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Resetting The Growth Engine
Self-Reliance: The New Mantra
All Roads Lead to Self-Reliance
Ever since being voted into power way back in 2014, the government has emphasized on reshaping the Indian economy to a manufacturer’s paradise. The challenges have been daunting. Yet the government is a step by step approach has been seeking out efficiency gains with small steps – each time making a big impact and an even bigger splash on the world stage.
Today, amidst the crisis, India stands at the cusp of yet another daunting challenge – Rebooting the Indian growth engine. As the world battles the human and economic costs of the Corona Virus, the government has promised a mega multipronged stimulus package aimed at addressing challenges in 5 key areas –
Together labeled as the आत्मनिर्भर भारत अभियान or Self Reliant India Movement
The COVID-19 Stimulus – Leveraging The Firepower
The government has announced a Rs 20 lakh crore incentive package (Including RBI stimulus). While the headline number (10% of GDP) is an impressive part of this package (~5% GDP) is already under implementation through RBI’s pre-announced liquidity measures and a mini package announced by the government. The incremental package would be 5%+ of GDP.
Source: RBI, Jefferies, News Reports, Axis MF Research
Empowering the Entrepreneur
Time and again the emphasis of development has been to harness the ability of the Indian entrepreneur to build credible businesses that would provide mass employment to India’s youth and develop India’s industrial might to compete with global giants.
Key Announcements for MSME’s
- Definition of MSME redrafted
- Rs 3 lakh crores collateral-free Loans for Businesses, including MSMEs. The 4 Year loan offering has an inbuilt 12-month moratorium on principal repayment
- Rs 20,000 crores Subordinate Debt to be partially guaranteed for Stressed MSMEs
- Dedicated Fund of Funds with a corpus of Rs 50,000 Cr to provide much-needed equity funding
- Global tenders for government contracts up to Rs 200 Cr to be disallowed
Who Benefits?
- MSME’s continue to operate under the financial backing of the GOI
- Banks & Financial institutions lend basis credit backing of the government
- Laborers will not get furloughed
Keep The Money Flowing
Credit risk in today’s environment has been a key reason for the reluctance of banks willing to lend even to investment-grade borrowers. By taking over some degree of credit risk, the government hopes to restart the lending cycle and bring back confidence into the economy.
Key Announcements
- 30,000 Cr liquidity scheme through Investment-grade debt papers of NBFC, HFC, and MFI fully guaranteed by GoI.
- 45,000 Cr through partial credit guarantee scheme scope expansion. AA-rated papers and below including unrated papers will be included under the scheme. First 20% loss to be borne by GoI.
Who Benefits
- The financial sector gets covered on both sides of the balance sheets – Cost of borrowing comes down NBFC’s and banks as they borrow with government guarantees. The banks can also use the T-LTRO for on-lending as well. On the asset side, MSME’s and corporates lend with credit guarantees from the government, reducing the effective risk profile of borrowers.
Creating Demand
Restarting the economy needs money in the hands of consumers. Given the limited resources, targeted spending has achieved better results in the past.
Key Announcements
- TDS / TCS rates reduced by 25% on non-salaried payments effective tomorrow up to 31 March 2021. Will apply to all payments – Rs. 50,000 Cr additional liquidity in the hands of consumers
- All pending refunds to charitable trusts and non-corporate taxpayers (but including LLP) will be issued immediately
- Ongoing public works – Concessional period to be extended by 3-6m for contractors. Government agencies will partially release bank guarantees for partially completed contracts
- One-time Emergency liquidity infusion – Rs. 90,000 Cr to all electricity distribution companies against all receivables. Generating Companies to also give rebates to distribution companies for passing on to consumers
What Does This Mean for Equities?
The current situation is still a health crisis. We are already seeing green spots emerge as the government has lifted restrictions in select regions of the economy. The ‘people first’ approach of the government is commendable and should help the economy recover faster and healthier. Unfortunately for us, markets will remain uncertain till the time a cure is found. Volatility is likely to remain elevated While we remain cautious, we believe the reasonable valuations could be used as an opportunity to top up existing investments in a staggered manner.
… And for Fixed Income
Today’s announcements are material positives for the economy and should positively affect the debt markets. Piggybacking on the RBI’s stimulus is a great way to conserve limited resources and we will continue to stay tuned to the next tranches of stimulus likely to be rolled out in due course. From a fiscal standpoint the immediate cost to the exchequer will be the range of Rs. 1-2 lakh crore, which is not too outlandish given the current situation.
The support to the financial sector is likely to result in further compression in yields corporate bonds yields. Credits have seen a significant blow out as many AA quality names in the credit space continue to see their bonds trade in double-digit YTMs. This should normalize over the next months.
From an investment standpoint, investors should look to deploy in the short to medium term space in actively managed short term strategies. Given the current uncertainties and risks around select industries with global inclinations, AAA bonds continue to offer better opportunities from a risk-reward standpoint.
Disclaimer
Source of Data: Bloomberg, Axis MF Research. Data as of 13th May 2020.
This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness, or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as a research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable.
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