Vijay Kumar Gaba: fiscal stimulus

Showing posts with label fiscal stimulus. Show all posts

Thursday, May 21, 2020

Farm Sector - Govt may need to do much more

The much publicized and even more widely criticized Rs20trn Self Reliant India economic recovery package has laid significant emphasis on the farm sector reforms. The following 10 key promises have been made as part of the package.

1. Essential Commodities Act to be amended to enable better price realization for farmers by attracting investments and making agriculture sector competitive.

2. A central law to be enacted to provide for inter-state trade and framework for e trading of agriculture produce.

3. The government to facilitate appropriate legal framework for an enforceable standard mechanism for predictable prices of crops at the time of sowing (some sort of contract farming or forward pricing mechanism).

4. Financing facility of Rs.1Lakh Cr to be provided for funding Agriculture Infrastructure Projects at farm gate & aggregation points (Primary Agricultural Cooperative Societies, Farmers Producer Organizations, entrepreneurs, Start ups, etc.)

5. Rs 10,000 Cr. scheme to be launched for Formalization of Micro Food Enterprise (MFE). through Cluster based approach (e g Mango in UP, Kesar in J&K, Bamboo shoots in North East, Chilli in Andhra Pradesh, Tapioca in Tamil Nadu etc

6. Rs20,000 cr support to be provided under the Pradhan Mantri Matsya Sampada Yojana (PMMSY) for integrated sustainable, inclusive development of marine and inland fisheries. Rs11,000 cr to be provided for activities in Marine, Inland fisheries and Aquaculture and Rs9,000 cr for infrastructure including Fishing Harbours Cold chain, Markets etc. Provisions of ban period support to fishermen (during the period fishing is not permitted) and personal & boat insurance.

7. Rs 13343cr to be provided for starting National Animal Disease Control Programme for foot and mouth disease and brucellosis.

8. Animal Husbandry Infrastructure Development Fund to be launched with total outlay of Rs15,000 cr.

9. Rs4,000 cr support for promotion of herbal cultivation covering 10lakh hectare. Rs500 cr scheme infrastructure development related to integrated beekeeping development centres, collection, marketing and storage centres, post harvest & value addition facilities etc.

10. Operation Green proposed to be extended from tomatoes, onion and potatoes (TOP) to all fruits and vegetables i.e., (TOTAL)

Indubitably, these measures are important and desirable. It is totally redundant to debate whether these are new measures or part of the work in progress as part of the plan to double farmers' income within the stipulated period. The important point is that if the current crisis is leading the government to accelerate these long pending initiatives, we must welcome this.

However, the second question, which in my view may be more pertinent, is "whether these measures sufficient or we would need much more to attain the twin objectives of self reliant India and sustainably higher economic growth?"

I believe that these measures are important and required. But these will deliver the desired outcome, only if implemented with the many more structural reforms in the farm sector. I have shared my views on this issue before also. I would like to discuss these again in light of the recent developments, over next couple of days.

Thursday, May 14, 2020

Fear dominates hopes

In past 50 days of lockdown, I had a chance of interacting with numerous professionals, investors and businesspersons. The general environment is that of anxiety, fear and pessimism. The promise of a meaningful economic stimulus by the prime minister seems to have rekindled some hopes. Though greed usually accompanies hopes, as of this morning, the fear still continues to be the dominating factor in influencing the investment decisions.

In my view, the following three are the primary sources of rising hopes:

(a) The prospects of total collapse in economic growth and consequent high stress in the financial system is prompting RBI for an aggressive monetary easing. Easing inflation and government’s resolve to bring back the economy on growth path is also helping the sentiments.

(b) There is abundant liquidity in the financial system. As of 6 May 2020, banks had deposited over Rs8.6trn in RBI's reverse repo window @3.75%. The banks have been reluctant to lend for quite some time now. People are hoping that the government may assure banks on credit losses through some sort of guarantee and motivate them to restart the lending.

(c) The impact of COVID-19 is receding as the most developed countries are reporting flattening of curve. There are reports of an accelerated approval for vaccine to treat the infection.

However, unlike August 2019, when the corporate tax rate restructuring was announced, there appears no urgency amongst investors and businesspersons to catch the first flight, as the fear still is continues to be the dominating sentiment.

The fear is stemming primarily from the structural weaknesses in the economy, anxiety about the future course of socio-economic life, health concerns and likely redundancies of businesses and people in post lockdown world.

From stock market perspective, it is pertinent to note that FY21 earnings estimates have been drastically cut to almost 0% growth from 24-28% growth projected a few months earlier.

The downgrade to upgrade ratio of credit rating of Indian corporates has touched its nadir in the current quarter, highlighting the deteriorating solvency and liquidity profiles of Indian businesses.

The stimulus package, the details of which would be known fully only by Friday evening, notwithstanding its size and shape, is likely to support businesses and economic over a period of time. Many MSME or even larger businesses may not survive till that time.

Under these circumstances, I continue to remain hopeful that we shall get a better entry point in Indian equities during summer of 2020. Till then I shall savor the cash and watch the markets carefully.

I shall keep reminding myself the most inspiring tag line I saw behind a truck: Jinhe jaldi thi woh chale gaye(Those who were in hurry, have passed away.)

Tuesday, November 5, 2019

Keep the wheels of economy in motion

In one of his recent interview, Brian Coulton, the Chief Economist at Fitch Ratings, emphasized that the persisting credit squeeze in the Indian economy may hurt the economic growth much more than the present estimates. Brian cautioned that the GDP growth in FY20 could slip to 5.5%, much below the current RBI and government estimates of 6%+ growth.

For records, the Indian economy grew at the rate of 5% in the first quarter (April to June 2019) of the current fiscal year, the slowest in more than 6 years. The slowdown was visible in all sectors of the economy including agriculture, manufacturing and services. Within services, the growth in finance, insurance and real estate sectors was cited as particularly worrisome, as it highlighted poor credit conditions.

Besides, the credit availability, the high cost of credit is cited as one of the constricted factors. Despite 135bps cut in policy rates in the year 2019, the real rates are found to be still elevated, constraining the growth.

The GST collections for the month of September have reported at Rs 95,380cr a year-on-year decline of 5 percent and 3 percent lower than the monthly average of Rs 98,114 crore for FY19. The GST collections in FY20 have been consistently below the budget estimates. Juxtaposed to the shortfall in income tax collection, it does not augur well for the fiscal balance. The scope for the fiscal stimulus as widely anticipated by the market participants appears very limited. In fact, the government may actually be forced to increase the effective taxation for the affluent section of the society in the forthcoming budget.

Reportedly, housing sales declined 9.5 percent during July-September period across nine major cities to 52,855 units on low demand as economic slowdown and liquidity crisis weighed on buyer sentiment. As per the PropEquity data quoted by Bloomberg, Chennai saw the maximum fall of 25 percent in housing sales at 3,060 units during July-September 2019 as against 4,080 units in the year-ago period. Housing sales dropped 22 per cent in Mumbai to 5,063 units from 6,491 units, followed by Hyderabad that saw 16 per cent decline to 4,257 units from 5,067 units.

Notwithstanding some encouraging sound bites from the corporate leaders this Diwali, the recently released data on core sector growth belies the optimism. The growth in India’s core sector output contracted 5.2% in September 2019, its worst performance since 2005. All sectors in the core index, with the exception of fertilisers, posted a contraction. The data indicates the economy may have slipped further in the 2QFY20, confirming the fear of rating agencies and economists. As per some estimates the GDP growth rate for 2QFY20 could be closer to 4% rather than 6% as widely anticipated.

Two short points I would like to make here are as follows:

The growth slowdown is real, persistent and widespread. A part of this is certainly cyclical, but treating the entire thing as such may be misleading. The structural part of the downward shift in growth curve needs to be acknowledged, identified and treated separately.
The adhoc stimulus must be directed at boosting both consumption as well as investment demand. The measures like corporate tax rate restructuring, and ease of doing business shall have impact only in due course; and for these measure to have any impact the wheels of the economy must be kept in motion.