Opportunity In The Making! ‘Atmanirbhar Bharat
With heightened nationalism being the current global trend in which every nation is attempting to safeguard its national interest, the ‘Atmanirbhar Bharat’ initiative by the Indian government sounds like a perfect solution, at least superficially, to become self-reliant in an extremely uncertain global economic environment. But what does it mean to equity investors who are bullish on the India story? Yogesh Supekar and Karan Bhojwani draw attention to the sectors which stand to benefit from this initiative while also focusing on sectors that will gain from the increasing angst against Chinese products.
When the first trickle of news of China’s incursion in Ladakh filtered in, a majority of Indians believed that it was not such a serious issue, assuming that as in the case of Dokhlam, the contentious face-off would be resolved amicably. But when the border tensions between India and China flared up, leaving at least 20 Indian soldiers dead, India was angered and maybe for the first time after many years resolved to boycott Chinese products. Whether it is possible to completely boycott these products or not is a different story altogether – the intention is to minimise dependency on China, it now being a matter of pride and honour.
There is no question that boycotting goods imported from China won’t be easy as both the economies are deeply intertwined. China is India’s biggest trading partner after the US apart from being the second-largest economy in the world with a GDP of about USD 13.6 trillion. China supplies industrial components and raw materials across various sectors in India and has lately been investing in India’s start-ups and technology firms. It is estimated that Chinese technology investors have parked an estimated USD 4 billion into Indian start-ups and as of March 2020, 10 out of India’s 30 unicorns are Chinese-funded.
Big Basket, BYJU’s, Delhivery, Dream 11, Flipkart, Hike, Make My Trip, OLA, Paytm Mall, Paytm, Policy Bazaar, Quikr, Rivigo, Snapdeal, Swiggy, Udaan and Zomato are some of the Indian start-ups that have Chinese investors. It is ascertained by Invest India that there are roughly 800 Chinese companies operational in India out of which approximately 75 have manufacturing facilities for smart phones, consumer appliances, construction equipment, automobiles, chemicals, power gear and optical fibre.
Some of the biggest Chinese brands manufacturers in India are Fosun International, Oppo, Vivo, Haier, SAIC and Midea while Dr. Reddy’s Laboratories Ltd, Jindal Steel & Power Ltd., BEML Ltd., Adani Global Ltd., Aurobindo Pharmaceuticals Ltd., BHEL and Godrej & Boyce Manufacturing Co. are some of the prominent Indian companies with presence in China. No doubt that there is a large presence of Indian companies in China and Chinese companies in India. The billion dollar question is how these companies will emerge out of this tricky situation on both sides.
Indo-China Trade and Dependence
India runs a huge trade deficit with China. The deficit has increased considerably over the years. China accounted for over 5 per cent of India’s total exports in FY 2019-20 and more than 14 per cent of imports. China is India’s biggest exporter. China sells smart phones, electrical appliances, power plant inputs, automotive components, capital goods like power plants, telecom equipment, metro rail coaches, iron and steel products, chemicals and plastics, engineering goods, pharmaceutical ingredients, fertilisers, etc. in India. With a goal to minimise dependence on China, India has several options. It is argued by Acuité Ratings that there are almost 40 sub-sectors where dependence on China can be minimised.
These are sectors such as chemicals, automotive components, agro-based items, drug formulations, cosmetics, consumer electronics, bicycles parts, drug formulations, handicrafts and leather-based goods which collectively contribute almost USD 33.6 billion worth of imports, which experts believe have significant scope for import substitutions. It is conceivable that without significant additional investments, the domestic manufacturing sector can substitute 25 per cent of the total imports from these specified sectors which may enable India to reduce USD 8.4 billion worth of trade deficit in a single year itself.
Suman Chowdhury, Chief Analytical Officer, Acuité Ratings and Research, says, “With imports of USD 65.1 billion and exports of USD 16.6 billion, India recorded a trade deficit of USD 48.5 billion with China in FY20. While the imports from China have moderately declined by 15 per cent since FY18 due to imposition of anti-dumping duties on some products, the dependence of the domestic economy on Chinese imports remain high with direct contribution to over 30 per cent of India’s aggregate trade deficit. Over the past three decades, India’s exports to China grew at a CAGR of 30 per cent but its imports expanded at 47 per cent, leading to lower capacity utilisation of domestic players in a few sectors. We can consider certain measures to reduce the dependence gradually which will also have a positive impact on the Indian economy.”
As the situation is fluid and dynamic between India and China, it is difficult to estimate exactly which stocks or sectors will be impacted positively or negatively as India decides to give a befitting reply to China. It is argued that India can do more damage to China economically than militarily. Telecom players such as Vodafone and Bharti Airtel’s fortunes may fluctuate as there is a possibility of higher tariffs and import curbs on telecom network equipment providers. In the chemical space there are several companies such as Rallis India, Dhanuka Agritech Limited and Insecticides India which are dependent on China for raw materials and hence any imposition of higher tariffs may adversely impact the companies.
Those companies in the chemical sector with lower exposure to China such as Bayer India may be less impacted. India is the world’s sixth-largest chemical manufacturer and its chemical and polymer imports are close to over USD 12 billion. It is no secret that Chinese smart phones are very popular in India. Xiomi, Vivo and Oppo are the biggest Chinese brands in this category with an estimated 72 per cent share put together. India’s pharmaceutical industry is one of the biggest in the world. It is third-largest in the world by volume and is ranked 14th by value. India exported medicines worth over USD 14 billion to the US in 2018-19; however, India imports two-thirds of its active pharmaceutical ingredients (key ingredients of drugs) from China.
Matter of Scale
India is the seventh-largest export market for China even as India’s imports from China jumped 45 times since the year 2000 to reach over USD 70 billion in 2018-19. Clearly enough, India is losing out to China on the trade front. This can be expected to change in the coming years if India as a team, including both government and private sector, gets its act together. India has the capability to achieve manufacturing excellence and help support the initiative of Aatmanirbhar Bharat.
However, India hasn’t achieved the required scale yet, which is the biggest advantage China has not only over India but over a majority of its trading partners. If anything, we just have to study Chinese manufacturing capabilities and scale to understand how to become ‘aatmanirbhar’. China is indeed independent when it comes to manufacturing. The complete value chain is integrated for most industries in China, which is not the case in India.
The dependency is high on China at this moment. However, strategic intent and support to the manufacturing sector will be the triggers going forward. It is a no brainer that creating industrial supply chain requires time. If at all India needs to compete with China it will have to close in on the competitive advantage gap that China enjoys. China functions with several advantages such as lower cost of capital, lower cost of utilities, indirect subsidies and active government support to select industries. India lacks such formidable competitive advantages.
China has been investing in building infrastructure and this has helped it ensure optimal movement of goods globally. This has been the success mantra for China for many years now. India has yet to prioritise on infrastructure the way China does. While India is still struggling to understand exactly how to interpret Aatmanirbhar Bharat, China continues to leverage its manufacturing capabilities and financial muscle to dominate global trade. In the long run it will help India immensely if we interpret this mission of self-dependency as a country producing high-quality goods consumed by Indians and global consumers.
At least a major chunk of the value-addition should happen in India. Eventually India will achieve the scale it desires. The capability and technology is already there to support the lofty ambitions of the aspiring nation. Practically speaking, the most important question India has to ask itself is whether it wants to completely replace global inputs at the cost of economic advantage of scale. Also, it must not be forgotten that businesses are run to maximise shareholder value or returns. The dependency on China will happen automatically and rapidly when there will be an economic logic associated with it.
Dr. Vikas V Gupta CEO and Chief Investment Strategist OmniScience Capital
Being Proactive is the Need of the Hour
Several Indian sectors could benefit from the ‘Make in India’ initiative and in the post-pandemic scenario, India’s Atmanirbhar Bharat initiative and the international initiative to restructure global supply chains will help reduce dependency on China. Given the democratic political system, capitalistic economy, welldefined legal system, a large unskilled and skilled labour force, and a large base of trained and experienced engineering and management professionals, India is a potential candidate for the shift away from China. So far, there have been challenges which have prevented this shift from happening.
However, with the government proactively attempting to reduce the barriers, it should be possible to make India an attractive destination for at least certain sectors in the mid-to-long term. While there are several industries which could benefit from such initiatives – the obvious ones being pharmaceuticals and specialty chemicals – we will focus on the not-so-obvious industries gaining from second-order effects which we think can benefit in the long-run and which are also available at a significant discount to intrinsic value.
Power : There is a direct import substitution benefit for power equipment manufacturers. This will benefit large equipment manufacturers as well as mid-sized and small, specialised electrical equipment manufacturers. A second order impact of manufacturing shifting to India in the mid-term would be that the demand for power in India is likely to go up at a much faster pace. Currently, power consumption in India is 1,200 kWh per capita as compared to 5,200 kWh per capita for China or 12,000 kWh per capita for This is likely to kick off the next round of capital investments in the power sector. The direct beneficiaries of this would be the near-monopolistic power sector finance companies. These companies will also benefit from theRs 25 lakh crore investments in the national infrastructure pipeline allocation to the power sector. Interestingly, these are available at extremely attractive valuations.
Railways : We believe that railway-focused EPC and consulting companies would benefit significantly with the Indian Railways preferring Indian firms for their contracts. High-speed railway and semi-high-speed railway projects will now have more indigenous firms.
Defence : Atmanirbhar Bharat is likely to boost the SOM (serviceable obtainable market) for domestic defence companies because of provisions for ban on import on certain weapons or platforms, specific plan for indigenization of imported spares and specific domestic procurement budget. Additionally, the China-India border situation could boost the defence budget in the future.
Minerals and Mining : As manufacturing shifts to India, the demand for steel is likely to increase. This will benefit iron and manganese ore producers.
Financial Services : As the capital investments for domestic manufacturing increase, capital markets will be utilised for raising funds via both equity and debt routes. This could benefit companies in the capital market ecosystem, i.e. stock exchanges, depositories, rating agencies, merchant bankers, among others.
Indo -China clash: Immediate impact on businesses
In what can be termed as the first real step taken by India against Chinese businesses, Indian government decided to ban at least 59 of largest China’s app citing national security concerns. This step is considered bold as the banning of apps threaten China’s rise as a Global tech power. This move by India may provide direction to the rest of the world on how to hit China where it matters the most. Chinese tech companies are poised to gain dominant position in emerging industries like artificial intelligence. India’s banning the app might force the world to rethink on how much access and user data should be given to the Chinese companies. This way the world could be stopped from potentially giving an economic leverage to China in future disputes. ByteDance’s TokTok app is one of the most popular apps in India with one in every six people in India already using the app. India is the biggest market for ByteDance with more than 200 million users. The ban will hit ByteDance the hardest as it is believed that a brief ban last year caused the Chinese company an estimated loss in revenue of about half a million dollars per day. China has expressed its concerns over India’s aggressive move.
☛India imports almost 70% of its bulk drugs and intermediates -- the chemicals that make a finished drug work -- from China
☛It buys 37% of electronic components, 45% of consumer electronics, and 44% of air conditioner and refrigerator parts from China
☛India has its largest trade deficit with China; imported about $69 billion worth of goods last year from China and exported $18 billion, according to data compiled by Bloomberg
But the hostile intentions and actions are impacting the Indian companies as well. There are casualties seen on both sides of the nation as the standoff takes place between the two Asian giants.
It is reported that the imports from China have been piling up at Indian ports pending for government clearances. This is not good news for those Indian businesses who have ordered raw materials and goods before the tensions soared at the border. The consignments are being delayed and there is no explanation given by the port authorities for the delay.
This has created some anxiety amongst Indian businesses as the clarity is not there as to when will the consignments be realized. The consignments, it is believed has been stuck at ports for over one week now and has negatively impacted the supply chain of various companies leading to losses. The congestion at ports will definitely impact manufacturing companies negatively even as the manufacturing companies continue to mount losses since the lock-down.
Conclusion
The Government of India will have to incentivise industry to not import from China and maybe open trade relations with other countries, dolling out trade benefits in order to make it strategically feasible for the industry to shift sourcing from China. The Indian industry has the potential to safeguard its interest and reduce dependency on China but it may take time and can happen only in a phased manner. The biggest positive outcome of becoming self-dependent can be of ‘bringing back the animal spirit’ in the Indian economy that has been missing since demonetisation. The revival in private investments may be the most desirable outcome of this mission of Aatmanirbhar Bharat.
The virus-driven crisis was enough for equity investors to remain cautious. Now, the Indo- China border tension has added more concerns for equity investors. Investors want to know if this market will continue to act as if in an early bull phase where broader markets perform, cyclical stocks show leadership and the economic struggle is not fully reflected in stock prices. If it is a liquidity-driven rally, is there enough liquidity to support the strong rally witnessed so far? In the short term, investors are searching answers to these difficult questions even as the signs of correction are ominous in the market while there is no visibility of the markets touching the lows in March 2020.
People always underestimate the ability of people to adapt and therefore underestimate potential recovery or a V-shaped recovery whenever there is a crisis. The stock market is betting on a slow V-shaped recovery as is reflected in stock prices. As there is enough liquidity, it is always possible that more money is available to potentially chase fewer goods, thus leading to increase in prices. If that is clubbed with boycotting Chinese products, we may face higher product prices for a majority of items, leading to higher inflation. Investors may focus on those stocks and sectors that will benefit from higher inflation.