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India Strategy: Government is back to boosting growth

The Finance Minister announced a slew of confidence and demand boosting measures cutting across five broad topics namely, a) gaining confidence of corporates, b) boosting financial markets concerns, c) enhancement of credit flows, d) unclogging government spending constrictions, and e) specific sops for automobile sector.  The big picture is that the government is trying to shun the recent public impression that it is disregarding economic growth. There is a strong attempt to turn the vicious cycle into a positive narrative. While there is attempt to refurbishing a pro-reform image, todays measures are not reformative. Importantly, the FM has promises two more such announcements addressing the housing sector and global trade tensions. 

The following are emphasis areas from announcements:

Government is business friendly: The growing perception that regulatory defaults, with respect to CSR obligations and tax payments are being dealt with prosecutions - was creating animus within the business sector. By stating that such defaults will be treated as civil cases subject to penalty, there is an attempt to create a pro-business sentiment.

Arresting the sagging equity market sentiment:  The complete withdrawal of surcharge on long term-short term capital gains on equity market investments of FPI and domestic investors is a sentiment booster for financial markets. The loss to the exchequer from this withdrawal is small, pegged at ~Rs 14bn.

Big push to hasten liquidity & credit transmission: The front loading of PSB recapitalization of Rs 700bn (as provided in the budget earlier), is expected to create a liquidity support of Rs 5tn in the system, along with meeting regulatory requirement. This is geared to support credit delivery of PSBs to corporates, NBFCs, MSMEs, retail borrower. Importantly, there is enhanced persuasion on banks to hasten the 110bp rate cut transmission announcement by the RBI since Feb’19 to 5.40% towards lower the MCLR of banks across all borrowers. In addition, there is a thrust towards benchmarking bank lending rate to RBI’s repo rate, thereby creating a structural framework for immediate transmission of monetary policy easing. The combined impact of enhanced PSB capital, speedy transmission of rate easing and uniform percolation of lower lending rate will boost credit availability and demand. This should be positive for economic outlook, especially for leveraged consumption, but it will result in margin compression for banks (especially in light of a high credit/deposit ratio in the sector). We retain our underweight position in the banking sector, led by the PSBs.

Employment intensive MSME gets redress:  The redress for the MSME sector comes in various forms including classification of on-lending by banks to MSME sector, directed lending by PSBs against recapitalization, checkbox-approach to hasten the settlement of loans, time bound refund of GST (30 days for pending and 60 days for prospective refunds), mechanism for speedy GST credit through banks, simplification of definition of MSMEs. The setting up of co-origination mechanism for MSME loans between PSBs and NBFCs is another attempt to widen the reach of credit support.

Unclogging public sector dues in infrastructure: Clogged dues from the public sector including the government and CPSE has been a significant source of cash crunch in the infrastructure sector and companies associated with large companies. This manifested from constricted spending by the government sector (Q1FY20 central government capex was down 28%yoy). The decision to expeditiously settle these dues with active monitoring by department of expenditure will improve circulation of money, even as it eases the grip on government spending. The FM informed that Rs 300bn of such outstanding has been released recently. The medium term plan form Rs 100 bn infrastructure spending remains for which a task force will be formed.

Sops for the automobile sector: Reversing the fading hopes following yesterday’s statement by the CEA, the sector specific announcements has rekindle some positivity for the beleaguered for the auto industry. The enhancement for depreciation provisioning to 30% for all types of car and deferment of one time registration fees till 2020 are the most significant measures to boost demand. The FM also tried to allay concerns regarding Electric Vehicles and validity of ICV registrations. There is also a plan to implement vehicle scrappage subject to creation of relevant infrastructure.