Expert Speak India Matters
Published on Mar 31, 2020
Tools for economic revival post Covid 19 The Indian economy has been in a slow down mode since past many quarters. It’s been crisis of confidence for sometime now - be it consumer sentiment or Indian entrepreneurial investment appetite. We have tacitly accepted it, with vehement denials about the reality and its reasons. Now Covid19 allows us for an economic reset. In this time of economic slowdown with the added burden of the (yet unknown) economic cost of corona virus, the liquidity pressure on the Government of India (GoI) will be higher than usual. In the current market mayhem, GoI’s disinvestment plans will be challenged in terms of valuation expectations as well as the timelines for deal closure. Also, the pressure on political stakeholders will be high to line up public funding for post Covid 19 in the form of any subsidies, write-offs, deferred payments, etc. These will add to the cash flow pressures on the Treasury. While the expectation is that RBI will do an out-of-turn rate cut, it is almost like (unfairly) expecting the RBI to do the weight lifting on its own. We have seen the commercial implications of profit booking and the pressures of being listed-enterprise (market expectation of higher profits or lower losses) has delayed the process as well as rate of passing on any rate benefit to the market. So the rate cut, whenever it happens will help, but not turn-the-needle. Luckily the oil prices have tumbled globally thanks to a geo-political face-off between major oil blocs. So the worry about CAD should not be for Current Account Deficit, but rather for Covid 19 Against Development. Assuming that the oil prices will be lower than last year’s, the oil import bill for our country will be lower as a percent of GDP for this fiscal and hopefully, a part of the next. That could give some space for liquidity managers at GoI to use up those “surplus” into various social schemes or fiscal incentives that’s expected from the government now. With the corona pandemic being global, the other economies are equally or if not, worse off. At the standards of living that developed-nations are used to and at their cost of living, the rehabilitation of their economies will be expensive and long-drawn.The biggest worry for any sovereign fund or treasury manager is to manage the pricing and free float of their debt papers, and to maintain relative advantage vis-a-vis the debt papers of other nations. This could be an apt time for GoI to use this window of opportunity to reset its federal fiscal deficit target higher to say a 5 percent of GDP and plan to bring it to around 3.5 percent over the next 24-30 months. This could open up liquidity wriggle-room considering that in current situation, industries will slow down further and hence direct & indirect tax revenues will take a beating too. In the current context, global rating firms may not worry about downgrading sovereign papers on account of fiscal deficit increase. Even if they did, relative pricing of other debt papers will be at stress considering their own federal indebtedness. For those pundits’ fear about an idea like this potentially increasing inflation over next few quarters, let’s pause for a moment. Inflationary trends would take time to set in (say 3-4 quarters), and if monsoon season this year is decent, then the consumer sentiment would be (further) positive. In the current circumstances, a short-term inflationary pressure might be a better pill to swallow than to struggle with liquidity challenges at the federal level. Surely this would mean that all eyes will be on the road between North Block and Mint Street, not withstanding the chaotic traffic from Dalal street.
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