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Emerging Markets Case Study: India Amid COVID-19

Featured Author: Gurpreet Pal
Gurpreet Pal is an analyst on the Artisan Partners Sustainable Emerging Markets Team.

As the COVID-19 pandemic evolves, emerging markets are set to take center stage. The US, Italy and other developed markets appear to be flattening the curve and starting to reopen their economies. In comparison, many emerging markets appear to be in much earlier phases of an outbreak. Within EM, India is an especially intriguing country to watch as it seems to be managing the pandemic better than previously feared.

India has the seemingly right conditions for a high number of cases and rapid transmission: more than 1.3 billion inhabitants; high population density , nearly a quarter of its city inhabitants living in slums and a large informal migrant labor force . Adding to the challenge is India’s notoriously underdeveloped infrastructure, including the health care system.

But the outbreak in India has been fairly subdued to date. The government acted aggressively, initiating a 21-day lockdown on March 24, subsequently extending it to May 3 and then extending it an additional two weeks at the start of May—with some relaxation of restrictions in less affected areas. Compliance across states has varied, but overall the public has done a good job. Major cities are vigilantly monitoring cases and creating containment zones. The country’s relatively young population may be helping as well. Overall, it appears as if India is already flattening the curve, although a degree of skepticism and bewilderment understandably exists.

A clearer picture will emerge as the pace of testing accelerates. On that point, we are encouraged by increased private sector involvement. A domestic med-tech company has developed a scalable testing kit while private labs are approved for testing and conducting tests at a discounted rate. 

Given the low number of active cases and total deaths at the end of April, pressure for a nationwide plan to roll back the lockdown is coming from multiple sides, including informal workers and businesses watching Chinese competitors ramping up activity.

The urgency to reopen the economy may be compounded by already weak economic conditions. A liquidity crunch among  non-bank financial companies (NBFCs) in 2018 contributed to a deceleration in economic growth. NBFCs are vital lenders to small businesses and consumers. Making matters worse is a recent government bailout of Yes Bank which raised investor concerns about private bank liquidity. Bouts of political unrest haven’t helped either.

India’s institutions are attempting to cushion the blow: The government announced fiscal stimulus of $23 billion, while the Reserve Bank of India cut interest rates and boosted liquidity to the tune of 3.2% of GDP. Even so, the efforts are likely insufficient to offset the extent of economic slowdown.

A rebound driven by pent up demand is probable once the country and a significant portion of the world quell COVID-19’s spread. Nonetheless, GDP figures for Q1 and Q2 will probably be especially weak, and many small and medium-sized companies will likely not be able to survive—India just doesn’t have the same ability to bail out sectors like the US and other developed markets.

And the pandemic could have some important implications for economic activity, consumer behavior and corporate strategy. We could see an accelerated shift toward formal business activity and labor markets. Companies should place more importance on strong brand recognition and balance sheets in order to better weather future fluctuations in pricing and demand, as well as supply chain disruptions. Similarly, companies will need to improve their capabilities to cater to changes in demand and consumer priorities as the pandemic exposed how quickly those can change. As an example, it is logical to expect greater demand for hygiene-related products, as well as some change in consumer preference toward products and brands with a better public reputation for quality and cleanliness.

Along similar lines, a potential investment lesson from this pandemic is the importance of sustainable business models. Indian companies—indeed, companies in any EM—with sustainable competitive advantages and which take ESG matters seriously should have some advantage in navigating the current public health and economic crisis. They tend to have a longer-term perspective that typically leads to solid financial and operational fundamentals, as well as continuity with shareholders, employees, customers and the communities around them. Indeed, given the broad-based selloff in EM earlier this year, many of these fundamentally sound companies appear even more attractively valued now.