A continued derating

Context: The future of economic growth rise lies in the perception of global investors about India. Second generational structural reforms must be implemented to raise investors’ expectations.

Impact of COVID lockdown:

• Underperformance among Emerging Markets (EMs): linked to severe lockdowns and inability of the Indian government to provide enhanced spending.
• Discomforting investors: Global Investors are fleeing non-stop across both debt and equity. The asset quality of banks and environment of negative growth discourages them due to no clarity on recovery.

Pre-existing Structural gaps: 

• Continued Derating: The current derating of India is not a new phenomenon but has been going on for a long time among EMs. Moreover, developed countries like US outperformed compare to aggregate EMs.
• Stagnant Market Capitalization (MC): At 55% compared to 2009 level, MC has been constrained. For instance, only 10 companies have MC of $25B, a small number for $2.5 trillion economy.
• Administrative challenges: Global investors are convinced that we lack administrative capability and structure to handle the complexity of running such a large economy.
• Low corporate earnings growth: Earning per share growth of only 3-4% has downgraded the investor’s sentiments.

Conclusion:

• Although, the last seven years have seen cleaning up of corporate and removing inefficiencies in the businesses, the benefits are not visible. Structural reforms in administration, judiciary etc. are necessary for sustained future growth.