Daily Financial News Analysis – 20th May’20

Table of Contents

Fitch on Indian Package

The government’s Rs 20.97 lakh crore COVID-19 package lacks in addressing immediate concerns of the economy as the actual fiscal impact of the additional stimulus is only about 1 per cent of GDP as opposed to the claim of 10 per cent.
Prime Minister Narendra Modi on May 12 announced a stimulus package of Rs 20 lakh crore, or nearly 10 per cent of GDP, to deal with the economic fallout of COVID-19.
The contents of the package were broad-based and announced in five tranches.
“About half of the package amount covers fiscal measures that had previously been announced and also include the estimated economic impact of monetary stimulus from the Reserve Bank of India (RBI),” Fitch Solutions said in a note.
The macroeconomic and industry research firm said a seeming reluctance for fiscal expansion by the central government amid the COVID-19 crisis in India also poses a significant downside risk to its 1.8 per cent growth forecast for 2020-21 fiscal.
The new fiscal stimulus announced between May 13 and May 17 is “made up of the government loan guarantees, credit extensions to be led by banks, and regulatory amendments,” it said.
The package, it said, will not have a major fiscal and economic impact, despite the government’s claim of its ’10 per cent of GDP’ size.
Of the host of new stimulus measures, only about six — pension fund support, temporary tax cuts, farm infrastructure upgrades (if funds are quickly disbursed and projects rapidly executed), free food provision for migrant workers, funds to safeguard rural employment and an emergency fund for post-harvest activities — can be quantified as a fiscal stimulus with a near-term impact.

WEF study

A prolonged global recession due to COVID-19 pandemic, high unemployment, another outbreak of an infectious disease and increased protectionism are among the biggest near-term worries for companies around the world.
The world is not ready for the knock-on effect of far-reaching environmental, societal and technological risks, but a “green recovery” and more resilient, cohesive, inclusive and equal societies can emerge if leaders act now.
As economies restart, there is an opportunity to embed greater societal equality and sustainability into the recovery, which would unleash a new era of prosperity.
The study, titled ‘COVID-19 Risks Outlook: A Preliminary Mapping and Its Implications‘, has been conducted in partnership with Marsh & McLennan and Zurich Insurance Group. It taps into views of nearly 350 senior risk professionals who were asked to look at the next 18 months and rank their biggest concerns in terms of likelihood and impact for the world and for business.
The report also calls on leaders to act now against an avalanche of future systemic shocks such as the climate crisis, geopolitical turbulence, rising inequality, strains on people’s mental health, gaps in technology governance and health systems under continued pressure.

Govt extends deadline of projects

The Finance Ministry has extended the deadline for fulfillment of contractual obligations of all government projects, including public-private partnerships (PPP), which were due for completion on or after February 20, by up to six months in view of COVID-19 crisis.
The Expenditure Department, under the ministry, had in February said that COVID-19 outbreak in China would be considered a ‘force majeure‘ situation, which refers to extraordinary events and circumstances beyond human control or a natural calamity, giving relief to companies which have contracts with the central government.
“Limitations placed on the movement of men and material by the Ministry of Home Affairs…. and the respective state and UT governments from time to time have severely impaired the fulfillment of contractual obligations for supply of goods, works and consultancy services and affected the volume of vehicular traffic,” it said.
In view of the restrictions placed on the movement of goods and services and manpower on account of the lockdown situation prevailing overseas and in the country it may not be possible for parties to the contract to fulfil contractual obligations, the department said, adding in respect of public-private partnership (PPP) concession contracts, period of the contract may have become unremunerative.

Interview of FinMin

The relaxation of the lockdown curbs has begun. Are you expecting a surge once the postponed consumption demand kicks in?

I am expecting a surge in growth, but it may be gradual because the labour component is something on which the industry is either remodelling themselves by depending more on local workers, skilling them, or probably waiting for (the return of) those people who have gone home. The surge, from that point of view, may be gradual, given the uncertainty related to labour.

India Inc. is not pleased that they missed the stimulus bus.

I heard all of them and then took a decision. I do understand each has a perspective on what is best. I welcome all views. I have done what is best in my view.
I do not wish to sound patronizing and it will be unfair for me to judge anyone but it is worth remembering that before covid-19, when we all felt the economy was slowing down and an incentive needed to be given, the corporate tax rate was cut to an unimaginable extent—it was a drastic step.
But did I get anything out of it? We showed that we want to give big-time help to industry. Possibly, some green shoots should have been visible by January, by which time firms could have saved enough for making fresh investments, but God willed otherwise.

One charge being levelled against you is that you are a fiscal hawk. This is ironic because previously it was a much sought-after moniker.

I am hearing it for the first time. I would assume that is a virtue. I am dealing with public money; I am dealing with money, every penny of which I am answerable to. I have to be cautious.
And again, even if they suggest that you have to be generous, it is only the second month of the year.

So you are not ruling out more measures?

I am not ruling it out. I have to see how it (pandemic) develops as we go further.

How will you be funding this stimulus package? Is monetizing the deficit on the cards?

I have kept all my options open. I have to see where it goes.

What is your assessment for the next three months?

I can’t see the pandemic retreating. We are still in a lockdown mode.
These schemes are getting implemented and people will have some money in their hands and start businesses again. This may not be the best time to make an assessment.

Are you prepared to give tariff protection against cheap imports?

Let us see what are the things we can do to make our industry stronger. We will not hesitate.

You mentioned we are entering a new paradigm in a post-covid world. Could you elaborate?

The world is not going to be the same. When we lift the lockdown, the working environment, the office and interpersonal contact for business is changing, the world over. Some companies have said working from home could be the norm permanently.
One of the big things that has changed, a paradigm shift, is that administration, urban local bodies, wards and panchayats will now have to—I am not speaking on behalf of the government—develop a credible data source of people and their skill sets, the industry engaging them so that, God forbid, if any such situation happens in future, we can handle them.

Like farmers and industrial workers, for the first time, we are now discussing migrant labourers as a cohesive unit for policy making?

I will appeal to all those who are interested in humanitarian issues to positively engage in this. We should create a lot more local job opportunities. I am not saying they should not move around in the country. But the point is whether we can scale their skill sets, which is crucial whether one is a local worker or a migrant. But many migrant workers come to urban areas because there are not many local job opportunities.
Even if we cannot engage all of them in their respective local areas, at least some of them can have opportunities there. Why is it that some kind of economic activity does not take place in certain places and everyone there is compelled to move out?

Almost everyone has appreciated the big ticket reforms you have announced but some of them such as dismantling APMCs have been on the table for sometime. What makes your government so confident to execute them?

As I said, it is not something new. After 2014, we also worked on it. I remember once attending a governors’ conference at the Rashtrapati Bhavan, even in that it was discussed. The national integration council meeting with CMs, it was discussed there as well and many states had agreed to take it up. In my budget speech, I had very clearly said that I am giving a model APMC Act, please get going with it. We gave the nudge but I am pinning my hope now that with Covid-19, it can’t be the same thing. Farmers cannot be restricted to sell to licencees only, why can’t they sell to others?

The underlying theme of this has been entitlement versus empowerment. This is a fundamental shift. Can you elaborate the government’s thinking?

I don’t want to speak for the Prime Minister but whether as chief minister of Gujarat or as the Prime Minister, his faith was on empowering people. Entitlement does not empower. When you give dole, before and after that, your position is no different. He has never believed in entitlements. That does not mean he does not recognise (the need for giving benefits). For instance, under MGNREGA, we have given more money because those who return to their villages and face uncertainty, should still have an opportunity. Ideally it will be better if a work opportunity arises either in his own place or elsewhere. It is a sound philosophy because ultimately the dignity of a human is more when he thinks he is contributing, earning honest money and taking care of his family.

The politics of entitlement is a much easier card to play.

Maybe so but today’s aspirational India wants education for their children, good healthcare and a dignified way of earning. He wants to do some work and earn honest money. A responsible government should give that opportunity to everybody.

Now that Central government’s fiscal position is severely affected by the Covid-19 pandemic, do you think financially compensating states to the extent that they get an annual 14% GST revenue growth is still viable?

As long as that law (GST (Compensation to states) Act, 2017) exists, I have to honour it. In the GST council, the revenue situation was explained much before the pandemic. The council was ceased of the matter and that the cess revenue wasn’t adequate. That was also one of the issues on which some discussion commenced on how the 14% will be paid. I will have to meet and talk to them about it. We will have to see what the Council wants.

Are you prepared to spend more on health infrastructure?

I have said in my announcements that health infrastructure will definitely get more funds. It will also be supported by viability gap funding for people to create social infrastructure at the block level.

The contact economy, that is, sectors like hospitality and aviation, is facing a massive crisis with job losses and they may end up as non-performing assets.

That is why banks are going to give them additional working capital and term loans without asking for collateral. Banks will extend this credit facility to all MSMEs. With the definition of MSMEs being expanded, a larger number of companies will benefit. Banks are aware of the potential of big borrowers.

Lessons of 2008-13 guided Covid stimulus: Nirmala Sitharaman

The government kept the lessons of the 2008-13 period in mind when designing its Rs 20 lakh crore stimulus package, Finance Minister Nirmala Sitharaman told ET, explaining why it had avoided spending recklessly to revive the economy. She was referring to the programme implemented in the wake of the global finance crisis and its aftermath.
Sitharaman said in an interview that the steps that have been announced since last week cannot be boxed into “supply side measures” as they put money in the hands of people who will spend and create demand.
The finance minister also said the government wants to help migrants but does not have the data to reach out to them.