Potential for faster growth

India’s economy is now back in full swing. The number of new Covid-19 cases is declining sharply and India’s death rate is lower than in most other countries.

GDP for 2020/21 is expected to fall by 6-7 percent, but a sharp increase of 12-13 percent is expected for 2021/22. Corporate profits will increase by only 7 percent for the financial year ending in March 2021, but next year’s profits will be up by over 30 percent according to forecasts. A weak starting point with low comparative figures obviously plays a role here, but historically low interest rates coupled with both global stimulus from central banks and strong measures in India’s state budget for 2021/22 provide the potential for faster growth.

This morning I talked with Mr Keki Mistry, CEO of HDFC Ltd, India’s largest mortgage lender. I have been following this company for over twenty years and it is probably one of India’s best managed businesses, with a consistent strategy and high profitability. India’s real estate market has been out in the cold for a few years due to the liquidity crisis among finance companies (except HDFC Ltd), high housing prices and builders who had too much debt and were unable to complete their projects.

Now the situation is different. The interest rate for mortgages is below 7 percent, which is historically low. The government reduced stamp duty for housing from 5 percent to 2 percent in October, which has boosted demand. In a year with a global pandemic, HDFC increased its lending by 26 percent in the third quarter, with its margins increasing to 3.4 percent. Lower borrowing costs mean higher profitability. As much as 80 percent of new lending is going to the purchase of new homes, i.e. purchases made in the last four months. In the past, lending has grown as HDFC has taken market shares from other players.

India’s budget provides a strong stimulus to the economy. Although the deficit will increase to 6.8 percent of GDP, it is in good company with many other countries in the same position. Large investments in infrastructure, simple affordable housing for the less well-off and new scrapping rules for trucks are positive. They also want to remove the bad debt losses from state-owned banks and move them to a separate company for restructuring. A couple of state-owned banks and insurance companies will be privatised. The fund reduced its holdings in Reliance Industries and Hindustan Unilever this month. We increased in banks through an acquisition in Axis Bank and increased in Bharat Forge and Voltas.