On May 12, 2020, the Prime Minister announced an economic package of Rs 20 lakh crore, which was probably more than what India Inc expected.
The package quantum includes the fiscal and monetary support that has already been provided thus far. This amount is two-thirds the size of the government budget announced this February.
With this India catapults other emerging markets in terms of the size of an economic package relative to its GDP, which stands at 10 percent.
As per global brokerage firm Nomura, the quantum of the package that includes liquidity measures and a fiscal package of nearly Rs 7.5 lakh crore, could imply an additional package of nearly Rs 12 lakh crore (6 percent of GDP).
Nomura believes the package would involve a combination of direct monetary and fiscal stimulus and contingent liabilities.
"The package could potentially include direct support to impacted sectors and micro, small and medium enterprises (MSMEs), income transfers, Infrastructure investment, support to financial intermediaries in the form of credit guarantee and provisions for bad loans and payout of unpaid dues by the Government of India," said Nomura.
The announcement has come as a major relief, especially due to the fact that the impact of RBI's monetary policy is diminishing with structural issues of demand and weaker financial intermediaries
"Such fiscal push and the government’s actions are critical in addressing these issues and supporting growth," Nomura said.
"We think broader economic growth is rightly the priority, which could likely be at the expense of higher fiscal deficit," it said, adding that this could involve deficit financing by the RBI, as domestic and foreign savings could be insufficient in funding the deficit.
Nomura’s India economics team has forecast a fiscal deficit of 7 percent of GDP for FY21, which could potentially rise with the announcement of the package.
However, the global brokerage pointed out that the growth revival over the medium-term could help sustain higher public debt, which would likely rise in the near-term.
Announcement a positive for India’s equity markets
The announcement was the need of the hour as India Inc was smarting under pain due to COVID-19. This announcement will support growth, which is positive for the equity markets.
"The PM's announcement supports valuation multiples as the risk to medium-term growth abates," Nomura said.
Even though the near-term earnings outlook remains weak, as the spread of COVID-19 will continue to impact economic activity, strong support from the government could help allay the risk of significant dislocations in industries and financial system, Nomura pointed out.
The global brokerage said at the margin, the announcements are positive for domestic cyclical. It expects the financials to be the biggest beneficiary with some allay in asset quality concerns and better medium-term growth prospects.
"We are overweight on financials (see our note). ICICI Bank and Axis Bank are our top picks," said Nomura.
The actual impact on growth and hence earnings of other domestic cyclical is unlikely in the near-term, said Nomura.
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