Vijay Kumar Gaba

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.

 In past one year, ‘K’ has emerged as one of the most popular letters in economic jargon. Unlike past economic crisis when ‘R’ (recession and recovery) and ‘D’ (depression and deflation) were popular letters, this time a multitude of dichotomy created by pandemic is subject of popular narrative. In fact, I believe that these dichotomy in various trends was always present, but the pandemic has just exacerbated these, making them look more prominent.

In past few months, a ‘K’ shaped movement has been reported in many segments. For example, consider the following –

(a)   The developed world, China and few other emerging economies appear to have mostly recovered from the pandemic shock; whereas numerous emerging and underdeveloped economies are still struggling to emerge from the pandemic related losses.

(b)   Another manifestation of ‘K’ shaped movement is seen in the price movement. While the Purchasers’ prices (wholesale inflation) have seen sharp surge in past one year, consumer prices have not matched yet.

(c)    The bond yields have also moved in a ‘K’ fashion over past one year. The gap between US 2yr and US 10yr treasury yields has increased from ~50bps to ~150bps over past one year.

(d)   The wealth and income of people has also shown a ‘K’ tendency. While the top echelon of the society have accumulated record amount of wealth in past year; the millions who were just coming out of poverty have slipped back and many who were struggling to come out are even worse now. Numerous smaller business and self-employed people are staring at deep abyss of uncertainty and hardship, while many new unicorns are emerging from new technologies and newer ways of doing business.

In stock markets also, sector wise ‘K’ shaped performance is clearly visible. While consumers have underperformed materially, cyclicals are their running to their decadal highs. The dilemma for small investors is what strategy they should follow!

 I had an opportunity to e-meet the promoter of a decent sized enterprise yesterday. His company manufactures some auto parts mostly for replacement market. The business of this company had been doing extremely well for past more than a decade, before it hit a small bump last year. It recovered from the fumble in two quarters and was about to regain its pre Covid trajectory in 1QFY22. The intense second wave has however derailed the business from recovery path. The promoter now expects the business to normalize not before summer of 2022. Even for that he is not very confident. I have known this gentleman for past 17years. It was for the first time I found the gleam in his eyes missing. A driblet of sweat on the temple was also rather conspicuous.

He is not only worried about his business. The worries are in fact emanating from a variety of factors. For example,

·         Having lost couple of senior family members to Covid, the family is terribly shaken. They are insisting they the family migrates to a “better place” to live. He has faced this situation earlier also and was able to manage it well. But this time his resistance is weak. He is finding it hard to convince his US educated children to stay back and work for the betterment of the country.

·         His working capital requirements have increased materially, as many of his customers (mostly traders) have failed to pay in time. He is staring at significant losses from irrecoverable debts. His raw material cost has also increased and he is in no position to pass it on completely. Therefore, he has to cut production. He is contemplating retrenching at least 20% workers in two weeks.

·         He faces serious threat from the larger peers who mostly produce for OEMs. Some of them have already started servicing the replacement market due to slowdown in OEM demand.

·         Many of his workers are turning violent generally. Many of them have faced hardship in treating their family members. He finds that workers’ belief in system is materially diminished. Some of them have turned cynical and get easily provoked. Their chances of becoming non-compliant are far higher now.

·         He expects his bankers to soon downgrade his credit facilities, which will further raise his credit cost. Though he has the wherewithal to withstand tough conditions for next 3-4years, a prolonged phase of uncertainty could precipitate the fall.

This gentleman is quite convinced that any hopes of normalization in 2021 are terribly misplaced. He feels it will be at least 15-18 months process to normalization. From his workers he understands that unlike the first wave which spared the hinterlands, the impact of this second wave is deep and wide. It has seriously damaged socio-economic fabric of the country. Many households’ finances have been damaged structurally, pushing them into vicious cycle of debt and poverty.

He agrees that the pandemic has fully exposed the inadequacies of our social infrastructure and disaster management capabilities and significant improvements must be expected in next few years. Nonetheless, surviving these next few years could be quite challenging for a significant proportion of the population.

 “Commodities” is the most important buzzword in equity markets these days. Chartists, analysts, economists, strategists and traders et. al. are predominantly talking about stocks of commodity companies. The strong rally in the stocks of commodity producers is primarily based on the material rise in the global commodities’ prices, especially in past one year.

I analysed the market performance since announcement of first lockdown (25^h March 2020). I also looked at the market performance in three other timeframes, viz.,

(i)    Since January 2021, because most of the restrictions announced in March 2021 were lifted, US elections were completed and vaccine launches had already begun.

(ii)   Since February 2021, because a market exciting budget was presented with strong on infra building and fiscal discipline; and UK exit from EU was complete, and global trade had started to normalize.

(iii)  Since April 2021, when a second wave of pandemic started to hit few states of India badly

The following are some of the key trends observed in the performance of market in these time frames.

1.    “Metals” have been a clear outperforming sector over all timeframes. Nifty Metals has returned 255% since Lockdown 1.0, more than double of the second best performing sector, i.e., Nifty IT (121%). Auto (109%) and Pharma (108%) are other sectors that outperformed Nifty (90%) in this timeframe.

2.    Pharma has materially underperformed metals over all timeframes. Which sounds bit counterintuitive, given the pandemic situation.

3.    FMCG is a top underperformer over all timeframes, despite huge social sector support, resilient rural sector, and strong corporate performances. Some of this could be explained by significant outperformance of FMCG sector in previous year

4.    Media is another noticeable laggard, despite work from home, lockdown, etc.

5.    Despite huge outlay for capacity building in 2020 stimulus packages and FY22budget, Infra sector has performed mostly in line with the benchmark Nifty over these timeframes.

6.    Realty has been the worst performing sector over all these timeframes.

7.    PSU Banks have outperformed their private sector peers in 2021. This is in line with PSEs in general outperforming Nifty in current year.

8.    Announcement of much awaited scraping policy does not seem to have nay impact on auto sector. Nifty Auto is down 4% since budget.

9.    The positive momentum that was created in reality sector last year due to duty incentives and lower rates seems to have subsided. Nifty Realty has underperformed materially after Budget.

10.  In FY22 so far, Only commodities and pharma have yielded meaningful return.

 The localized lockdown and mobility restrictions in past 6weeks have led to scaling down of FY22 GDP growth estimates. The new estimates mostly imply that Indian economy may record marginally negative growth during two period from April 2020 to March 2022. These estimates though assume (i) No community transmission of infections; (ii) no nationwide lockdown; (iii) no wider shutdown of industries and construction work; and (iv) normalization of mobility restriction in 2HFY22. Any further worsening of pandemic situation may lead to further downgrade of growth estimates resulting in spillover impact over FY23 as well.

The global rating agency S&P, recently published a note saying, “The possibility the government will impose more local lockdowns may thwart what was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues, and banking system profitability.” The note further stated that agency is “looking at two scenarios, both entailing a cut in its GDP growth forecast for India:

·         In a moderate scenario, new infections peak in May 2021. If that happens, the hit to India’s GDP growth is estimated at 1.2 percentage points, indicating that India’s GDP is likely to grow 9.8% in FY22 compared with 11% growth estimated previously.

·         In a more severe scenario, new infections peak in late June 2021. In this case, the hit is estimated at 2.8 percentage points, with growth of 8.2%.”

As reported by Bloomberg, the scenario projections by S&P assume that initial shocks to private consumption and investment filter through to the rest of the economy. For instance, lower consumption will mean less hiring, lower wages, and a second hit to consumption, the note said. The severe scenario, which assumes hits to economic growth and infrastructure sector cash flows, presents more downside risks. Leverage remains elevate.

Incidentally, the current estimates appear to assuming a fast normalizing developed world, and hence buoyant export sector and capital flows.

IMF has projected US and China economies to move beyond their pre-Covid levels in 2021 itself, led by sharp rise in both consumption and investment. Even EU that bore the brunt of pandemic in 2020, is expected to reach near pre-covid level in 2021. This essentially implies rising global inflationary pressures creating possibilities for an earlier than currently forecasted monetary tightening. The capital flows to emerging market may there get impacted, if these forecast come true.

What no one is forecasting is a re-lapse of pandemic in the developed world. Rationally, it does not look likely, given the speed of vaccination, development of preventive ecosystem and treatment protocols. However given that the virus is mutating itself fast, assigning zero probability to this occurrence in economic forecasts may not be fully appropriate. God forbid, if this happens, Indian economy may decline rather precipitously.

The government had surprised the markets by maintaining strict fiscal discipline in Union Budget for FY22. So far we have not heard any relaxation in budget estimates of fiscal deficit. However, any worsening of conditions from here may require another dose of fiscal stimulus. It is pertinent to note that the fiscal stimulus last year was mostly focused on capacity building and easing liquidity. The present conditions require strong social sector spending program, which primarily aims at cash handouts. The recent setback to the ruling BJP in UP local body elections and West Bengal assembly elections; and continuing farmers’ agitation may motivate the government to consider material cash subsidies to poor and farmer ahead of critical state assembly elections in UP, Punjab, Odisha, Goa and Uttrkhand. All these elections are due in February/March 2022.

Insofar as stock market is concerned, the consensus appears to be leaning towards the strategy that the localized lockdowns may not hamper the industrial and construction sector like 2020, as the government has spared the manufacturing and infrastructure activities from lockdown restrictions. The consumption may however get impacted materially. Cyclical over Consumers appears the preferred trade as of now.

More on this next week.

In an unscheduled press conference yesterday, the RBI governor admitted that the Covid19 pandemic has recently intensified in India. This intensification could derail the still fragile economic recovery. He implied that the impact on livelihoods due to restrictive access to workplace, education and income mediums could be significant and needs immediate attention.

The governor also highlighted that “The global economy is exhibiting incipient signs of recovery as countries renew their tryst with growth, supported by monetary and fiscal stimulus. Still, activity remains uneven across countries and sectors. The outlook is highly uncertain and clouded with downside risks.” He underscored that “Consumer price index (CPI) inflation remains benign for major AEs; in a few EMEs, however, it persists above targets on account of firming global food and commodity prices.”

The governor also highlighted the emerging inflationary pressures and softening bias in bond yields as follows:

·         “CPI inflation edged up to 5.5 per cent in March 2021 from 5.0 per cent a month ago on the back of a pick-up in food as well as fuel inflation while core inflation remained elevated.”

·         “Domestic financial conditions remain easy on abundant and surplus system liquidity. The average daily net liquidity absorption under the liquidity adjustment facility (LAF) was at ₹5.8 lakh crore in April 2021. The first auction under G-SAP 1.0 conducted on April 15, 2021 for a notified amount of ₹25,000 crore elicited an enthusiastic response as reflected in the bid-cover ratio of 4.1. G-SAP has engendered a softening bias in Gsec yields which has continued since then.”

In fact the governor announced that “Given this positive response from the market, it has been decided that the second purchase of government securities for an aggregate amount of ₹35,000 crore under G-SAP 1.0 will be conducted on May 20, 2021.”

It is therefore clear that regardless of the inflationary pressures, the liquidity conditions may remain benign for 2021 and no thought of monetary tightening may be entertained by MPC/RBI. Persistently, poor credit growth also supports this view.

It is pertinent to note that Banks’ non-food credit growth was just 4.9% in March 2021, almost a 4yr low. Credit growth in service and manufacturing sectors continues to remain materially below par; though agriculture and personal credit is buoyant. During March 2021, industry credit off grew a dismal 0.4% yoy, while credit to large industries segment continued to contract (-0.8% YoY). The credit growth pickup in February 2021 failed to sustain. The April credit growth number may still be disappointing, given the widespread mobility restrictions across large states.

Though RBI governor emphasized strongly on the need to support small, medium and unorganized businesses; the credit growth to this segment remains anaemic, highlighting the extreme risk averseness of lenders. Loans for Housing & education; and to weaker sections have also suffered recently. Given that MCLR rates are now stable as most of the transmission of policy easing has already occurred, any material fall in rates may not be expected in 2021.

 In his latest policy statement, US Federal Reserve Chairman Jerome Powell commented “Inflation has risen, largely reflecting transitory factors.” The FOMC noted that “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time” and said that “the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.” (see here)

These comments of Federal Reserve have triggered a fresh debate on probability of imminent “hyperinflation” and a global “commodity supercycle”.

As per a recent report of Bank of America Securities (BofA) after the third week of earnings. mentions of “inflation” have now quadrupled YoY; and after last week, mentions have jumped nearly 800% YoY!

BofA analyst also concludes from the corporates’ earnings commentary that “On an absolute basis, [inflation] mentions skyrocketed to near record highs from 2011, pointing to at the very least, “transitory” hyper-inflation ahead.”

As per the recent World Bank Commodity Outlook report (see here) “Energy prices are expected to average more than one-third higher in 2021 (a significant upward revision from the October report) followed by a smaller increase in 2022. Non-energy prices are forecast to increase 19 percent in 2021 (also revised upward from October), but a modest decline is expected in 2022 as metal price increases partially unwind. The outlook is heavily dependent on the path of the pandemic, with the potential for additional upside risks if the vaccine rollout gathers pace and strong growth in the United States generates significant global spillovers. However, on the downside, the global recovery could yet be derailed by renewed outbreaks in large economies.”

Not being an expert on commodities of economics, I draw the following from the discussion on “hyperinflation” and “Commodity supercycle”

1.    Presently, the consensus is revolving around “transitory hyperinflation”. There are some technical analysts who are forecasting a prolonged bull market in commodities (commodity supercycle) but it is far from consensus.

My views are clear on this account. I strongly refute any case for a “commodity supercycle”. (see “Commodities – trade “yes”; invest “no””)

2.    Inflation and Deflation are always transitory in nature. It is primarily the job of the central bankers to manage this transition in a way that these trends do not cause significant disruption to the economy. A high transitory inflation could be easily compared to a cyclone that destroys the weak structures and trees falling on its way.

The problem occurs when the central bankers persistently refuse to use the available monetary policy tools, arguing that “it is transitory” and “this shall pass too”. This tendency weakens the markets’ faith in central bankers and raise doubt about their relevance per se.

We have also seen RBI following the same tendency. In past three policy statements, the persistence of inflation has been recognized but action has been avoided. I am sure inflation may not last much beyond FY22, but in next few months it can destroy economics of many household, businesses and eventually lenders.

One thing I am really concerned about is the “transitory” food inflation. The weather in many parts of the world has been unusually dry in past many months. Notwithstanding the forecast of IMD, I have gathered from old farmers (who forecast monsoon based on some natural signs) that monsoon may be below normal at least in North and North West India.

The global food prices are already running at multiyear highs and look good for a further move north. The recent food buying spree of China may be another indication of things to come.

Many people I regularly speak with have expressed surprise over market’s resilience despite (i) worsening pandemic conditions; (ii) persistent FPIs’ selling; (iii) downgrade of economic growth forecasts for FY22; and (iv) likely earnings downgrades due to renewed mobility restrictions.

To be honest, I am not at all surprised with the market resilience. I believe market resilience is underlined by the following five major factors –

1.    Sharp rise in global commodity prices and consequently elevated inflationary expectations fuelling a rally in commodity stocks, especially metals and agro commodities.

2.    Extreme pressure on MSME sector, especially those in unorganized sector. This is resulting in accelerated consolidation of business in top companies resulting in sharp rise in their valuations.

3.    RBI commitment to lower rates.

4.    Consistent rise in non-institutional participation in market. This segment is usually less sensitive to valuation and more concerned with momentum. Given that Covid-19 has resulted in higher private savings; lower working capital requirement for smaller businesses, the liquidity with this segment remains comfortable.

5.    Lower systemic leverage. Tighter margining and funding rules implemented by the regulators have resulted in materially lower systemic leverage as compared to previous crisis periods. This has prevented any panic selling in the market so far.

In my view, worsening of economic conditions may keep market supported for more time, before it begins to hit larger corporates; and/or rates begin to rise to control inflation.

The sharp rise in infection and mortality rates in past one month have attracted global attention towards India. I would also like to share some thoughts on the worsening pandemic conditions in India.

In the sacred text of Shri Durga Saptshati, eighth chapter is dedicated to the killing of a demon named Raktabīja by the Mother Supreme. The Raktabīja was a very powerful and strong demon. He had a super power. Whenever his blood dropped on the ground, a clone of his (equally powerful and strong) would emerge from every drop of blood so fallen. Killing him therefore was extremely difficult task. All attacks on him would result in thousands of his clones emerging in no time. The mother Supreme then thought of a trick. She summoned goddess Kali and ordained, “I shall hit Raktabīja now; enlarge your mouth and consume each drop of his blood before it touches the ground.” This way the entire blood of Raktabīja was finished without any clone taking form. The demon eventually succumbed to the injuries inflicted by the Mother Supreme. His elimination paved way for eventual elimination of his masters, the demon king Shumbha and his tyrant brother Nishumbha.

As India’s struggle with intense second wave of Covid-19, inspiration could be drawn from this episode from scriptures. Each infected Covid-19 patient is infecting multiple other healthy persons. If the contagion continue to spread at this rate (or even at a slightly lower rate), it is estimated that close to 20% population may catch infection in next few months. At a mortality rate of 2%, we are staring at a potential of over 5million casualties. Even thought of such an eventuality is frightening.

It is therefore critical that virus (SARS-CoV-2 and its various mutants) must be killed before it is able to replicate itself. Aggressive testing and vaccination are two very potent methods to achieve this goal. Unfortunately, we are facing serious challenges on both these solutions. Testing infrastructure is proving to be grossly inadequate, discouraging even the people with clear symptoms to get themselves tested. Vaccination drive is not progressing at desired pace. In this situation, one can only expect the situation to worsen before it begins to improve.

I have the following two suggestions for the government to kill this incarnation of Raktabīja:

Vaccination

1.    The government may immediately declare Covid-19 a “national emergency”. Set up a Covid-19 task force comprising of Chief Secretaries of all states.

2.    Set up an emergency fund to raise US$50bn for Covid-19 management. Some large projects may be suspended and resources may be diverted to this fund. A one-time 10% cess may be imposed on income of top 500 companies. Multilateral and Bilateral agencies may be tapped for special loans.

3.    The fund may be used to procure adequate stock (at least 2bn) of vaccines from all possible global sources, including setting up local capacities, in next 6months.

4.    Train one million volunteers to give injections in next one month. Each volunteer should be able to vaccinate 50persons every day.

5.    Vaccinate people door to door in next one months.

Testing

Make Rapid Antigen Test (RTA) test kit available for OTC sale at a subsidized price of Rs5/per kit. Encourage people to self-test at least once a week.

Do not get discouraged with non-gold standard of the test. Remember, the results of self-test pregnancy test, digital blood pressure monitoring machines, digital thermometers, self-test blood sugar monitoring etc. are far less than 100% accurate. But all these monitoring means do play a material role in preventing care.