Analysts Say More Stimuli, Rate Cut Needed To Deal With Covid-19 Outbreak

Most analysts said the government needed offer more stimuli to help India tide over the crisis stemming from the new coronavirus pandemic.

While Citi Research expects around Rs 1.2 lakh crore (0.55 percent of GDP) would be additional funding requirement, Credit Suisse estimates that there’s a space of up to 3 percent of GDP of further stimulus, according to their research reports.

The Indian government on Thursday announced a Rs 1.7-lakh-crore relief package to take care of poor, workers and those who need immediate help amid a lockdown. The Pradhan Mantri Garib Kalyan Scheme, which will cover 80 crore poor people, will include cash transfers and food security, Finance Minister Nirmala Sitharaman said.

The novel virus has so far killed 16 people in India and infected nearly 700, forcing businesses to shut down temporarily in an already slowing economy as the government sealed the nation’s borders to contain infection.

Meanwhile, the Reserve Bank of India rescheduled its review meeting and cut repo rate by 75 basis points to boost growth and maintain financial stability. And that’s more than what analysts expected.

Here’s what the brokerages have to say…

UBS

• Biggest challenge will be government’s ability to implement these quickly considering the mobility restrictions.
• Support measures are only a first step with more likely to be announced over the coming weeks.
• There is a need to relax the fiscal limit to allow states to respond quickly to the crisis.
• Funding of higher deficit will be a challenge post this crisis.
• Expect the Monetary Policy Committee to ease the repo rate by a further 50 basis points in the upcoming policy review.

Jefferies

• Underwhelming government stimulus; hopefully this is just part one.
• Stimulus appears small, especially as about one-third appears to be a reuse of existing funds.
• Some part includes an additional contribution to the long-term retirement funds.
• No formal announcement but the finance minister dropped hints that more might be likely going forward.

Elara Capital

• Stimulus aimed at alleviating the discomfort facing the bottom of the pyramid households.
• Announcements are more a relief measure; a lot needs to be done to provide a real booster shot to the economy to tide over the current dislocation.
• PM Kisan Yojna benefits will not have any fiscal impact, as it is only front-loading the first installment of payment.
• The current economic situation warrants further action and needs more broad-based stimulants.

BofA Securities

• Move broadly in line with our expectation of Rs2,000 ex gratia transfer to below poverty line families.
• Estimate that the direct fiscal impact at $10.6/0.3 percent of GDP.
• Measures can help (partially) compensate for the loss of income at the lower economic strata.
• Measures won’t drive any surprise in volumes for staples and be large enough to drive material change in discretionary demand.

Citi Research

• Estimate that around Rs 1.2 lakh crore (0.55 percent of GDP) will be additional funding requirement.
• Penciled in around 1.0 percent of GDP fiscal support in our 2.5 percent of GDP growth forecast for FY21.
• Government did not rule out a support package for business/taxpayers in future.
• Announcements should be seen more as a relief package for the poor rather than a sustained growth stimulus.
• Implementation challenges could reduce actual fiscal spending.

CLSA

• The package is a mix of cash, kind, front-loading, and support from states.
• Calculate an effective new cash transfer from the central government to citizens of Rs 45,000-50,000 crore.
• Back-of-envelope calculations show that nearly 0.4-0.5 percent of GDP is likely to be a fresh burden on the central government’s finances.
• Finance Minister did not provide clarity on whether this will be offset by lowering committed amounts in other plans or if it will raise the FY21 fiscal deficit.
• A commensurate stimulus package may be required to ensure a growth pickup later in the year.

Credit Suisse

• The first stimulus targets the worst hit; there is space and need for more.
• Estimate that just the 21-day nation-wide lockdown can bring down GDP by 4 percent.
• A now-casting of the deficit suggests a 180-basis-point slippage in FY21 already.
• Estimate there is space of up to 3 percent of GDP of further stimulus.
• It appears inevitable that the Reserve Bank of India will have to help with bond demand.

Edelweiss

• These measures are necessary, but underwhelming.
• The actual fiscal outgo may be just 0.2–0.4 percent of GDP as several measures may not entail extra spending.
• The package failed to address the serious issue of debt repayments amid the lockdown.
• Do hope more measures will follow shortly to address the mounting risk of debt defaults.
• There are signs of stress building-up in credit markets (spreads are widening).

Goldman Sachs

• The size of the fiscal package is small, compared with that announced during the global financial crisis.
• Assume a headline fiscal deficit for the central government of 4.1 percent of GDP in the stimulus scenario.
• Assume the headline deficit to rise by the same magnitude as the increase in revenue spending.

Morgan Stanley

• Policymakers need to use multiple levers to support the economy.
• Expect the MPC to lower rates by 40 basis points in the upcoming policy review with continued durable liquidity injection.
• Also look for the government to relax the fiscal deficit by 0.5 percentage point of GDP.
• The government could adopt a staggered approach in announcing measures to support the economy.