"Whatever it Takes" When, how, and how much – recovery?

Estimated reading time: 10 minutes 10 seconds

In this edition, we have covered:

  1. Tax Harvesting methods and details
  2. The FM's Relief Package for the poor
  3. RBI's yet another out of the box effort to ease the credit crunch in the system
  4. Higher weightage to India in the Morgan Stanley Composite Index

Link of the March Newsletter - 2020 at the end of the blog

Market commentary and our take on the current situation

There is a certain unquantifiable fear and because fear is unquantifiable, therefore the aversion by retail investors to believe that whatever is the current market levels is the all discounted market levels. Yes, the markets can go down because the economy will go down and the economy will go down because of the fear of the Virus. Therefore, it is the fear of the virus which is making the retail undecided and worried about markets and this fear can actually play out and cause havoc if a) the cases continue to spread, then b) policymakers continue to remain undecided, then c) lockdown extension or not, then d) production or not at factories. Point is that the sequence can be cut at any point of time if the fear is controlled by an actual panacea or by the application of resoluteness to counter the fear and take it on.

If a cure comes up soon, then the fear is getting controlled by the first step.

If the curve flattens drastically, then the fear gets controlled by the second step and maybe at some time, gets more strengthened with the possibility of the cure.

India vis-a-vis The Developed Economies on the CV19 issue

Comparisons on CV-19 data till April 20th

Notes: -

1. MR - The mortality rate is basically the number of deaths divided by the number of infections.

2. Infection – The number of cases confirmed as a % of the total tests conducted

In China, the mortality rate for CV-19 has been 5.5%. In Italy, it’s about 13%. In the US, it’s about 5.36%. In Germany, it’s 3.1% and in the UK., it’s about 13.4%.

Barring Japan, as on 35 days after COVID cases go beyond 100 in a country, India has the lowest growth rate at 16.10%. Its mortality rate is much lower than the world average of 7%. India’s infection rate is also much lower than the world average and also in comparison to major developed economies.

Unknowingly or knowingly the fear of the virus overlaps with the fear of the recession. While the cure for the virus is a quest and may take time, the cure for the recession is already in place. Therefore, as soon as the first fear is captured and controlled, the second fear of recession which has already begun well into the quarter would mean more fiscal efforts to make the slowdown less impactful and the low-interest rates would mean the effect on markets will not be great.

As we know, this is not a monetary crisis as was the Lehman collapse where companies were overleveraged going into the correction. A monetary correction involves a bubble collapse where there is a subsequent massive asset value erosion. Because of the credit crisis in 2018-19, Indian companies especially the lending companies are not overly leveraged and most of the NBFC’s are not overleveraged at 2 times equity book value. Finally, this type of slowdown becomes an economic correction, characterised by a lack of consumption and production. Companies were already at a weak capacity utilisation going into the CV lockdown. A situation of low debt, low capacity utilisation, high spread in the credit rate to the policy rate all augurs well for a recovery.

As and when the lockdown is lifted, the production and/or expenditure could revert to near previous levels.

Since the current expenditure is mostly towards food and medicine expenses, the savings due to the lockdown would either have got invested already or will get consumed at pre-March levels.

India vs the Developed World in terms of money supplied

Faced with the COVID-19 economic disruption, the world has rolled out massive economic relief and stimulus packages. The US has announced a $2.2 trillion package, which amounts to 10 per cent of its gross domestic product (GDP). Germany has announced a $808 billion package 21% of GDP, the United Kingdom $398 billion 14% of GDP; and Japan has unleashed a massive $990 billion rescue or 20 per cent of GDP.

In contrast, India has announced a Rs 1.7 lakh crores package for the poor and a three-month loan moratorium for borrowers. At current exchange rates, the relief package is around 0.8 per cent of GDP or around $22 billion at Rs 76 to the US dollar. Liquidity measures were initiated by RBI to the tune of 3.2% of the GDP. This was followed with a 1.7 lakh crores package to help the migrant, informal workforce and the poor.

While it can be clearly pointed out that our response to the situation is quite insignificant, one should clearly see the envisaged steps of action depending on the path the virus situation takes.

We should remember that we entered into the COVID situation with a slowing economy, high fiscal deficit and slowing tax collections which collectively was showing green shoots of improvement.

India cannot clearly fire all the bullets at one go

While the US can issue dollar-denominated bonds and get bonds easily placed due to the dollar’s safe-haven status. India has a low production high inflation problem track record. Excess printing of notes to deal with such situations can lead to a debt downgrade and higher inflation which will create fresh problems in place of the current problem.

The current handling of the COVID situation by authorities is commendable, as the spread rate has been one of the slowest around the world and efforts to minimise infections have delivered results as can be seen from the table above. The next steps would be to open up the non-hotspot areas and the green zones (places where no COVID cases have been reported). If we reach the 90 days since March 14th target, then by June 14th, we may probably swing to full action mode on the production side.

Debt is the issuer’s risk while equity is the buyer's risk. Probably with the COVID issue synchronising with the existing issues, the turnaround will be optimum due to the combination of low-interest rates, private companies with 70% capacity utilisation, easing of bank credit with sufficient cash in hand, the government can get a perfect timing to raise its resources and lead the reconstruction of the economy.

Interestingly via the televised address to the nation, the RBI governor borrowed ex-president of the ECB Mario Draghi’s famous phrase “whatever it takes” to signal that the Governor will reduce rates or ease regulations on the banks, provide liquidity boosters and other options to keep the economy rolling forward. Importantly, there has been a clear signal that the RBI governor is in full charge and the calls going forward will not be in the hands of the MPC.

By May 3rd, we would have had a 5-week incubation period and at the end of it, we would have controlled the spread of the disease and possibly mark up zones with go, no go tags.

The Employment Side

Santosh Mehrotra, a human development economist and professor at the Centre for Informal Sector and Labour Studies in Jawaharlal Nehru University, figures out that India’s labour force has a strength of 49.5 crores. In 2017-18, about 3 crores were unemployed, which implies that 46.5 crores are currently in the rolls of organised and unorganised farm and non-farm sectors. Out of 46.5 crores workers, 26 crores people were employed in India’s non-farm sector while the agriculture sector motivated 20.5 crores. In a paper, Mr Mehrotra co-authored with Jajati K. Parida of the Department of Economic Studies, Central University Punjab, the share of the informal sector was arrived at 90.7% overall which leads to the finding that the number of informal workers in non-farm sector totals to 21.7 crores workers. Splitting the informal worker’s industry-wise, Manufacturing employs 5.6 crores people in India while the non-manufacturing sector (mostly utilities like construction, mining, electricity, water and gas) engages another 5.9 crores. The services industry supports an estimated 14.4 crores workers. The situation for both services and utilities will start to improve as the lockdown reduces in its degree of rigidity. The 4.3 crores formal sector workers would most likely be retaining their jobs with almost 80% monthly savings that they may have already decided to invest or maybe waiting for the lockdown to get over to buy consumer non-durables and other utility deriving goods.

The GDP Side

Companies remain hopeful of an early resumption of full operations after govt relaxes some shutdown curbs, but demand revival may not be synchronised with the supply side. On 20th April, the Centre and several state governments partially lifted the lockdown in non-hotspot areas, allowing agriculture and allied industries to restart operations. With time soon enough, further relaxations will happen in regions where the reporting of cases has been relatively less or nil. As per a survey done by IPSOS, the survey by Ipsos placed India (63 per cent) as being the third most optimistic country after Vietnam and China regarding a quick economic recovery. Among those surveyed, people in Spain (76 per cent), France (72%), Italy (68%), United Kingdom (67%) Russia and Japan (64%) felt that the economy will not make a quick recovery.

So for all matters, it can be clearly said that the time from now to reaching the post coronavirus is still an unknown yet the growth rates of fresh cases across the world and the world as a single entity is now coming down and soon to enter into single-digit %s. Post this CV time, we will be left with a likely extended US recession, which brings all-time low-interest rates globally and very low oil prices. Back home, low oil and low commodity price led low inflation, sufficient gunpowder holding RBI which so far has been very calibrated in its rate-cutting approach and can also supply money still remain well-within its fiscal boundaries. Besides, add the benefit of reforms like GST on the organised sector and reduced corporate taxation. Plus, unlike a major part of the developed world, India hasn’t used the money supply power and prudently so, as someone should be at the receiving end of this unlimited money supply also.

Clearly, all sectors will have a varying degree of getting hit from the coronavirus led lockdown, however, it is also getting clearer that the strong will get stronger, one sector’s loss will be some other sector’s gain, and the savings induced by the lockdown will either go as investment funds or consumption money.

In summary, some of the points that can be noted are:

  1. Already certain manufacturing units are working with live-in facilities as well.
  2. Manufacturing is around 15% of the GDP, the part of the economy that is likely to be hurt maximum. Most of the consumer durables, capital goods, consumer discretionary will see the pent-up sales demand to come back.
  3. Whatever is lost in consumption today on the demand side is gained in savings and finally, it will either go later into consumption or investment side.
  4. Almost 55% of the workforce is employed in the agricultural and construction sectors. Rules enabling the resumption of activities have been made and operations have started to happen under constraints.
  5. Current leverage for the NBFC’s look comfortable with almost 50% of the NBFC’s at less than 2 times leverage.
  6. The rating agency will adopt a lenient procedure for cases where the delay in payment should not be called as default.
  7. Banks have deposited 7 lakh crores through the reverse repo window, this cannot continue as the reverse repo rate has now been bought down to 3.75%. Apart from buying of bonds, the bulk of this excess cash will finally get back into the lending channel. The buying activity of banks on the NBFC bonds will ease the credit rates and lead to better monetary transmission and necessary cheaper funding for the NBFC's.
  8. The fall in GDP is grossly overestimated due to the fear factor.
  9. A cure could cure all the problems. 
  10. Rating agency, S&P, revised Asia-Pacific growth in 2020 to 0.3% with China at 1.2%, India at 1.8% (the best in the pack), and Japan at -3.6%.

March Newsletter - 2020

The writer is the CIO of Mitraz Financial and can be contacted through


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