While the government is addressing the first-order impact on the poor affected by the COVID-19 lockdown, a lot more needs to be done to help businesses and avoid second-order impacts, according to Navneet Munot, Executive Director and Chief Investment Officer, SBI Mutual Fund.
“Social agenda needs resources that can only be generated by reviving growth and expanding the pie. Versus most countries, we have been high on stringency of the lockdown and low on fiscal support,"Munot told Moneycontrol.
“The economic fallout is real and a matter of concern though,” he added.
He expressed concern that while the fiscal room may be limited, India must be cautious of the "paradox of thrift".
Paradox of thrift means individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth.
"Given the environment, both corporate sector and households may remain thrifty and risk-averse, the onus is on government to lever up and spend. While direct support to poor was critical during the lockdown, as the economy opens fiscal multiplier should be the driving force in prioritizing expenditure," he said.
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Infrastructure projects should be prioritised to create immediate employment.
Fortunately, rural economy is in decent shape and must be shielded from supply chain disruptions as well as from the virus that returning migrant workers may bring along, Munot said.
RBI's role
Munot agreed that the central bank has been aggressive in policy response so far, but yet it has only met with partial success in achieving the desired outcomes.
He referred to the big disconnect between macro and micro level liquidity.
The tepid response to TLTRO 2.0 suggests lack of risk appetite and therefore the real economy stays starved for funds, Munot said.
Government providing first loss guarantee, further relaxation in prudential norms, and RBI capping absorption through the reverse repo window along with aggressive OMOs are some measures that should help transmission, Munot said.
Referring to the credit market, Munot said: "This month credit markets witnessed an unprecedented event when a $ 3 billion bond portfolio was left wanting for liquidity in a $ 3 trillion economy."
Next generation financial system reforms such as deepening of corporate bond markets, securitisation market, channelising patient capital through the AIF route and creating lenders of last resort, to name a few should be considered, he pointed out.
"Banks' lending behaviour is largely pro-cyclical and therefore we need a strong institutional framework to facilitate access to capital across the credit spectrum when the cycle is at its worst and its need to sustain the economy is the highest. If access to formal capital stays blocked, there is a risk of return to informal money lenders and in turn reverse the gains of formalisation. Amidst the recent challenges in the debt market, SBI MF's conservatism and prudent credit assessment has helped. Given the growth-inflation-external account dynamic, we stay long duration," Munot said.
On equities, he said: "Several valuation measures were in the vicinity of GFC (Global Financial Crisis) lows in late March."
However, he believes that the run-up since March has been too sharp given the challenging economic backdrop, and therefore further bouts of volatility should not be ruled out.
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