Like the rest of the world, India has seen a significant slowdown in its economic activity on account of coronavirus pandemic. While the government has announced a Rs 20 lakh crore stimulus package to revive the economy and get the growth back on track, Ashu Suyash, MD & CEO, CRISIL told The Indian Express that direct fiscal spending from the overall package is about Rs 2.6 lakh crore or 1.2% of GDP this year. Stating that the current extent of economic decline would demand stepping the scale and scope of fiscal measures, she said that without a strong fiscal stimulus, recovery is unlikely to be a V-shaped one. Excerpts:
How do you see the Rs 20 lakh crore stimulus package announced by the government in terms of its impact on the fisc and its ability to provide a fillip to the economy?
Many steps in the Aatmanirbhar Bharat package are oriented towards raising the long-term ‘trend’ rate of growth. If I have to pick out a standout facet, it would be the agriculture-related measures such as dismantling of agriculture produce and marketing committees. The amendment to the Essential Commodities Act to deregulate food items (food grains, oilseeds, onion and potato), too, is aimed to improve price realisation at the farm gate. The measures towards MSMEs and NBFCs are also a critical part which would help alleviate some stress.
We would have liked to see targeted measures to address near term stress such as scaling up cash transfers to the poor; direct cash support for micro and small enterprises which are facing acute liquidity problems; permitting restructuring of loans for viable businesses and formal clarification on applicability of moratorium on bank loans to NBFCs / HFCs / MFIs which provide the very critical last mile connect.
From the overall fiscal package, direct fiscal spending is expected to be about Rs 2.6 lakh crore, or about 1.2% of the gross domestic product (GDP) this year. The balance is mostly in the form of government guarantees and facilitating credit growth through the banking sector. So we are leaning more on monetary policy, whereas fiscal policy would have been more effective in the current situation where the near-term worries are immense.
That said, no amount of stimulus can offset the widespread economic impact from the pandemic, it can only minimise the blow. So it makes sense that the government is also trying to push reforms now, these will pay off in the medium run.
Do you think the government could have done more, or was it constrained?
Lack of fiscal space is a huge constraint. India’s fiscal position was already strained even before the pandemic, with fiscal deficit well above the FRBM limit in fiscal 2020. Recent data shows fiscal deficit of the Centre at 4.6% of GDP against the revised estimate of 3.8%.
That, coupled with expectation of lower tax and non-tax revenues amid the ongoing lockdown, has held the government from giving a direct push to the economy. This is in sharp contrast to the period preceding the 2008 crisis when Centre’s fiscal deficit was under 3%, which gave it space to boost spending.
However, the current extent of economic decline would demand that fiscal measures are stepped up in scale and scope.
What are your first thoughts on the relaxations to restrictions being announced by the government? Can this advance recovery?
Every day of lockdown has only magnified the ‘life vs livelihood’ quandary for policymakers. It is only prudent to open up in a calibrated manner what has been the most stringent lockdown in the world.
With measured relaxation, economic activity is already starting to come back as proxy indicators such as Google mobility charts and power consumption show. For example, ‘all India mobility trend to workplaces’ has improved from a trough of -72% in March end to around -40% in the third week of May. Similarly, power demand has recovered smartly from a 30% fall y-o-y to almost zero decline in the same two month period.
However, with a large part of the economic activity in ‘Red Zones’ – in our estimate, over 40% – the uphill climb will be far from smooth.
We, therefore, believe that sans strong fiscal stimulus – which we don’t foresee – recovery is unlikely to be a V-shaped one. Our 5% GDP contraction forecast is predicated on this.
While CRISIL has estimated a GDP contraction of 5% this fiscal and 10% permanent loss, what are the downside risks to this estimate?
There would be further downside if three risks materialise: One, if global GDP declines at a steeper pace than expected (2.4% decline projected by S&P Global for 2020 calendar year). Two, a second wave of Covid-19 cases emerges, adding to the uncertainty and stringency of containment measures; and three, agriculture, the beacon of hope this year, faces a setback on account of rains – the lack or excess of it.
Will the RBI’s move to cut the repo rate and push liquidity help credit growth?
It may not lead to a material uptick in credit growth. Two factors are expected to keep credit growth subdued this fiscal. One is the challenging macro-economic undercurrents leading to an expected 5% contraction in GDP, and two, risk-averseness among lenders.
Till such time banks are comfortable with the credit quality of borrowers, they may not loosen purse strings. That said, the government’s Rs 3 lakh crore scheme to extend credit to MSMEs – backed by government guarantee – should provide some tailwind to credit growth in this segment.
Which sectors do you see impacted the most by the lockdown?
The consumption sector – especially discretionary – will feel direct and immediate heat.
While assessing consumer income impact is difficult in India, given the large proportion of unorganised labour and self-employed people, our analysis of employee cost for over 40,000 companies, with total employee wage bill of Rs 12 lakh crore, paints a gloomy picture. It shows that about 52% of wage bill pertains to companies that will be materially impacted by the downturn.
By number of companies, the scenario is worse. Given that smaller ones are more vulnerable, over two-thirds are likely to be impacted, which is why demand will take a big hit this fiscal.
Consumers may prefer precautionary savings, curbing sales of discretionary services and products such as airlines, hotels, restaurants, automobiles and durables. In automobiles, overall sales of passenger vehicles may be at a decadal low, and for two-wheelers, on a par with fiscal 2012.
Apart from telecom, it is difficult to find a sector that may do well.
While investor confidence remains low, what is the impact of the pandemic on the corporate bond market and how will it hurt the ability of companies to raise funds?
Mutual funds, which were active investors in corporate bonds, have been seeing outflows, which limits their ability to participate in new issuances. Further, risk aversion has resulted in a shift in preference for overnight and gilt funds, as compared to credit opportunities, short duration and medium duration funds that invest into corporate bonds.
Heightened risk aversion has resulted in increased preference, across investor types, for public sector and very highly rated private sector papers. Spreads have increased significantly for almost all other issuers, despite the RBI’s liquidity measures. For instance, even in case of AAA bonds (barring benchmark issuers such as NABARD), median spreads have increased by about 30 bps in April alone. The widening is more pronounced in the non-AAA space.
Given the high risk-aversion and credit quality worries, private sector, non-AAA issuers will find it difficult to access the corporate bond market. Additionally, more floats by the central and state governments could crowd out other issuers.
What are challenges you foresee on credit quality and impact on ratings assigned to companies?
Given our call of 5% contraction in GDP this fiscal, corporate credit quality would be under pressure and downgrades would outnumber upgrades in the near term.
The loan repayment moratorium, including the recent announcement extension up to August 31, 2020, will offer respite to corporates. While the moratorium ensures the default risk is minimised in the near term, our rating approach for corporates will look beyond it, too.
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