The lesson for Corporate India from the Atmanirbhar Bharat packages and targeted lending is to blend rewards with restructuring
Instead of putting to rest the noisy debate about what
propels equities, the spree of record highs being notched by local and global stock
markets since the first fortnight of November have polarized opinions. The pandemic
is showing no signs of weakening. The US tops countries with most infections. The
fate of a second stimulus package remains uncertain. Many parts of Europe are once
again under lockdown. Implementation of the European Central Bank’s fiscal support
is facing obstruction from some European Union members, reluctant to follow the
rule of law. India is confronting a second wave after the festive season. Retail
inflation has raced past the Reserve Bank of India’s comfort level of 6%. Consumption
of food items is at a much faster pace than core sector offtake. The
Atmanirbhar Bharat 3.0 tranche did not create any ripples as the series continued with
the tradition of making available credit easily rather than any direct cash transfers.
Companies’ gradual ramp-up of operations to the pre-covid-19 levels does signify
recovery from Q1 June 2020. The question is if they were functioning optimally
in Q2 September 2019, the yardstick used to measure capacity utilization, to
celebrate the semblance of normalcy. Automobile makers were struggling to dispose
of inventory in the run-up to a new fuel-efficient regime. Most others were
coping with the credit crunch following the collapse of IL&FS in September
2018 and the subsequent takeover of DHFL by the central bank. Green shoots became visible after the
US and China in January 2020 signed a limited phase-1 trade agreement to end
their over one-year tit-for-tat import tariff tiff.
What has changed is sentiments. The path is clearing
for Joe Biden’s occupation of the White House. The wait for effective vaccines
is in the last lap. The trading ring’s resounding reiteration of the appeal of life
without face masks and with control over mobility has overridden concerns of last-mile
delivery. Forecasts of a global synchronized recovery next year have gained
traction. Horrible estimates of economic contraction are now being tempered with
the prospect of unlocking of the animal spirits. The reaction is typical of the
market that looks ahead with optimism despite a prickly present. Otherwise, stocks
would have continued to languish, without, on an average, returning over 50% in
the eight months since bottoming out. Neglected components of manufacturing and
services such as aviation, logistics, hospitality, lifestyle adornments and tourism
are meriting a second look in the hunt for value. Till recently fancied substitutes
for remaining connected, shopping and entertainment are being dismissed as
expensive. With the grudging acceptance and adjustment to the new normal of movement
constraints, the imminent return to the pre-pandemic era, with inequities such
as greed, bubbles and bankruptcies, should have either been met with skepticism or a jolt of
shock. The enthusiastic response reinforces the typical trait of the market to find
redemption in a hopeless situation or to become despondent even when the setback
is temporary. The behavior post reduction of interest rates by the central bank
on projection of lower GDP growth, for example is not predictable: jumping with
joy at the availability of cheap money or turning glum on worries of dip in demand
for several sectors.
If there is any redeeming quality to the bout of
sluggishness, in the absence of an adrenaline fix, alternating with irrational
exuberance, on the approaching release from home confinement, is India’s
calibrated moves to tackle the crisis. As the RBI was releasing cheap credit so
necessary for risk-taking, the Narendra Modi government was simultaneously undertaking
structural reforms. Targeted lending to farmers, home buyers and small and
medium enterprises were matched by freeing the agriculture sector to sell
produce anywhere, simplifying labor laws and linking incentives to output. Liquidity
injections have been measured and selective, mainly aimed at farmers and urban
poor. The outcome is becoming visible. The lure of no-cost loans will accelerate
the shift to the organized sector that was being encouraged by lacing the GST with
the incentive of input tax credit. The enlarged tax-payer base will enable focused
addressing of weaknesses. Production as a pivot junks the concept of tax
holidays to attract investment and acknowledges the importance of scale in
manufacturing. There is a lesson for companies and investors. Dividends, buybacks
and bonus shares need to be accompanied by capital expenditure for boosting
market share to ensure that the rewards are sustainable. A crisis can be an
opportunity to empower stakeholders to make them meaningful contributors to
wealth creation.
-Mohan Sule
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