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Will the latest stimulus package revive investor sentiment?

The finance ministry announced Rs.20 trillion package to counter COVID-19, but that figure may be a stretch  

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Published 5 months ago on May 22, 2020 Read

India is experiencing a double whammy in terms of demand and supply. Supply has taken a hit owing to lockdown and now there is uncertainty over a recovery in demand. Consumers and entrepreneurs will most likely save and plough back rather than spend, which will not help GDP growth. Even though the stimulus package is a comprehensive one, the caveat is that the cash outgo is much less than what was expected — 1% of GDP instead of 10%. Corporates have parked almost Rs.8.5 trillion with the RBI in reverse repo, yet there is risk aversion among banks, and they do not want to lend. The intent may be good, but the package does not hit the right notes in the near term. Despite that, the consensus is overestimating earnings growth, which is eventually going to disappoint in a big way as nothing has changed between March and today. The market is buoyant largely because global markets have rallied after the US Fed purchased all the sub-standard bonds. The false euphoria is evident through low institutional participation, as only retail investors and HNIs participated in this rally. Once the gravity of the situation sinks in, the market will de-rate. Barring sectors such as IT, pharma, consumer staples, cement and tractors, the narrative is not looking good for the broader economy.

 

Jigar Shah
CEO and head of research, Kim Eng Securities

 

 

While there is consensus that the latest package announced doesn’t meet expectations, it is still a comprehensive package. It is the right step to arrest a worsening economic situation as the government announced long-pending essential reforms to bolster manufacturing and agriculture. The government has announced three crucial reforms in the agriculture sector; the amendment of the Essential Commodities Act to exclude some crops from the list, marketing reforms by amending the APMC Act, and contract farming. Though these reforms may take some time to show positive impact on the ground, they were needed to make essential changes in India’s agriculture sector helping both farmers and consumers. In the immediate future, steps such as guaranteeing incremental small & medium enterprise (SME) credit of Rs.3 trillion and credit guarantee for buying NBFC and MFI debt could help reduce risk aversion in the financial sector, albeit the execution details would be important in assessing the effectiveness. One Nation One Ration Card, under which 670 million beneficiaries are likely to be included covering 83% of public distribution system population by August 2020 is another important development, which is expected to cover 100% by March 2021. Another noteworthy move is liberalisation in the coal sector. While immediate boost to investor sentiment is unlikely, long-term investors will hold on to high quality businesses in consumption, manufacturing, banking and NBFC sectors. While execution will take time, if the reforms are targeted well, this can help contain GDP contraction in FY21.

 

R Venkataraman
MD, IIFL Securities