30 Apr 2020
16 April 2020
Sukumar Rajah, Senior Managing Director, Director of Portfolio Management
India’s government has implemented a series of measures to contain the spread of the coronavirus, aiming to strike a balance between saving lives and preventing an economic catastrophe. It recently stepped up its fight, extending a lockdown of its 1.3 billion citizens until May 3. Franklin Templeton Emerging Markets Equity’s Sukumar Rajah weighs in on the implications.
The accelerated transition of the COVID-19 virus from a regional epidemic to a global pandemic is a glaring example of the brutal side effects of an integrated world. China—where the coronavirus originated—took a series of measures to contain the virus, including a prolonged lockdown that disrupted the global supply chain.
India likewise took bold steps to contain the spread of the virus. It enforced a complete lockdown on March 25 by sealing international borders and restricting domestic travel.
Due to the nature of India’s temporary workforce, the initial lockdown sparked a mass migration of millions of workers from industries such as construction, retail, textiles and leather, and tourism.
The government announced it has now extended the lockdown period until May 3, which stretches beyond the initial 21-day period. However, the announcement also indicated that the situation will be reassessed on April 20 to increase exceptions to reduce the economic impact. With the government monitoring progress in each district, it is likely that each state in India will likely free up restrictions district by district on a varying scale that will be coded as red, orange and green zones, depending upon the number of COVID-19 cases and frequency of transmission. The differentiated restoration of some normalcy with specified conditions will help the economy to gradually restart.
While there has been sporadic discontent from the government’s decisions, by and large there has been buy-in from the general populace. It is widely expected the government will want to open up the Indian economy in phases, which suggests leaders will try to strike a balance between saving lives and preventing an economic catastrophe.
The government also announced an economic stimulus plan worth 1.7 trillion rupees (US$22.6 billion) in response to the initial lockdown, providing relief for those millions affected in lower-income households. Some of these measures include a one-time direct cash transfer, and free food and fuel.
Fresh Measures to Combat the Coronavirus
Global central banks have pulled out all the stops to cushion economic fallout through the implementation of a variety of policy measures, including interest-rate cuts. India is no different.
The Reserve Bank of India (RBI) stated it will do “whatever it takes” to support the economy and maintain its accommodative stance, which should help restore some confidence in financial markets and boost liquidity.
The RBI addressed three issues in its policy response: cost of credit, credit availability and quality of the existing credit in the system.
The central bank cut the benchmark repurchase rate 75 basis points to 4.4%, a move that should help address the cost of credit and prioritize growth and financial stability.
The RBI also cut reverse repurchase agreement rates to levels that should dissuade banks from parking liquidity in government securities. The RBI’s Targeted Long-Term Repos Operations (TLTRO) helps organizations manage cash-flow issues in light of the coronavirus pandemic. Banks are able to borrow in a special window to purchase investment-grade bonds, which allows the bond market a chance to return to near normalcy.
Finally, on the quality of credit, the RBI has ensured that a three-month moratorium on payment of loans including home loans, education loans and auto loans, is available to borrowers who need support in this phase of tight liquidity. Given the history and risk of moral hazard of a moratorium, the central bank has left to the respective local banks to implement this moratorium in the form and shape they deem suitable.
Funding Highlights Health Care Infrastructure
India’s government has prioritized citizen safety through strict social measures and fiscal measures at a time when business visibility and sentiment is particularly poor.
Indian Prime Minister Narendra Modi also promised an additional 150 billion rupees (US$2 billion) to health infrastructure, including testing facilities, personal protective equipment, isolation beds, ICU beds and ventilators.
Part of the reason for India’s aggressive lockdown stems from the country’s under-resourced public health care system in comparison with developed countries. While India does have a public health care system, most people typically use private providers. The majority of India’s doctors and beds belong to the private health care sector, which has enormous leeway with respect to cost of treatment.
However, since the initial lockdown, private hospitals have earmarked beds and isolation rooms in preparation for an increase in COVID-19 cases, and more diagnostic laboratories have been approved for larger-scale tests. In the short term, planned surgeries have been put off and health tourism has stopped.
Looking ahead, we’ll keep our eyes peeled for any developments in the way of finance packages as India enters the next stage of combatting the coronavirus.
When the economy opens up and the damage becomes clearer, we would expect there will likely be more targeted deployment of stimulus measures. While overall cases continue to grow in India, recent announcements from the Union Health Ministry suggest that several districts across the country which had detected COVID-19 infections earlier have contained the spread and have even stopped seeing new cases over the last 14 days.
Modi has already directed each ministry to work on a plan to slowly open the country for business, and asked ministers to prepare a list of 10 major decisions and 10 priority areas to focus on once the lockdown is lifted. This suggests that the government realizes that containment alone is not a long-term strategy, and a difficult trade-off needs to be made between saving lives and limiting the economic damage.
From an investment standpoint, how things play out really depends on when life goes back to normal. If the virus can be contained and we don’t see a second round of COVID-19 infections with greater intensity, sentiment should turn more positive. For companies, we think balance sheet resilience is now crucial as the impact on businesses largely hangs on when the economy will re-open.
Kerala: A Case Study of Flattening the Curve
On January 30, Kerala became the first state in India to report a positive case of the novel coronavirus, originating from a student who had returned from Wuhan. Over the next two months, more than 350 coronavirus cases followed as other citizens returned from overseas. Kerala’s leaders leaped into action to combat its spread. In addition to passenger screenings at its four major airports, local government leaders closed schools and banned large gatherings before other developed countries had initiated lockdowns. They also deployed resources to help provide assistance, not only health care but also delivering food to those in need, building shelters for migrant workers and boosting internet bandwidth for those working at home. In Kerala, there have been no reported cases of community transmission, as the state mapped people coming back from abroad and isolated infected individuals for an extended period—even from their families—who were also tracked to determine points of contact with others. The state’s aggressive response has started to flatten the curve there, and India overall is trying to execute a similar scenario in all other states. However, there are a few challenges in replicating the success that Kerala has seen in some of the other states. These include different leadership styles, lack of confidence of the citizens in their government, low literacy rates in some states, the ability of local health care systems to deal with the crisis and local bureaucracy.
What Are the Risks?
All investments involve risks, including the possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement.