“Incredible India” has lost some of its economic shine in 2020, with the global coronavirus pandemic exacting a tragic toll in lives and livelihoods as the South Asian nation braces for its worst recession since independence.

But with structural tailwinds still in place, analysts point to its favourable long-term outlook and current lowly weighting in global equity portfolios as reasons to invest in Asia’s third-largest economy.

The nation of 1.3 billion people has been hit hard by COVID-19. Despite strict lockdowns, there were more than 673,000 reported cases and over 19,200 deaths as of 5 July, according to the health ministry.

India’s economy was already slowing even before the full impact of the coronavirus shutdowns. For the March quarter, the economy grew by just 3.1 per cent, its slowest pace since 2009. The country’s growth rate slumped to an 11-year low of 4.2 per cent for the financial year ending in March.

“Although [India’s] lockdown started on 25 March, pressure points were already visible [in] the service sector, especially transport, tourism and hospitality, and a lot of cancellations have been happening from mid-February,” N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, told the Nikkei Asian Review.

Indian Prime Minister Narendra Modi’s government has sought to combat the coronavirus’ economic damage with a stimulus package worth more than 20 trillion rupees ($385 billion), equivalent to a tenth of the nation’s GDP, aimed at assisting small business owners and farmers.

The Reserve Bank of India has also responded, cutting its key repo rate to its lowest on record at 4 per cent as it admitted the “macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated”. Another 50 basis point cut is likely this year, according to ANZ Research.

In a blow to policymakers, in June, ratings agency Moody’s downgraded India to its lowest investment grade rating, maintaining its outlook at negative amid “deeper stresses in the economy”. The agency cited economic and financial stress, sub-potential growth and potentially rising public debt as reasons for the downgrade.

From being the world’s fastest growing major economy, India’s GDP growth rate has cooled from 6.1 per cent in 2018 to 4.2 per cent last year and an expected recession for 2020. The International Monetary Fund (IMF) projects negative 4.5 per cent growth this year, followed by a rebound in 2021 to a 6 per cent expansion.

Indian stocks have felt the fallout, too. As of 3 July, the benchmark S&P BSE Sensex index was at 36,021, well down from its year high of 42,273 and showing a one-year return of negative 7.7 per cent.

Adding to New Delhi’s woes has been a border conflict with China that saw 20 Indian soldiers killed. This sparked retaliatory measures, with India banning Chinese technology services including the popular TikTok app as well as placing restrictions on foreign investment.

Reasons for hope

In its December 2019 country assessment, the IMF said economic growth would gradually rise to its medium-term potential of 7.3 per cent “on continued commitment to inflation targeting, gradual macro-financial and structural reforms” including the Goods and Services Tax, Insolvency and Bankruptcy Code and continued efforts to improve the ease of doing business.

India’s resilience should see it emerge stronger from the COVID-19 pandemic, according to Anuja Munde, senior portfolio manager, Nikko Asset Management.

“GDP growth will be very weak for this year and we will need to be watchful for secondary impacts in terms of job and income losses,” she says.

“But the surprising thing during the lockdown has been people’s willpower has been very resilient…cases continue to rise but the mortality rate is extremely low.

“COVID-19 is a medical problem and as soon as a solution is found, we will have a lot of euphoria and expectations will rise on that”.

Structural reform

Munde points to further reforms by the Modi government, including making labour laws more flexible and creating special zones to provide non-agricultural land for industry. New Delhi is also seeking to attract more overseas companies, including those seeking an alternative to China amid the US-China trade war.

Longer term, structural tailwinds remain in place, including the “formalisation” and “financialisation” of the economy and favourable demographics.

“India’s external position remains very strong, forex reserves are at record highs and crude oil prices have fallen. There is a reformist government which is not shying away from reforms even in these tough times,” she said.

“India is still largely a very domestic economy unaffected by trade wars. As the population becomes richer they will consume more, so we remain very positive from a long-term perspective”.

In its May “Asian equity monthly” report, Nikko AM noted it remained invested in “private banks, digital services and logistics and have been adding to specific consumer sub-sectors”.

Australian investors seeking an exposure to India’s growth could consider exchange-traded funds, including emerging market or India-focused ETFs.

The latter include the BetaShares India Quality ETF (ASX:IIND), which provides exposure to 30 “quality” Indian companies including Infosys, Hindustan Unilever and Tata Consultancy.

Another fund, the ETFS Reliance India Nifty 50 ETF (ASX:NDIA), offers exposure to India’s Nifty50 index, representing 50 of the largest blue-chip companies listed on the National Stock Exchange of India.

India’s population is projected to overtake China’s by 2027 and with a stock market capitalisation representing less than 3 per cent of global equity markets as of 2019, the opportunity exists for investors who “subscribe to the view that India’s growth potential is greater than its current market size,” according to ETF Securities.