Stimulus 2.0 and the road ahead for India

The wait is finally over. Prime Minister Narendra Modi comes on screen at 8PM as the entire nation waits with bated breath. He keeps repeating the term ‘self-reliant’ and tells the approach Indians should now take to consumption is – Go Local. What did really come as a welcome surprise was the announcement of a 20-lakh crore stimulus package ~10% of India’s GDP. While we wait for the final outline to come out and see what it really entails between the lines, on the face of it this is a gargantuan number. The only countries that have gone above and beyond for a high stimulus package for a post Covid – 19 revival are Japan (21.1%), United States of America (13%), Sweden (12%) and Germany (10.7%). The size of the stimulus for India is almost 5x the proportion of South Korea, 2.5x of China, and 2x of that of UK – all in percentage terms.

Almost 40 days back when the first leg of stimulus was announced, it was to do more with survival. This right here as a clear intent to bring the focus back on revival and awaken the so called ‘animal spirits’ missing in the economy.

Various economists, bankers, and policy experts have suggested and opined on the way forward. It would be worthwhile to have a look at the road ahead through all these lenses.

The Banker’s view

The banker right now has been very skeptical in releasing credit in the system. In an earlier piece on “The Great Indian Economic Slowdown” by Arvind Subramanian, the former Chief Economic Advisor of India, the author had highlighted the stress existing in the financial system. Flow of credit has come down drastically due to reduced economic activity and increased risk aversion on account of multiple cases of frauds and poor corporate governance practices coming to light. The spike in NPAs – across both public and private sector banks makes bankers cautious with lending credit further in the economy. As a result, most banks have been parking money with RBI through reverse-repo which has almost reached ~8.5 Lakh Crores. The banker today now seeks a sovereign credit guarantee to issue fresh loans to ensure further stress is not created in their books, adequate credit is released in the financial system and economic activity can resume again. On the other hand, the Basel framework entails NPA recognition to take place when the default exceeds a period of 90 days. Extraordinary times may allow for stretching this to 180 with a deadline to go back to 90 after the crisis subsists.

The Economist’s view

The economist is precarious with the sudden increase in the borrowing plan announced by the Government of India. India’s sovereign credit rating can be downgraded which can again lead to potential downgrade amongst all debt instruments existing in the country. Although credit rating agencies will have to provide a leeway owing to the uncertainty around Covid – 19, the leniency has always been stringent in the case of India compared to other countries. Any increase in Fiscal Deficit can lead to this consequence. Well, it doesn’t require an expert to forecast that Fiscal Deficit for the current year can overshoot the estimate. The Economist argues for the use of a long-term zero-coupon bond with a 20/30-year maturity or a perpetuity bond with a nominal rate of interest ranging in 2-4%. This will not create debt servicing challenges or redemption pressures.

The Policy Expert’s view

The policy expert argues that India had a complex suite of myriad labour laws due to which when the word manufacturing output was booming, India could not live up to the potential of being a powerhouse. In the last 10 days the states of Madhya Pradesh, Gujarat and Uttar Pradesh announced the suspension of a few labour laws to kickstart economic activity with the industrial sector.

This does send a strong message to the global investment community looking to shut shop in India. While the chatter all-around has been that companies have been flying out of China and looking for alternatives, India is still not the number one choice. India has been reeling with it’s own set of issues right from demand shrinkage, twin balance sheet issue (which later got extended to a four balance sheet issue – explained in detail here) and under the current lockdown a flight of labour from major industrial hubs.

The point is when global companies did come up and set shop in China as a critical part of their supply chain they had done their necessary due diligence. While there has been no dearth of conspiracy theories floating around, let’s keep that aside for a moment. Amidst all the countries, China has had the best response to contain the virus and has also managed to show it’s efficiency in containing damage and restarting economic activity. Thus, we are still a long way to get any capital flight inbound.

Everyone in India now awaits for the fine print of the stimulus. While Vasudhaiva Kutumbakam advocates the thought of the entire world to be one family, and is also a founding tenant of globalization. With the ongoing crisis and the slew of safety measures that need to be adopted, this chain can see getting broken. As PM Modi said, go local from global, it would be worthwhile to see what lies ahead.

Update – 14th May, 2020: This post got me a whole lot of love.

I was called on TRT World (a Turkish state international news channel broadcast 24-hours per day in English) to talk about my initial thoughts on the announcement on 13th May, 2020. Here’s the snippet:

Look Maa, I’m on TV!

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Abhishek bajaj

Well thought and written

Thanks Abhishek. Happy that you liked it!

Krishna Kumar

The headline of 20lakh crore is mainly for the gallery – so is the daily soap opera by the FM. Within that framework, the government has managed to do the fire fighting – providing liquidity and credit guarantee to ensure that financial system doesn’t collapse during the lockdown. It also tried to push the reform agendas showing the intent of the govt. that it is ready to do whatever it takes. Govt. is holding on to some more fire power- more fiscal expansion is possible in the coming days. We are still in the middle of the pandemic – we don’t how long and deep is going to be the impact.

There were some strong reforms that were pushed through these announcements. Since everyone is an armchair economic policy expert today and was expecting huge DBT flowing in, the bulk of the crowd was disappointed. Having said that, the only thing certain right now is uncertainty and it would be more prudent to do things in a calibrated fashion. Throwing more money is never the answer.

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