Govt measures consist of reforms that need not have waited for Covid-19

The focus of the first set of announcements was ensuring liquidity / credit flow to micro small and medium enterprises (MSMEs), help Discoms tide over liquidity crunch, the second set concentrated on alleviating the hardships caused to the farmers, migrant workers and street vendors due to the coronavirus-induced lockdown restrictions. The third set of announcements by the Finance Minister (FM) consisted mainly of providing relief to rural population. Also, the timeframe of spends in some cases extends beyond the current fiscal.

The proposed amendment to Essential Commodities Act, however, is the most exciting part. It is very welcome and can have large beneficial impact on Indian rural economy and its gross domestic product (GDP) if done fairly, transparently and swiftly. However, one hopes that the states and/or traders lobby don’t put impediments in this plan due to political or commercial considerations.

The fourth part of the stimulus announcement is focused on new horizons of growth, which covers a wide spectrum. These are spread over multiple years, and hence, their immediate impact may again be limited. Fiscal impact also seems very small for the current fiscal. Some of these may require legislative approval and states’ cooperation. Measures related to power generation and distribution and mining are welcome, as they can make an impact fast if states get on-board soon, leaving aside their political compulsions.  

The fifth and final part of the stimulus announcements was light in terms of fiscal impact, but covered a wide gambit of procedural matters. A welcome announcement was about notification of a list of strategic sectors requiring presence of public sector enterprises (PSEs) in public interest. If this bold announcement is quickly transmitted into action, then it could unlock a lot of value.

Linking raising States’ borrowing limit from 3 per cent to 5 per cent of state GSDP with measurable targets of reforms is a good idea. The Suspension of IBC proceedings for one year though essential in these times, would postpone the pain for banks and non-bank finance companies (NBFCs) and they could see large slippages and lower recoveries post the one-year period.

Although the intent of these announcements was no doubt sincere and good, markets will get disappointed with them because the immediate spend out of the big fiscal stimulus is relatively small. There will be doubts on whether economic growth will revive soon and in proportion to the large figure of the stimulus. Worry about rating downgrade could, however, get postponed. To be fair, in most major countries, 50 per cent – 90 per cent of the stimulus amounts comprise of contingent liabilities like loan guarantee, conditional capital infusion etc. The rest are fiscal measures – revenue foregone and additional spending.

The common thread in these announcements is that they consist of a lot of reform measures that need not have waited for Covid-19. Also some of these measures depend on how far and soon states, traders impacted by agri reforms come on board, and how soon will Judiciary become less active / pro-people and more fair to businessmen as far as mining, power and infra reforms are concerned.

The impact of government stimulus on corporate earnings may not be felt immediately. Defence-related stocks could remain in focus for a few days, while banks and NBFCs could come under pressure. Overall, markets have run out of one more positive trigger and now we have to look forward to the balance corporate results / commentary and onset of monsoon. The extension of lockdown with relaxations for non-red zones is welcome, but as long as the main business centres (metros) remain locked down, the impact of relaxations can be limited in terms of reviving overall growth. Safe and swift reopening of the entire economy, more than anything else, will be key to alleviation of distress of various sections of society.

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Deepak Jasani is head of research at HDFC Securities. Views are his own.