Yesterday, the first day of the financial year started off on a negative note, impacted by the negative global markets and also domestic uncertainties with regards to Banks’  stressed assets and auto numbers. FIIs have net sold around Rs.62000 crores in Equity in March and with virus infections increasing, markets are anticipating a worsening of the situation.

Regarding the size of stimulus package announced in India, it is good enough assuming that restriction on business will not be for more than three months, for which the stimulus amounts to 4% of India GDP. It provides sustainability to unprivileged, rural & agriculture business which is the largest section of our demography. In terms of business it provides stability to defensive, staples, farm and FMCG. It also provides confidence that the consumption-oriented business will survive and come back to normalcy post the successful lockdown, the economy is slated to open on 15^th April 2020. Banks will also benefit from relaxation in classification of NPA, higher treasury gains and reduction in interest cost. This is the time we should focus on domestic oriented business which are self-sufficient and have low correlation with external export & import of material. Such defensive stocks are likely to outperform the market with huge spread in the period of recessive risk in the year of 2020. For others and growth-oriented business like Infra, Cement, Export, Metals & Discretionary will do well only after the economy has moved out of recessionary risk, improvement in country’s liquidity.

At the start of the year, the market was robust in expectation of a reversal in the domestic economy. Today, the data suggests that we are in a recession for FY21, due to fall in economic activity in Q1 & Q2. On a positive note, given the sudden crack in market, the stock prices have factored a good part of it. Stock market trend may continue to be challenging in the near-term and will overview the opening of business post lockdown and watch for its effect to the economy. If the lockdown of 21 days in India becomes successful and the domestic market opens then the coming weeks will be very promising for the market. At the same time, we need recovery in global lockdown & health meter.

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India’s orderly response

India has been managing this crisis very thoughtfully, in a step-by- step manner. We started with the Janata Curfew on 21st March, followed by a 21-day complete lockdown from midnight of 24^th March. Importantly, we went for a complete lockdown much before many other countries ravaged by the pandemic did. The lockdown was followed by a massive fiscal package of Rs 174000 crores, which was more a humanitarian package to help the poor and vulnerable, than a stimulus to boost the economy. The very next day, on 27^th March, RBI announced the most comprehensive package in its history to ease the credit markets, boost the economy and to bring relief to borrowers.

The fiscal package

The comprehensive fiscal package from the Centre can bring great relief to those impacted by the lockdown. The supply of additional food grains free to all ration cardholders will ensure that nobody goes hungry. Cash transfer to Jandhan accounts, though limited in amount, is a timely help. The revision in MGNREGA wages though desirable, will not be of much help in lockdown times. Front-loading of PM Kisan transfer and measures to help the elderly and vulnerable women are laudable. Reaching help to the millions of very poor in India is a Herculean task; there are thousands who are homeless, have no bank accounts and none to support. The women and elderly in this segment are highly vulnerable. The civil society and NGOs, who are already doing a great job, can deliver effective help to such segments.  For the well-off segments, this is the time for charity.

Much of the action is at the state level. Some states are doing a great pro-active job in crisis management. A major deficiency of the Centre’s fiscal package is that there is no meaningful transfer of funds to states.

RBI’s Bazooka

The RBI, rising to the occasion, delivered a better than expected response. The massive cut in repo and reverse repo rates, by 75 and 90 basis points respectively will bring down the cost of credit to borrowers and the 1 percent CRR cut will release Rs 1.37 lakh crores into the banking system. LTRO of Rs 1 lakh crores enabling banks to buy corporate bonds and CPs will facilitate easy credit to corporates and ease the pressure on lending. The moratorium of three months on term loans is a big relief to borrowers in this time of stress. These measures aimed at augmenting liquidity, improving monetary transmission and relaxing repayment pressures will have some benign effects on the economy.

Global economy will slip into recession

With most parts of the world in lockdown, most economic activity has come to a grinding halt. This is not a slowdown in economic activity; this is almost a total shut down of economic activity. Recession is inevitable. In the last serious global recession of 2008-09, the real economy was working even though the financial sector was paralyzed in the developed world. Now, it’s different. Most parts of the real economy are not working. The only question now is: how prolonged and intense the recession would be? That would depend on biology rather than economics.

Biology would dictate economics

Monetary stimulus will be largely ineffective in a recession, triggered by collapse in demand due to fear, aggravated by complete lockdown. Fiscal measures announced are more a humanitarian effort to mitigate the sufferings caused by the lockdown than a stimulus package to revive the economy. Therefore, the key to economic recovery will be biology rather than economics.

If covid-19 is contained and the numbers of new infections and deaths are brought down- as China, South Korea and Singapore did -economic activity is likely to resume and the recession would be short-lived. If, unfortunately, the virus were to spread exponentially, the consequences would be devastating with an intense prolonged recession. Therefore, biology will dictate economics, going forward.

Recovery? Yes. Timing unpredictable.

This epidemic too, like all previous epidemics, will also come to an end and the global economy will recover. But when the epidemic will end and when global economic recovery will begin is difficult to predict. Perhaps in 2 quarters. The recovery in markets is likely to be swift and sharp. Let’s hope for the best.

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