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Globally, News continues to be dominated by things about and related to Coronavirus.
In this edition of the newsletter, we have covered:
The link to the April Newsletter is at the end of this article.
Please see below the market commentary and our take on the current situation
The age of rumour and negative information
1. "Company A's bond yields surge to 60% as MF's look to sell paper."
Well, it was not 60% but the yield was on a bond maturing in the next 4 months quoting at a price of 80 on a face value of 100. The newspaper annualised the yield and reported it as 60%.
2. A leading news agency, one of the oldest in the world, reported on April 8th that XYZ’s GDP will contract 30% in the second quarter. There was a note in small print which mentioned that the rate mentioned is the annualised rate, which means it was a 7.5% dip. An annualised rate for GDP projections makes no sense absolutely as the base for the next quarter GDP growth is different and the decline could be as bad as the last quarter decline, but does that all add up to 4 times the first quarter de-growth rate as the decline in GDP for the year?
3. “Although India reported its first case on January 30, around 74% of India's total cases have been reported in May alone.” – a newspaper report
Assuming the average doubling rate was 12 days, then 100 would have become 200 in 12 days and 200 would have become 400 in another 12 days. The last 24 days accounting for 75% cases. The important fact is that the media tries to highlight the bad part more and the good part less. In this case, highlighting the fact that the doubling rate is now 13.3 days as on May 22nd compared to 3.2 days as on March 24th is not what media wants to do but report that 75% of cases came up in the last 24 days.
4. The curious case of rating agencies. Neither will you make food, neither will you eat food or feed.
A noted rating agency’s Investors Service in May said the negative outlook on India's rating reflects increasing risks that GDP growth will remain significantly lower than in the past and partly hints at weaker policy effectiveness to address economic and institutional issues. It also said that India’s “fiscal deficit this year is set to widen materially due to sharp decline in growth and stimulus spending, and weaker government revenue.” It is really difficult to assume that fiscal stimulus will be considered as healthy and not considered by the rating agency to determine its ratings in the future. Simultaneously, it also said that "Overall, the fiscal stimulus is modest compared with support packages implemented in many other countries, particularly given the breadth of India's nationwide lockdown measures. We expect the government will announce additional measures in the future." So, a rating agency traps the country (not all countries) on both sides. On one side it tells a country to increase GDP else taxes will be lower and therefore fiscal deficit will be higher. One the other side, they really don’t tell anything on what their action would be if the country does a stimulus to create growth. Is there another way of growth when internationally, people are staying locked at homes?
5. India’s CV against CV 19 - Now and then
India’s recovery rate was a decent 41% as on 24th May, compared to 26% as on April 30th.
At the beginning of the lockdown, CV cases were doubling every 3.2 days as on March 24th, by April 30th, the CV cases were doubling every 11 days. As of May 22nd, the doubling rate stood at 13.3 days
6. From lockdown to no lockdown, where we would be?
If we take the middle path between China and Italy’s recovery, in the next 30 days we will be seeing a gradual decline to triple-digit additions per day to the confirmed cases, a lot lesser than the current 6000 plus additions every day. Even after 126 days as on 23rd May since crossing 100 cases, and most of the disease being controlled to stay inside Huabei Province, there is still reporting of 2 to 12 cases every day, this means that the virus in other countries may most likely take more days to report meaningfully lower fresh cases and is very unlikely that the cases would drop to zero anytime sooner than 3 months. Moreover, with the reopening of the country, there could be a likely surge in reported cases. Removal of lockdown may stress the hospital infrastructure as fresh cases may add to the existing active cases and the return of expatriates may trigger a surge in cases.
However, that does not mean the lockdown needs to continue as the results of a continued lockdown will be more disastrous than a practical no lockdown situation taking adequate steps against the virus.
7. Risk of COVID related fresh cases post lockdown
The top five states together account for 77% of the active cases nationally, and the top ten states account for 91 % of all cases. At 30,482, Maharashtra leads in terms of the number of active cases followed by Tamil Nadu with 7,527 active cases, followed by Gujarat, with 6,586 patients still under treatment. Delhi is fourth on the list with 6,214 active cases and Madhya Pradesh fifth with 2,809. Nationally, the active case count was 69,597 as of 23rd May.
As of 23rd May, the top 5 districts out of the 600 districts that have reported confirmed cases account for 52% of the total cases in India. These are Mumbai, Ahmedabad, Chennai, Thane and Pune. These five districts account for 55 % of new cases over this period. The top 10 districts account for 60% of the confirmed cases.
Therefore, the removal of lockdown with high security and control on the top 10 districts is the most likely step to be taken.
8. India’s infrastructure preparedness – Can India handle a sudden blow out in reported cases?
As per Niti Aayog, the Central government has prepared the infrastructure (dedicated hospitals) to treat 10 lakh coronavirus disease patients in the country in the two months of lockdown with the help of state governments. 1,093 COVID dedicated hospitals exist in the country with 1,85,306 beds including 31,250 for intensive care. There are 2,402 COVID healthcare centres where not so serious patients can be treated. The country also has 7,013 Covid-19 care centres which have around 6.5 lakh beds. These facilities are used to treat patients with mild symptoms or to keep them in isolation to prevent the spread of the disease. Together, these three categories of healthcare facilities account for 9.74 lakh beds. And if Covid-19 facilities provided by the armed forces if added to it, the number reaches 10 lakh cases. According to the Union health ministry, patients who need oxygen support, ventilator of treatment in ICU are less than five per cent. Out of the treat 95%, only those patients who have co-morbidity need to be admitted to a hospital. Around 80% of the patients need to be in isolation which can be ensured by the COVID care centres.
9. Recovery post-COVID situation
While there is no certainty on the impact of this virus attack on the economy, it is likely that there will be a swift rebound to normal economic activity. The amount of liquidity that is floating in the markets will ensure a float level to most of the financial markets. The amount of stimulus that Central Banks have already announced is more than 200% of the stimulus that was put in the entire global financial crisis of 2008-09 and this can increase further if the spread continues. Just in the US, around $2 trillion of money has been announced, 1.9 times the GFC crisis package.
The current government initiatives in India seem to be keeping in mind a longer-term solution to the economic slowdown. The present set of initiatives can help in improving liquidity, improve the short-term problems for informal workers, alleviate the rural India economy. Over the longer term, Corporate India can attract foreign capital either through equity offering or debt placements have given that there is a low-interest rate situation everywhere in the developed world and higher nominal growth expected in the emerging markets. Besides, by not releasing all powder at once, the government is better prepared to deal the uncertain COVID period which nobody knows for sure how long, how severe the spread of infection and the associated economic damage during that would be.
Post-COVID, we will get closer to the US elections. With no clear indications on letting us know the winner, the next few months will see a different uncertainty that interestingly, will not be affecting the US or China as much as the rest of the world. Trump must demonstrate aggressiveness and is likely to up the rhetoric against China on both the geopolitical and the economic front. We feel it is going to be positive for India as the US threatens further trade tariffs on China and the possibility of US firms looking to India for key products including pharma ingredients. On a different note, India being a key US ally is also likely to improve the debt market and the equity market sentiment and reduce the risk premium and the country yield spread.
In India’s case, the net effect of past reforms like GST, reduction of Corporate Tax Rate to 25% from 30%, deregulation of Oil prices, Bankruptcy procedures, transparent auction mechanism for government-owned natural resources, opening up of sectors like Railways, Defense, Insurance, Mining, Construction, Multi-brand Retail for foreign investments have not played out so far. The fresh reforms including some which have been recently promised like the Agri reform in the form of removing the APMC monopoly of fixing prices/markets, Land and Labour reforms along with the previous reforms will help in improved business conditions and better ease of doing business.
It can be safely assumed that the Covid-19 situation resulted in lower consumer discretionary spend. Post lockdown and especially after easing of social distancing norms, there would be a pent-up demand for discretionary and durable goods though not in general but to specific sectors where the preference is for consumption at an individual level. For example, watching cinema at a theatre would give way to watching at home on a higher-end television. The organised sector may see a gain in market share as % of migrant workers would be higher in a company from the unorganised sector which may face a shortage of workers as soon as the economy opens completely. The organised sector may expand faster now that the unorganised sector starts to shrink. The MSME sector also is likely to attract migrant workers which mean lesser availability of workers for the unorganised sector.
10. The overall fear factor on almost a daily basis regarding falling GDP, high unemployment and government not doing enough on the stimulus front (or in other words, cash transfer into bank accounts)
Let’s take the falling GDP issue.
In normal times, the Q1 GDP is less than 24% of the annual GDP based on historical data. Assuming a contribution of 8% for every month in the first quarter. Based on data on fuel consumption, farm output, power output, assuming a drop of 50% for the two months (May compensating for April by a definite margin), we can say that maybe the GDP for FY21 is lower by 8 units. The rest of the months will contribute 84 units and a nominal growth rate of 10%. Without even taking in to account the likely rebound in GDP in the third and the fourth quarter, we could be at a slightly positive GDP growth rate for the year. The real GDP growth is negative by a small inflation margin really does not add anything negative further.
In April, the oil marketing companies (OMCs) delivered 4.53 crore cylinders to PMUY beneficiaries under the PMGKP. As per the Ministry of Petroleum and Natural Gas, till 20 May, OMCs have delivered total 6.79 crore cylinders to the Ujjwala-Scheme beneficiaries under the package. This means that the Direct Benefit Transfer (DBT) mechanism is working as the funds need to be given in advance to their Jan-Dhan account. Therefore, we can assume that the relief package announced for rural and migrant workers would be happening on the ground.
The RBI Governor Shaktikanta Das recently called agriculture and allied services as “the beacon of hope” in the middle of the coronavirus crisis on the back of an increase of 3.7% in foodgrain production to a new record. As per a Financial Express report, the following factors point to a strong Agri resurgence:
By May 10, Kharif sowing (summer crop) was higher by 44% over last year’s acreage and rabi procurement (winter crop) is in full flow in respect of oilseeds, pulses and wheat, benefiting from the increased harvest. Excess production is not an issue here as the government can still procure at a reasonable price and that cash issuance is more justifiable than offering cash as basic income.
The better-than-normal output and the outlook for the current year more than effectively suggests that the rural economy's cash flows will not be impacted. One more anecdotal evidence can be derived from the record movement of food grains from Punjab to different parts of the country. Record freight (grain) movement has occurred in the lockdown period with the Railways using innovative methods like joining two rakes when loaded and three rakes when empty.
Let’s take the high unemployment issue.
The high unemployment figure is a temporary phenomenon, as lockdown gets removed, there could be increased home state employment for the erstwhile migrants who do not want to return to the cities in the other states and that would mean competitive wages for the remaining erstwhile migrants as industries reopen in cities. The Central Government’s encouragement to provide more autonomy to the state government is a clear step to facilitate mass absorption of migrants in their home states. The Agri reforms to remove the APMC, Land and Labour initiatives by the States, MSME Credit guaranteed by the Government are steps taken to ease the unemployment problem.
Let’s take the low government stimulus issue.
So clearly, if we divide the Indian Economy into 4 parts: A). the Agri Economy, B). the Migrant worker-led Unorganised sector Economy C). Corporate India led Organised sector Economy and D). the Government component of the Economy, then, the demand for the higher fiscal stimulus is more a demand from Corporate India which wants direct cash transfer to people from all segments so that it would finally result in increased sales for Corporate India which would mean a fast track solution to sales and profitability as and when the lockdown is removed. Corporate India is not clearly concerned that rating agencies expect Indian Government’s Debt to GDP to be nearer to 80% especially with a flattish GDP and a higher borrowing this year. This 80% ratio will be higher than most of the BBB- rated countries with the median at 42% as per a BloombergQuint report. Finally, the government must worry about all this. A rating downgrade would alter the borrowing rates for the government as well as the corporates and for the retail. Given the limited manoeuvrability that the government had, it has tried to address the worst affected segments on both the demographics front as well as the economic segments. In other words, the government is doing a supply-side stimulus that hinges on moving the Land, Labour and Agri reforms along with MSME and NBFC Credit Guarantees and with the help of RBI, provide reduced interest rates to increase manufacturing capacity and generate employment. A demand-side stimulus has no lasting effects and does not benefit most of the country and does not create a structural push to the economy and leads to profiteering without capacity improvement. India’s Primary Deficit has been mere Rs.48,500 Crores in 2019 (less than 0.3% of GDP), Rs.64,000 Crores in 2018, Rs.54,900 Crores in 2017, Rs.91,100 Crores in 2016 which means that more than 90% of the fiscal deficit is towards servicing interest cost on accumulated debts. Any demand-side stimulus would mean higher government spending in times of reduced tax revenues, a negligible disinvestment capital and result in a higher fiscal deficit further.
Click Here to Access April 2020 Newsletter
Satish Anand is the author of this article. He is the CIO at Mitraz Financial Services Pvt. Ltd. The author can be reached at email@example.com.
The entire contents of this article are solely for information purposes and have been prepared based on relevant provisions and as per the information existing at the time of the preparation.
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