Government recognises this is time for fiscal measures: CEA Krishnamurthy Subramanian

 

Interview | Government recognises this is time for fiscal measures: CEA Krishnamurthy Subramanian

MoneyControl   • Sep 28, 2020 11:25 AM IST

By Kamalika Ghosh ,

Arup Roychoudhury

    

"If you look at international evidence during times of crises, government spending is really crucial, because both consumption and investment which comes from the private sector, go down,” CEA Krishnamurthy Subramanian said.

The Modi government recognises that the time for the centre to spend on fiscal measures is now, when the private sector investment is slow, Chief Economic Advisor Krishnamurthy Subramanian told Moneycontrol in an exclusive interview.

“I think this is certainly a time to spend. If you look at international evidence during times of crises, government spending is really crucial, because both consumption and investment which comes from the private sector, go down. I think that there is basically now, the recognition that there may be scope (to spend). I would not be able to comment on the timing, I will say that we are working on it,” Subramanian said.

As Moneycontrol reported last week, the centre is looking to announce another round of stimulus measures aimed at boosting demand and creating jobs ahead of the festival season.

Subramanian also said that while a number of indicators pointed towards a recovery, the pace has slowed down compared to the steep bounce seen in June and July from lockdown-hit April and May. “I think that while manufacturing has recovered very well, services continue to be a matter of concern, because it is one area where social distancing matters the most. For instance travel, hospitality and tourism,” he said.

Subramanian also warned that any economic assessment also depends on the direction of the COVID-19 pandemic during winter months, when more people are susceptible to common illnesses.

“It is important to wait for especially how this recovery pan out to see that before we can actually make assessments. The pandemic is still on, we are six-seven months into it. And till the vaccine does not come about and people get inoculated in large numbers, everybody will not be back to normal life and economic activity that also depends on each one of us getting back to normal life.”

Excerpts below:

Q: The Parliament has passed a number of farm-sector laws in amidst protests by opposition and farmers. How crucial are these reforms given the political risks?

A: It is critical to take a step back and appreciate the reforms that have been done. In India there has been this tendency to not appreciate reforms when they are being done. You can go back to 1991 and check the writings then. They were critical. It was the same when the Vajpayee government carried out reforms, and this government did as well after 2014. The reforms being carried out now will have an important impact on the structure of the macro-economy, and productivity in the economy as we go forward. If you take the primary, secondary and tertiary sectors, India has dominated the tertiary sector, which is services. But the primary and secondary sectors have not received as much attention, although those are by far the most important from a job creation perspective.

Now, these reforms are primarily catered towards the primary and the secondary sector, including the agricultural reforms, the APMC reforms and the essential commodities act. For example, the Essential Commodities Act had been passed in the 1950s at a time when there was actually famine and shortage. But successive governments did not undo that and as a result none of the infrastructure relating to storage, warehousing, etc could develop in this country.

Second, if you look at these bunch of reforms on the labor side, because labor reforms have been a constraint, in generating economies of scale and thereby jobs and productivity in the manufacturing sector. So, overall, when you take these reforms, there is an emphasis on enabling the primary and the secondary sectors, which are really critical for the large population that we have.

Q: Given that the April-June quarter showed a 23.9 percent contraction in GDP, and that many analysts expect all four quarters to show a contraction, are you still sticking to your assessment of a V-shaped recovery in the second half of the year?

A: We try and tend to try and be very simplistic in trying to capture all the nuanced phenomena in one letter. What does a V really mean? It means a sharp decline, followed by a sharp recovery. It's not necessary that a V needs to be the same slope. It needs to be a fall followed by recovery, right? And the statistics that I have actually pointed out in several of my media interactions, show that a V shape recovery is happening.

Let's take a few of them, like E-Way bills. In August, it was 98 percent of August 2019 levels. You look at the railways freight data, August was 6 per cent higher year-on-year. Similarly if you look at power consumption and cement and steel production, these are showing healthy trends compared to pre-COVID-19 levels. So, these are all actually what are conveying recovery.

Now, what is important is to keep in mind that there is a nuance there, which we have to know. So, some things have recovered to pre-COVID-19 levels. But obviously the same pace will not remain because the bounce from April and May has already happened. That said, I think that while manufacturing has recovered very well, services continue to be a matter of concern, because it is one area where social distancing matters the most. For instance travel, hospitality and tourism.

Q: But do you agree with some assessments that all four quarters of this fiscal year will see a GDP contraction?

A: This is a period of significant uncertainty. And one has to be a little careful, because oftentimes there is a lot of herding with these estimations. One entity says X and then everybody comes around and says x plus minus epsilon. Given this uncertainty I would not look too far ahead. We have our internal assessments. But it is important to wait for especially how does this recovery pan out to see that before we can actually make assessments. The pandemic is still on, we are six-seven months into it. And till the vaccine does not come about and people get inoculated in large numbers, everybody will not be back to normal life and economic activity that also depends on each one of us getting back to normal life. I would wait for the winter months, when you have higher instances of common cold and flu, and see how that is affecting COVID-19 cases.

Q: There has been criticism by observers that a country like India cannot afford to save fiscal firepower instead of utilizing it. Earlier, the issue was to see how close we are to a vaccine. But, now we need to probably bring forward any fiscal measures. Are we preparing any fiscal stimulus measures? Can we hear something soon?

A: I think this is certainly a time to spend. If you look at international evidence during times of crises, government spending is really crucial, because both consumption and investment which comes from the private sector, go down. That is because the precautionary motive to save and also because of risk aversion. And so, both those gaps the government must try and actually fill. I think that there is basically now, the recognition that there may be scope. I would not be able to comment on the timing, I will say that we are working on it, and that is the prerogative of the honourable finance minister to announce the ‘when.’ But we are working on it.

Q: The automobile sector has been saying that there is a need to relook at GST rates to spur consumption and economic growth. What is your take on that?

A: We look at the entire economy and also take into account the sectors that will generate the maximum bank for the buck.

Union Finance Minister Nirmala Sitharaman

Q: Coming to the financial sector, it was obviously understood that India will come out of the pandemic in a better shape if the financial sector is kept in good shape. But now, we have a situation where the Supreme Court has jumped into the fray talking about interest on interest. The RBI made it clear that waiving off interest during the moratorium period will lead to a hit of Rs 2 lakh crore for the banks. We are expecting not just corporate loans, but personal loans non-performing assets to go up. So, by your assessment, how badly is the financial sector hit by the pandemic?

A: The honorable prime minister has mentioned many times to convert a crisis into an opportunity. I think the financial sector would benefit the most from taking that particular perspective. If you look at the financial sector, for the fifth largest economy that we have, we have only one bank in the global top hundred. We basically punch far below our weight in terms of the banking sector.

What we need is organic growth that happens in a way without the “accelerator brake” phenomenon, where you start giving credit, press on the accelerator, then you basically have to press the brake on that for various reasons. And this requires our banks to really utilize technology because world over financial services firms are heavily data and tech dependent. And if you look in the Indian context, even private sector banks do not use data and analytics for large corporate lending. They use them for retail lending, but not for corporate lending.

For instance, we showed it in the economic survey very clearly that if you look at the 12 biggest NPA accounts, the accounting quality for years before the actual NPA would have shown that they should not have been lent to. If the banks had the data on related party transactions, data on basically their collateral - if banks had used the data, they would have been able to assess the willingness to pay and the ability to pay.

Also, this is another important part that in any economy, the innovation is brought by new entrants, and incumbents typically are not the ones that really innovate that much. So, this is also a sector therefore that is crying out for disruption, which is something that we should enable.

Government set to announce fiscal stimulus package ahead of festive season

 

Exclusive | Government set to announce fiscal stimulus package ahead of festive season

MoneyControl   • Sep 25, 2020 12:23 PM IST

By Arup Roychoudhury

    

Centre weeks away from announcing measures aimed at boosting demand and creating jobs. Plans include an urban job scheme and a massive infrastructure push.

The Narendra Modi government is just weeks away from announcing another round of stimulus measures aimed at creating jobs and pushing demand, as it looks to turn around India’s ailing economy which saw its steepest ever contraction in April-June.

These plans could involve a bigger direct fiscal outlay compared to the previous two packages - the PM Garib Kalyan package and the Aatmanirbhar Bharat package - and may include a Rs 35,000 crore urban jobs scheme, a massive infrastructure initiative with emphasis on 20-25 big projects which can be completed this year, and continuing focus on rural job and farm schemes and free food and cash transfers.

“The aim is to announce some measures before the festive season begins,” a top government official told Moneycontrol on condition of anonymity. India’s festive season begins traditionally with Dussehra/Durga Puja. This year, the festivities will start from the third week of October.

A vaccine works by mimicking a natural infction. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

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The October-December quarter is the most crucial one for customer facing companies in India, including four and two-wheeler manufacturers and makers of consumer appliances.

Informed sources told Moneycontrol that discussions are at an advanced stage for a job programme aimed at urban and semi-urban areas, which will be on the lines of the flagship National Rural Employment Guarantee Scheme (NREGS). A second official said that the initial outlay for the scheme is being pegged at around Rs 35,000 crore.

Unlike NREGA, however, “it will not require legislative action,” the second official said, and added that a draft cabinet note was being prepared. The scheme is expected to first kick off from tier III and IV cities before being rolled out in bigger urban centres.

The government is also identifying some key projects from the National Infrastructure Pipeline where work can be expedited in order to create more employment. “These are projects where money can be spent this year. Not next year or the year after that. The aim here is to ramp up activity and generate jobs in the shortest possible timeframe,” the first official quoted above said.

The centre’s focus on the rural economy, spelt out under the previous two Covid economic packages, is set to continue as well. The free foodgrain and free cash transfer schemes are likely to be extended.

The current thinking in the government is vastly different from its earlier view of ‘keeping the powder dry.’ Chief Economic Advisor Krishnamurthy Subramanian had said in late-July that the right time for a fiscal stimulus package may be when a vaccine is available.

Now however, the first quarter GDP numbers seem to have convinced the government on the need to spend. “The right time to spend is now. The situation is still uncertain and a vaccine may not be available till the first quarter of the next year. The centre’s biggest economic focus is job creation,” said the second official.

India saw perhaps the biggest fall in GDP in its independent history, as April-June GDP contracted 23.9 per cent year-on-year. Private consumer spending, the bedrock that contributes more than half the Indian economy, got chipped by 27 per cent. But investment, represented by gross fixed capital formation (GFCF), contracted by 47 per cent, their worst fall to date.

There is also a concern that after an initial boost in economic activity in June and July after the lockdown in April and May, as shown by many key high-frequency indicators, things may be starting to slow down a little bit, especially as daily Covid cases show no sign of slowing down, the pandemic spreads to rural India, and states still declare mini-lockdowns. This concern has been spelt out in the Finance Ministry’s last monthly economic report as well as by independent analysts.

 

'Once the money printing stops and normalcy resumes, FII inflows can cool off'

MoneyControl   • Sep 24, 2020 12:02 PM IST

By Sunil Shankar Matkar

    

Liquidity and negative interest rates globally will continue to drive investment in financial markets, says Devang Mehta of Centrum Wealth Management.

After a fast rally, minor corrections should not come as a surprise. The market will more or less fall in line with global trends, with the US elections a key event to watch out for. The dollar is weak but that might change. Hence this money can move out and any risk in the system can also push this money away from emerging markets, Devang Mehta, Head–Equity Advisory at Centrum Wealth Management says in an interview to Moneycontrol's Sunil Shankar Matkar. Edited excerpts:

Q: Do you think the US elections are a major risk for India? What are the other risks that can impact growth?

The recent communication of the new Federal Reserve policy framework by Chairman Jerome Powell that monetary policy will stay extremely loose for longer will keep key rates lower and will be a positive sentiment booster for the global markets. However, with the US elections approaching in what will be a highly contested battle, there is a fair amount of volatility, which may act as a spoilsport in the ongoing rally. Also locally, a significant deceleration in growth could be seen, as the surge in demand related to the reopening of the economy will fade. India-China tensions on the border are another variable, which comes into the proceedings intermittently. Valuations have also started to look a bit stretched, in the absence of earnings growth.

Q: What is your take on the banking sector, especially after the end of the moratorium period and the expected non-performing assets (NPA) issue?

The banking sector will be in for a rough ride in the shorter term in view of continued capital requirements for public sector banks, an anticipated spike in stressed assets, higher credit costs, weaker earnings due to interest reversals and lower fee income and muted growth prospects in the wake of the measures taken to contain the spread of Covid-19.

However, most large banks have strengthened their capital buffers, built contingent provisions and have been proactive in managing the loan portfolio. While the credit growth could remain dismal, and short-term financial performance could deteriorate modestly, large banks may benefit from credit migration. As opportunities arise, these banks are in a position to gain substantial market share in the medium term.

Q: Given the recent measure by the government, do you expect more FPIs/FDI to come into India in the coming months? Which sectors can attract FPIs/FDI, and should one start investing in them?

With global central banks being in a charitable mood, a lot of liquidity has found its way to emerging markets like India. Off late, the rally has also been broad-based and covering the entire spectrum of market capitalisation. Indian equities reported a decade of high monthly inflow from foreign portfolio investors (FPIs) in August. The recent share sale by many listed companies and reduced interest rates have attracted the foreign investors' money into Indian equities.

While such FPI equity flows support domestic equity markets and investor wealth, their translation into jobs and output is more tenuous in comparison to FDI flows. With Reliance Jio raising at Rs 1,53,000 crore via multiple deals with global giants, the appetite for such businesses that are using disruptive technologies is huge. Also, seeing the recent successes of a few new-age IPOs, there seems to be a high demand for quality paper. Successful QIPs, rights issues, etc by a lot of companies also augur well under the prevailing circumstances. CY20 YTD, healthcare and IT continued topping the charts while financials languished at the bottom. A lot of action can be seen in these sectors going forward.

Q: Do you expect more inflows into smallcaps and midcaps after Sebi tweaked multicap fund norms? What could be the reason behind it and do you expect Sebi to bring in more such changes?

Clearly the premise to invest in small and midcaps has to be on merit rather than the tweak in MF norms. With the ongoing rally in mid and small caps, the huge valuation discount between these indices compared to the Nifty has now narrowed. Rather than putting them in different buckets of market cap, it is imperative to judge the quality of business and earnings profile and be market0cap agnostic.

The major reason behind bringing in this norm is that a scheme has to be true to the label, hence a multicap fund should have holdings across market capitalisation. The AMCs have been given a lot of flexibility in terms of how they deal with the new norms like merging the schemes, providing investors the option to switch to other schemes, convert the scheme into another category or rebalance the portfolio in line with the new norms.

Q: Most experts say a correction is due given expensive valuations. Do you expect 5-10 percent kind of correction in the coming months or are markets waiting for the US elections?

Once the printing of money stops and once normalcy resumes, the inflows could cool off. The dollar is weak but that might change. Hence this money can move out as well and any risk in the system can also push this money away from emerging markets. After such a fast and furious rally, minor ebbs and corrections should not come as a surprise. Our market will more or less fall in line with global trends, where the key event to watch will be the US elections.

On the contrary, it is expected that liquidity and negative interest rates globally will continue to drive investment in financial markets. Keeping money in a bank or in fixed deposits is not the best option as interest rates are lower. Expectations from equity over a period have now become realistic and in absence of any lucrative investment avenues, quality stocks will find buyers on any material correction. Buying great companies with pragmatic return expectations is the order of the day. Don't go down the quality ladder just for the sake of investing; this is important in the present context of a very sluggish economy.

Q: Midcaps and smallcaps have outperformed the benchmark indices but is the rally driven by fundamentals?

The best way to construct or realign the portfolio is to focus on the leaders in strong and relevant sectors. Market leaders do exist across the market-cap spectrum, be it large, mid or small. If these companies have exhibited to survive through difficult cycles in the past and do show earnings potential along with the simple traits of high ROE and durable competitive advantage along with necessary checks and balances in terms of fundamental matrices, they qualify to be portfolio stocks. There are sectors like chemicals, diagnostic labs, automation, engineering and R&D where market leaders are still in the mid and smallcap space.

However, just for the sake of earning a quick buck and fear of having missed out should not make one participate in the ongoing trend. Though it is encouraging to see the market breadth expanding, one needs to take cognisance of the fact that quality can't be compromised just because something is available cheap.

Q: Do you think the IT sector is going to be a star performer over the next few years? What is your pecking order that can boost the portfolio?

Even up until 10 years ago, IT sector contributed less than 5 percent to the country's GDP. Today, it contributes nearly twice as much. India's IT industry is advancing from growing demand for digital services as the pandemic accelerates the global shift toward automation. The criticality of technology to most companies' operations across verticals, along with a further rise in digital and cloud spend post the pandemic, is likely to drive growth recovery. Robust deal pipelines, positive management guidance and cost-cutting measures are few reasons to be optimistic. Reasonable valuations, free cash flow, return ratios and payout metrics also make the sector look attractive from a longer term perspective. We have been bullish not only on IT services but also niche companies operating in engineering and R&D, automation, etc.

Mahabharat of 2020

 the big catalysts before investing:

1. US Stimulus Package: Investors will remain anxiously hopeful that America’s economy eventually will receive another shot in the arm in the form of government spending.

2. The rise in global coronavirus infections.

3. The US-China tensions racketing up.

4. Brexit challenges lingering.

5. November US Presidential elections

 

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The Tides Have Turned As Stocks Continue To Sink

Sep. 21, 2020 2:50 PMSPY, QQQ, DIA

Summary

• The S&P 500 is breaking key level of technical support.
• Typically, when the market's technicals break, we turn to fundamentals.
• The problem - stocks need to fall as much as 15% more to find fair value.

The S&P 500 has fallen about 10% from its peak at the start of September, as the Nasdaq 100 has lost about 13.5%. But these losses are likely to grow worse, as valuations are still very high for the S&P 500. Based on valuation, the S&P 500 could even fall by as much as 14%. From a technical standpoint, the S&P 500 could have as much as 13% further downside risk.

The most significant risk to this market is that the technicals are breaking down. Typically, when we start seeing market technicals break down, we look to fundamentals for support. The problem here is that the markets have no fundamentals to support them during this breakdown, given the vast gap that exists between the current levels in the index and what could be considered fair value for the S&P 500 with a PE ratio approaching something in the 16 to 17 times earnings range.

Earnings Do Not Support The S&P 500

Based on my proprietary model, some of the earnings metrics of the S&P 500 have been slowing and have now started to reverse lower recently. Additionally, the S&P 500 is hugely overvalued when adjusting for long-term earnings growth expectations. They are still at their highest levels in about 40 years.

Currently, the MCM Reading The Markets earnings model estimates 2020 earnings for the S&P 500 of about $125.00. Followed by a growth rate of almost 27% in 2021 to $159.40 and 17% in 2022 to $186.50. Assuming a fair value P/E multiple of about 17 times 2021 earnings estimates, the S&P 500 is worth about 2,700; using a 15 multiple on 2022 earnings estimates, we get a valuation of about 2,800 on the S&P 500.

SPX	3,235.77	PE Ratio	Growth Rate	Forecast	Growth Rate
2020	$ 124.86	25.91
2021	$ 158.44	20.42	26.89%	2,693.43	-16.76%
2022	$ 185.36	17.46	16.99%	2,780.38	-14.07%

(MCM Reading The Markets, using bottom-up mean analyst earnings estimates)

When we look at the S&P 500, adjusting for long-term earnings growth, the index is hugely overvalued. Currently, long-term earnings growth is forecast to be around 10.8% for the S&P 500, as of September 18th, based on data from Refinitiv. That's up a little bit from where we were in July when they stood at 9.5%. However, the current expectations are significantly lower than the historical average over the last 35 years, which has been around 12.25%.

That leaves us with an S&P 500 that is trading around 20.5 times one-year forward earnings estimates. It means that when we adjust that PE ratio for the long-term earnings growth rate, we find that the S&P 500 is currently trading with a growth-adjusted PEG ratio of about 2. Historically speaking, the high end of the range has been 1.6, going back to 1985, with an average of 1.25. Typically whenever the S&P 500 gets to a long-term growth to PE ratio above 1.6, the market pulls back substantially. Supposing, we assume that the S&P 500 is to trade with a PE ratio of 1.6 times the expected growth rate. The S&P 500 would have a one-year forward PE ratio of about 16.76, making the S&P 500 worth about 2,650, a decline of about 18% from its current level on September 18th.

Technicals Breaking

More concerning is what's taking place in the S&P 500 on the technical charts, with the index now falling out of what looks to have been a descending triangle around the 3,340 region and now falling below a critical level of technical support at 3,260. It could result in the next level of support not coming until 3,175. But the real threat that the S&P falls to somewhere around 2,860, a decline of about another 12% from where the S&P 500 is trading. A move to 2,860 would allow the index to fill a technical gap created in the middle of May. It would also let the S&P 500 retrace about 50% of the move off the March lows,

Additionally, the S&P 500 has an RSI that's currently around 35. Which is still not even oversold. We would need to see the RSI fall below 30 before we consider the S&P 500 to be oversold due.

Should the current downdraft in the markets continue, it is likely to take either a major shift in sentiment to unwind the current downdraft. Or investors are going to start having to find pockets of the market that represent some form of value from a fundamental standpoint. In the absence of both, this sell-off may get worse before it is due to get better.