If you enjoy our content do consider subscribing to our Premium Plan where we deep-dive and analyze one listed Indian firm every week: GSN Invest++ With the lockdown extending beyond what was earlier expected, the economy is in dire straits, with almost every industry asking for some sort of economic support. There is now news doing the rounds that a second round of stimulus measures might be out soon.
But the combination of low tax collections, higher spend, and one downgrade away from a junk rating puts India in a very tricky spot. In today's post, we analyze the constraints behind a big-bang stimulus package, the priority of issues where support is needed, and how the government could potentially balance these factors.
A measured stimulus
As we had covered in one of our earlier pieces, India finds itself in a tricky spot with both direct and indirect taxes expected to come down, need for public support expected to rise (if for nothing else than to sustain the 80cr+ of our fellow citizens who could be pushed into the fringes of poverty), and rating agencies increasingly being critical of excessive fiscal loosening.
While arguments are often made about comparisons with the leverage positions of the US being far worse than that of India and the country still being able to afford a large stimulus (which is true!) but the discrepancy will continue to exist until countries start keeping their reserves in our currency or begin purchasing crude using the rupee.
With that in mind, it helps to be rational about our expectations from the second stimulus and its potential size.
The multiple needs of cash
But where should the cash that is given out be deployed? Here again, it helps to understand the needs in the system and then work on addressing the most pressing ones. The first most pressing need is to keep people fed and alive. The ratio, direct transfers, and cylinders that were given out in the first package should take care of that, at least for the next few months. It is natural for the government to keep some incremental wriggle room for additional spend here, in case the lockdown is extended for a longer duration.
The next challenge is firms facing a liquidity risk - a cash flow mismatch due to the current lockdown for example. This is especially acute in MSMEs who typically have a low cash cushion to survive through the crunch. This would possibly be the area the government would like to focus on most strongly. Helping firms in otherwise good shape, but facing a temporary mismatch in cash flows survive the crisis.
The next challenge and this is no small challenge is the large bunch of industries that were severely debt-laden and have a potential solvency risk. Companies in the travel and tourism space, where demand is expected to be muted for a significant period of time are especially susceptible to this risk. This poses a significant risk to the system, especially if it starts taking its toll on the banking system. That being said, given the fiscal room the second stimulus would have, it is fair to expect limited to no support on this front.
Till now the government has remained fairly level headed in its approach towards dealing with both the health and economic fall out of the covid crisis. Here's hoping a similar sense will prevail in its future decisions.