deposit-taking NBFCs (NBFCs-D) has gradually diminished and currently stands at 64, of which six have been prohibited by the RBI from accepting further deposits.

·         The consolidated balance sheet of NBFCs registered a Y-o-Y growth of 13.0 per cent and 11.6 per cent in Q2 and Q3:2020-21, respectively. “This double-digit growth in an adverse macroeconomic environment points to the resilience of NBFCs, which were able to cushion the impact of the pandemic on their balance sheets through quick adoption of technology, policy support and reasonably strong fundamentals.”

·         NBFCs continued to preserve cash to ensure adequate liquidity in view of the prevailing uncertainty due to the pandemic.

·         Due to risk aversion and market pessimism post-IL&FS, the share of market borrowings (debentures and CPs) in the total borrowing had fallen and correspondingly the share of bank borrowings had risen. NBFCs also moved towards longer term borrowings in tune with the tenure of their assets to manage their asset-liability mismatch.

·         In Q2 and Q3:2020-21 market conditions had eased, as indicated by the pick-up in market borrowings, particularly in debenture issuances. In the same period, bank borrowings grew at a robust pace, although slight deceleration was exhibited in Q3:2020-21.

·         In the aftermath of the IL&FS event, the NBFC sector attempted to realign its asset-liability mismatches by moving away from short-term borrowings to long-term borrowings. Accordingly, term loans growth remained high at 22.6 per cent and 18.3 per cent in Q2 and Q3:2020-21 (Y-o-Y), respectively.

Term loans constituted over four-fifth of NBFC bank borrowings at end-December 2020, followed by working capital loans and cash credit. While term loans continued to grow at a robust pace, they exhibited a deceleration in Q2 and Q3:2020-21, compared to Q2 and Q3: 2019-20 reflecting tepid demand for on lending of funds. An uptick in working capital loans was witnessed in Q3: 2020-21.

·         Over 70 per cent of the NBFC borrowings are now payable after 12 months and their share has remained stable, indicative of the growing market discipline among NBFCs. Similarly, over 70 per cent of NBFC advances are also now long term (that is, receivable after more than one year).

·         The industrial sector remained the largest recipient of credit from NBFCs-ND-SI even as its share moderated between Q3:2019-20 and Q3:2020-21. Retail sector, followed by services, are the other major beneficiaries and their share grew during the period under consideration.

·         Industrial sector, particularly micro and small and large industries, seemed the worst hit by the pandemic as they posted decline in credit growth. Imposition of lockdown, abrupt stoppage of economic activities and disruption in supply chains to contain the spread of the virus could have affected these sectors the most.

·         Passenger vehicles sales increased by 13.6 per cent in December 2020. It is mirrored in the disbursal of vehicle loans by NBFCs, as these loans grew by 10.7 per cent in Q3:2020-21. Loans against gold also grew robustly as it filled in the cash requirements and possible working capital requirements of small firms.

·         The profitability of the NBFCs improved in Q2:2020-21 compared to the corresponding quarter of the previous year on account of steeper fall in expenditure than in income. Given the persistence of infections, the full effects of the lockdown and suspension of business on the asset quality of NBFCs will be evident gradually.

Self-Reliance (Atamnirbharta) has been one of the key policy objective of Indian government, especially during the second term of the incumbent prime minister. It is clarified that self-reliance does not connotes self-centred systems; rather it encompasses a concern for the whole world’s happiness, cooperation and peace.

The stated aim is to make the country and its citizens independent and self-reliant in all senses. The five primary focus area identified to achieve the objective of self-reliance are —

Economy — Quantum jumps in various growth parameters, not just incremental changes.

Infrastructure — Building infrastructure that represents modern India.

Systems — Making systems technology driven.

Demography — Making the population vibrant.

Demand — Realizing full potential of the power of demand.

A number of programs, schemes and incentives have been announced in past one year under the umbrella of Self-Reliant India, encompassing support to a variety of sectors like agriculture, MSME, manufacturing, housing, infrastructure building, and exports, etc.

From various documents and public speeches by the prime minister and his cabinet colleagues, it appears that the idea of self-reliance is still at the stage of developing a conceptual framework; even though a slew of schemes and incentives have already been placed under this umbrella. Defining this idea in terms of a robust conceptual framework may actually take few more years, given the extraordinary circumstances presented by the Covid19 pandemic, which may result in result in reprioritization of fiscal and monetary policy objectives.

There is little debate on the point that digitalization has to be at the core of any economic development and modernization plan for future. In this context, I find it pertinent to highlight some of the data from ‘Digital Economy Compass 2020”, published by statista group. The report, inter alia, highlights some of the key global markets and consumption trends that may sustain in post Covid19 world. It also mentions the key players in each evolving market segment.

The services like healthcare, fitness, learning, entertainment, gaming, 3D printing, contact tracing (bio metrics, travel, GPS, demographics, talent hunt, etc.), communication, financial services (payment gateway, money transfer, transactions), collaborative software development, cloud hosting, cybersecurity, business and manufacturing process automation have acquired larger part of the markets (consumption, investment, and development etc.)

Manufacturing processes are being increasingly dominated by artificial intelligence, robotics, internet of things, etc. Development of 5G ecosystem is another major area of growth in global economy. Blockchain technology has made a prominent place in global commerce ecosystem.

Global trade is overwhelmingly dominated by ecommerce. Last year Chinese ecoomerce giant Alibaba alone logged a total merchandise trade that exceeded GDP of all but 14 top nations in the world.

Work from home trend is likely to sustain for longer than presently expected. This is leading to higher demand for products and services like home automation, food delivery, gaming, streaming of music and video, home management services, fitness, e-dating, shared mobility etc.

All these trends are essentially leading to materially higher demand for electronic devices (phones, tablets, laptops, servers etc.) and semiconductor chips to be embedded in various appliances (washing machines, cars, alarm systems, automatic machines, smart TV, refrigerators etc.)

Software is essentially the fulcrum that supports this entire global digital ecosystem. There is a variety of software development services like enterprise software, system infrastructure software, application development, and productivity enhancement software, etc.

The point to note is that presently Indian capabilities in these spheres are limited. Only 4-5 Indian companies appear on global podium, but their participation is mostly limited to software services. In most other areas our capabilities and size are limited in global context. The government programs and schemes (e.g., production linked incentive for mobile manufacturing) are presently focusing on low end value addition (mostly component assembly and contract manufacturing). If India has to become self-reliant in the modern world, the focus has to be on joining the top league in global digital ecosystem. Manufacturing mobile phones and chemicals may help in little more than managing the current account.