Atmanirbhar Bharat Package – A 5 Day Test Match with No Result
The Narendra Modi Government’s much-hyped ₹20-trillion fiscal package disappointed individuals and companies, who had expectations of audacious stimulus measures to revive the economy. The Indian Economy has remained almost idle for the past two months. The announcements made during the last 5 days involve a small amount of direct spending by the Central Government, and the package may not be adequate enough to revive the demand in the economy.
Announcements and its impact
The current measures announced by the government is largely a continuation of economic philosophy seen since May 2014. The key concern which has been left unaddressed by the Modi Government is the lack of measures to boost consumption. However, the government has announced an important step to revive the rural demand by increasing the allocation of funds of MNREGA (Mahatma Gandhi Rural Employment Guarantee Act) to Rs. 1 Lakh crore. This will help increase the demand in rural areas as more and more migrant laborers are returning to villages. Beyond the rural jobs guarantee scheme, little immediate support has been extended to revive demand in the economy.
The announcements made by FM Nirmala Sitharaman will have an impact in the medium and long term, however, it is our belief that the announcements made by FM will not help soften the short term pain caused due to COVID-19. We believe that the Atmanirbhar Bharat Package may fall short of mitigating the short-term challenges for various sectors, but it is better designed to improve India’s medium and long-term growth potential.
Discretionary, Airlines, and Tourism sector are the worst-hit by the nationwide lockdown that has now been extended to the end of this month and the lack of direct steps to support these sectors could lead to significant job losses and bankruptcies.
New Public Sector Enterprises Policy
In her final and fifth tranche of the announcement of the stimulus and reform measures, FM announced a new Public Sector Enterprises (PSEs) policy. As per the new policy, the government will open up all sectors for the private sector participation while the Public Sector Enterprises (PSEs) will play an important role in strategic sectors. The list of strategic sectors has not been shared by the government yet.
Disinvestment of government stakes in companies has become a major source of nontax revenue in recent years with collections of Rs 1 lakh crore in FY18, Rs 85,000 crore in FY19, and Rs 50,300 crore in FY20. With market conditions not conducive, the Centre might be forced to reduce the disinvestment revenue target of Rs 2.1 lakh crore for FY21 significantly.
In theory, the move to increase the disinvestment of government stakes in PSEs is a sensible and much-needed reform, however, this will lead to huge destruction in valuations of PSEs. There are a large number of PSEs in various sectors that are currently financially distressed. The perfect example would be Air India. The government would be forced to take on a large amount of the liabilities of these financially distressed PSEs to make it attractive for institutional investors to invest in them. The Government has failed several times to privatize Air India and with the impact of COVID-19, it shall become tougher to reduce its stake in the airline company.
What was the point of the “Economic Package”?
In the name of Atmanirbhar Bharat Package, the government found the perfect opportunity to push large scale reforms which would have been difficult to push during normal times. With this package, the government has been able to successfully bypass the Parliament and the large discussions surrounding these measures. No doubt, these are important measures that will have a positive impact in the medium and long term. However, the need of the hour was a relief package with policies more towards reviving the demand in the short term.
To help individuals with their loan payments, the RBI had announced a 3-month moratorium in the month of March. There have been several unofficial reports indicating that the moratorium can be extended for another 3 months. If such an announcement is made by the RBI Governor, this would be a welcome move, as it will help increase the cash in hand for individuals. However, extension in moratorium may not have a positive impact on demand, as a large chunk of the population may reduce their discretionary spending due to uncertainty.
As we approach the end of the first quarter (April – June) of FY 2020-21 and with the extension of lockdown till May 31, we believe that the GDP for this quarter would be negative. However, there is a possibility of a slight recovery in the second and third quarters of FY 2020-21. The recovery in the second and third quarters would largely depend on the period of lockdown and the implementation of reforms announced by the government.
What’s next for us?
To understand how to proceed next with your personal finance, reach out to our Advisory team for assistance.