Many of the relaxations are aimed at re-starting work in rural areas, but here too implementation is the key.
More and more countries are gradually exiting their lockdowns. As the rate of addition to new cases comes down, the US and countries in Europe are taking baby steps to ease the lockdown in areas where the worst seems to be over. In India too, plans have been drawn up for a cautious return to normalcy. They are aimed at slowly restarting the economy, helping protect jobs and livelihoods, and arresting the deterioration in domestic demand and exports. As always, the proof of the pudding will be in the eating.
Many of the relaxations are aimed at re-starting work in rural areas, but here too implementation is the key. The forecast of a normal monsoon has lifted hopes of an increase in rural demand, but it is early days yet and we need to monitor the progress of the rains. And just in case you thought that brightens the prospects for consumer staples, the early earnings guidance issued by FMCG companies should serve as a reality check.
The Reserve Bank of India too has chipped in, offering what amounts to little more than a band aid, when what is needed is major surgery. This is not ‘whatever it takes’, despite RBI governor Shaktikanta Das saying so, it’s more ‘take whatever little we give.’ While the liquidity support is welcome, will banks take the credit risk unless the central bank or the government provides a backstop?
Central banks in the advanced economies have opened the monetary spigots to junk bonds, they are monetising government deficits and here we have the RBI trying to make sure that banks create additional provisioning for the loans under moratorium. A report in the Financial Times says Covid-19 has shut down a quarter of UK businesses, with more than half a million companies reported to be in significant distress. What does the RBI think will be the number of distressed firms in India, where, unlike the UK, the government has given hardly any fiscal support? China’s fall in GDP by 6.8 percent year-on-year in the March quarter is a clear indication of the woes in store for the Indian economy. It’s worth noting that JPMorgan and Wells Fargo are making provisions to prepare for a wave of bad debt that is likely to sweep through the US economy.
Even after the lockdown is finally lifted, the social distancing norms will ensure that businesses function well below full capacity. Recall that the last RBI survey had showed that capacity utilisation in the manufacturing sector in the December 2019 quarter, at 68.6 percent, was the lowest since at least the first quarter of 2008-09. The question is: if capacity utilisation was already so low before the virus struck, what will it be after the lockdown is lifted, with demand badly affected? And how many firms can afford to keep their heads above water while functioning at capacity utilisation of, say 40 percent? It is no wonder then that debt funds are bleeding. Perhaps the RBI is keeping its powder dry, waiting for the lockdown to end. Or it may be waiting for the central government’s next dose of fiscal stimulus.
Almost every economist has said the government needs to increase its fiscal support measures. We added our voices to the chorus, pointing out that India’s fiscal support so far has been very low compared to most other big economies. If the government is worried about too high a deficit, we helpfully pointed out how it could deliver the maximum stimulus with the minimum fiscal damage. Remember this is not actually a stimulus, it is just enabling people to survive this period of unusual stress. If the medical crisis is not to snowball into a financial one, these measures are an absolute necessity. Even the RBI’s Monetary Policy Committee sees the existing fiscal sops merely as a measure of relief. And surely lower oil prices are a big help for the government?
The corporate results season is on and the March quarter results are largely expected to be a washout. The numbers for TCS and Wipro are already out and we give our recommendations on them here and here. We continued to search for companies best placed to prosper during the time of covid19, looking at pharmaceutical companies that can benefit from the demand for complex respiratory drugs, a public sector company relatively insulated from the macro uncertainty and one of the few companies that have benefited from the lockdown.
At the time of writing, markets across the world were surging on reports that a Chicago hospital treating severe Covid-19 patients with Remdesivir in a clinical trial is seeing rapid recoveries in fever and respiratory symptoms. Markets were anyway poised for a rebound, with lots of cash with fund managers. And the news of economies slowly re-opening has also helped.
With the bottom of the market in place, thanks to central banks in advanced economies planning to pay all the bills -- the Fed is now buying paper worth $70 billion a day, compared to $120 billion a month at the peak of quantitative easing under Bernanke -- it’s time for a bit of risk-on sentiment.