Savings and infrastructure in the post Covid-19 world

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Taponeel Mukherjee | 27 Apr, 2020
As we see even more of the global impact of the Covid-19 outbreak on healthcare and economics, a healthcare and financial catastrophe of such magnitude will impact current economic and financial trends and create new ones as well. From an Indian perspective, it would be prudent to watch out on three issues that will impact the Indian economy and deserve vital attention.

Firstly, given the plunge in global nominal yields with the ten-year US treasury yielding south of seventy basis points the requirement for returns or relatively higher-yielding assets, will be exacerbated in short to medium term. More specifically, the demand for real assets such as infrastructure assets will see further growth. Investors, pension funds, insurance companies and indeed all savers globally will require access to real assets, especially in the infrastructure space, that can generate cash flows to meet the target rate needed in the face of plunging yields all around.

The impact of Covid-19 will lead to further slowing down in growth in the near future, which will mean interest rates will remain lower for quite some time now. The world will look towards younger countries such as India to potentially create assets that can help meet the demand from local growth, while also providing investment avenues for savers. While the demand growth is contingent upon a gradual recovery in India, an opportunity to invest in Indian infrastructure will be even more critical for the global investment community moving forward.

For India, clearing the clutter in the infrastructure space to allow savings and investment pools to finance the assets will be the key to bridging the infrastructure financing gap. Mainly, in a world with collapsing returns, especially in the fixed income space, the next few years will provide opportunities to attract both domestic and global savings. Clarity in policy and expedited conflict resolution as the hallmarks of the new Indian infrastructure age are what is needed.

Secondly, we must realise that while liquidity and a higher quantum of money flow are essential drivers of economic growth, especially given both the demand and supply shocks from the Covid-19, productive usage of the additional capital is, if not more, as important. As the RBI expands liquidity in the system, to assess the impact one needs patience. Prudence in lending, especially with the hangover of NPAs, is much needed. While providing credit to a highly constrained economy is the lifeline, credit availability must not be at the cost of credit quality. Otherwise, we risk even greater problems from an avalanche of NPAs, a situation that is avoidable at all costs. Credit demand will see a pickup, however, only as consumer demand picks up and more importantly, the future path of action has greater clarity.

Thirdly, the recent happenings of a large mutual fund company in India shutting down certain debt funds once again bring to the focus the issue for investor suitability, liquidity and investor education in the context of the retail investment landscape in India. Balancing the need to provide savers with avenues to deploy their savings and allowing corporates to utilise the capital for productive use is both important and a desired underpinning of the modern economy. However, what needs additional focus in the years ahead is whether funds that invest in relatively illiquid corporate credit can provide short-term liquidity to their investors.

Essentially, investor suitability and investor education must be underscored. If a debt fund pays 200 basis points more than a bank FD, the question is: does that make the debt-fund a better investment option for the investor? Retail investors must understand that spread differentials must compensate them for the additional risk taken, and so on. Overall, providing market infrastructure that improves liquidity and pricing of credit in the market along with greater investor education constitute the vital components of further building the credit markets in India.

Effective mobilisation of savings into productive usage of capital must be the mantra for the Indian economy going forward. The Covid-19 outbreak has been a tragedy, but as we emerge from this tragedy India's capacity to offer attractive risk-adjusted returns on real assets and get its credit markets in order, will be crucial drivers of the economic growth that is much needed. An environment that makes room for savings to craft the much needed and critical infrastructure for assuring returns to savers and growth prospects for businesses is the most optimal way the economic wheels can deliver value. The current global environment offers India an opportunity for a fresh start towards the coming decade.