Classic Battle of Equity Vs Debt – Part 2

Tug war, two businessman pulling a rope in opposite directions isolated on white background

At the outset, let us confess this is a corrigendum to our previous blog of “Classic battle of Equity Vs Debt.”

Like many others, we were besotted by the zeros in 20 Lac Crores and hence taking the figure at face value, went a little overboard with our analysis. With the full details emerging on the plan,  the announcement of Rs. 20 Lac Cr fizzled out to a figure of mere Rs. 1 lac Cr. In light of this, the– narrative, interpretation and the end result has to change. 

To make our point, we present below a chart where few broking houses have pegged the impact of Stimulus package (of 20.97L Cr to be precise) on the Indian GDP.

By all consensus estimates, a package which was projected as government spending of 10% GDP will actually impact the GDP by not more than 1% (range of 0.7 to 1.3%). Which means the cash outflow by the government on this package is barely to the tune of 1 Lac Cr.

 Now, this leaves us with few basic questions:

 1. Where is the remaining 19 Lac Crore?

So asked every Indian, left baffled after the Finance Minister’s four-part elaboration of the stimulus package grandly announced by the Prime Minister. This figure includes the almost Rs. 8 lac crore that was announced earlier in the form of liquidity measures by RBI. Another big chunk to which it is difficult to put a number, is in the form of guarantees by the government and other public sector entities. This measure is essentially a confidence boosting measure for lending organisations in the economy. Today, most of them are highly risk averse especially when it comes to MSMEs which are hurting the most in this crisis. The government is attempting to reduce that risk by standing in as infallible guarantors if those organisations take debt.  Even if some portion of this comes into play – most of this will be borne by banks & state governments. Hence, the actual impact on government finances in the current scheme of things is not grave. The stimulus is mostly targeting the supply side, with the demand side somewhat ignored in the bargain. While in the interest of simplicity, we are restricting our discussion, in case you are interested in a deep dive of this stimulus package break-up, check it out here.

2. Is this good enough? – 

Given what other countries are doing inspite of not being in such a strict lockdown as India – this seems insufficient. But with our economy, it is much like a tight rope balance. We also have to keep in cognisance the fiscal strength of US/Germany/UK/China etc as compared to India. We will run a Public Debt to GDP ratio touching 80% this financial year and that’s a scary fiscal sign for any economy. We don’t have the fiscal latitude to go big. Much of the answer to this question will also depend on whether we have more future waves of the infection and if the lockdown relaxation will be more permanent or more of a start-stop mechanism. Considering how uncertain the situation is, nothing is set in stone and if things get worse, nothing stops the government from improving on the prevailing package. 

3. Where are we headed? – 

Well, much hinges on hope & prayers. Estimates of contraction in the Economy for the first time after 1980, are pouring in from all ends. While some news has begun to filter in, larger waves of mass unemployment, salary cuts and business shutdowns are yet to swarm us.  In the short run, manufacturing and agricultural side has to be restored quickly, as the service economy could take longer to revive. In the long run, we believe that structural reform is the only way out of this mess. To this end, Prime Minister Modi did announce that reforms on the 4L’s – Land, Labour, Liquidity and Laws would be implemented as a part of the AtmaNirbhar Bharat Abhiyan or the Self-Reliant India Campaign. We would wait to watch for the execution and implementation on these fronts.
4. Our view on Equity – 

Amidst all this, we stand by our call on Equity markets given in previous 2 notes (Read here: ), where for the time being we cap the upside to 10k mark on Nifty. This is also primarily on account of liquidity props being provided in the form of massive bailouts all across the globe by Governments & Central Banks. Our call has been a brief rally in Equity driven by Global liquidity and local fiscal measures. Local measures are clearly not enough but global headwinds are sufficient enough for a short spurt. Our persistent call has been to believe in the right asset-allocation and stick by it. Stock markets are lead indicators and will surprise on the upside much before actual economy will. So hang in there with patience. 

5. What’s our debt view –

 We over-estimated the fiscal impact in our last note. Looking at a number with 13 zeroes, we overdid our assumptions on the likely fiscal deficit and long-term impact on India’s credit rating. As the dust settles, its quite clear that fiscal hit of these measures isn’t that big and can be squarely managed. This is indicated in the yields of 10-year Government of India papers. On the day of the announcement, the 10-yr yield was at 6.16% (12th May) and within the next few days as the story behind the stimulus unfolded, it softened to at 6.03% (20th May). Perhaps, indicating that markets were factoring a bigger fiscal boost than what actually came out and hence the yields softened. This can also indicate, markets factoring substantial future rate cuts by RBI, even though the current repo rate is at a historically low number of 4.40%. Even if we factor further rate cuts, the fact remains that the Government will run a huge deficit number this financial year. Government borrowing which was pegged at about 8 Lac Cr at the start of this fiscal year, has already shot up to over 12Lac Cr and is further likely to go up. Tax collections are abysmal indicated by GST figures (April 2020 saw a collection of Rs. 28000 Cr against a target of Rs. 1.1 L Cr). So in a nutshell, we continue to believe that increased government borrowing will spike up the yields and hence it doesn’t change our view on long-end of the curve. Factors like enhanced fiscal measures, likelihood of negative GDP growth, falling prices, dropping tax collections will lead to huge borrowing pressure and resultant impact on the yields. Kindly note that this yield spike scenario can take time to pan out and our call is more with a 1-year plus time-frame, when the details on the spread of infection and progress of vaccines will also keep feeding into future forecasts.

 Just to encapsulate our views at Moneyfront (  and how it translates to action that you as investors can take:

 a. In Equity continue your SIPs and follow the asset allocation. Don’t break the rhythm of your ongoing plan. SIP remains one of the best bets to play out this deep and hopefully short volatility. Depending on the time that Nifty takes to race up and breach the 10k mark will need us to spell out a fresh view – which we shall responsibly do then. If this number is achieved within next 2-3 months, then it could mean unfounded investor exuberance and valuation worries. If this number comes through by year end, we are hoping to write a more positive note.

b. In debt- avoid income funds (be it long term, long to medium or even medium), GILT funds and credit risk funds. Long term investors (with a time horizon above 3 years) can consider Banking/PSU debt, corporate bond and short term funds selectively (after screening the portfolio quality). But the most preferred zone continues to be liquid, Money Market and Ultra Short Term funds. 

Perhaps the measures are in right earnest, but only time and quality of execution will tell whether they are sufficient enough.

Considering the times and the sentiment around, here’s leaving you with a thought that has been on our minds off late – “Dum Spiro Spero”, an ancient Latin phrase that translates to “While I breathe, I hope”.