The Signal: The Week Highlights
1. Spending, Not Being Spent Is The Solution
The sharpest economic contraction on record and across the world has investors worried about India’s promise as an investment-favorite destination. October’s Stimulus 2.0 of Rs.46,700 Cr (0.2% of GDP), inclusive of direct cash payments and interest-free loans are to provide limited comfort to India’s contracted economy. In total, 2 rounds of stimulus bring direct spending on fiscal support to 1.2% of GDP vs avg of 2.5% of GDP for Baa-rated peers!
Covid 19, now in 2020, and in 2021 in 3 months, continues to be bearer of bad news. Causing shockwaves across the world, India’s GDP correction reflects economic infections. Like before, reforms are being merited as economical vaccine, with individuals and institutions awaiting govt.’s possible Relief package 2.0 announcement between October-November 2020.
2. Inflated Inflation Indicates Illusions & Illness
Retail inflation jumped to an 8-month high of 7.34% in September, primarily driven by higher food inflation. Core inflation, which excludes food and fuel inflation, softened to 5.67% from 5.77% in August. At over 6%, inflation remains just above the MPC’s tolerance band of 4 (+/-2)%, creating a stagflation-like scenario where inflation is high despite a collapse in growth. Supply sinkages pried higher inflation figures on account of amplified fodder prices.
Amidst a corona- filled year, disruption in supply-chain activity was a given, and was reflected in latest figures. Ample system support via liquidity measures and restructuring facilities are deemed necessary for better times ahead. As for rate-cuts, we see a pause in the upcoming December meet, as outputs of effective policies and transmissions are brought outwards.
3. In Covid 19 Parlance, IIP Stands For “Indian Industrial Problems”
India’s IIP contracted for 6th consecutive month in August at -8.6% compared to -10.4% in July 2020 and -1.4% in August 2019. Industrial activity bore the brunt of localized lockdowns and work restrictions in August, chipping away nearly a tenth of the factory output.
Sharp recovery seen in May and June seems to be losing steam, even though there is consistent decline in pace of contraction. The adversity is here to stay for short-term, as the viral virus continues to spread an air of uncertainty across the country’s socio-economic factions. In this process, like a tortoise (slow and steady), India is sowing the seeds of the much-awaited and talked about V-shaped recovery.
4. Banks To Tank As There Is Fire-In-The-(W)Hole
The financiers of growth currently can neither finance nor grow they grapple with after-effect of Covid 19, finding themselves in similar waters with those they lend to. Even post policy support from the top, money flow is working like a malfunctioned pipe as stressed loans and write-offs increase. As NPA and credit costs increase, the profitability wound is sure to rupture, adding stress to current conservative credit climate
All, but one voice, cheered when the moratorium was announced, and that was the banks. Knowing of the impending doom, in economic contractions, and bending will to satiate central govt. policies, those who lend money are themselves in dire need of it. 3 years later, and banks find themselves 4 years behind! But as is always, Banks will navigate through this crisis too, maybe limping more than ever before!
5. “Locally Made – Globally Sold” –> The Make In India Mantra
After announcing Production-Linked Incentives for Pharmaceutical sector, Mobile & Electronics manufacturers, to adopt similar practice for more sectors to boost domestic manufacturing. Giving the ‘91 reforms a 2020 twist and reduced corporate tax rates will continue to attract attention of the world’s biggest makers.
Finding new home in India, companies with market-cap bigger than country have situated its producers where its consumers are. The cash-rich entities continue to be cash-hungry, being interest-invoked by India’s make-&-take plans. The Make Local – Sell Global policy is here and alive!