A toolkit for recovery

 

India’ graded and targeted fiscal and monetary support should be a template for future economic crises

 

Rarely does a budget pleases all stakeholders. Union Budget 2021 has achieved the impossible feat. The government is satisfied that its intention to gradually withdraw from running businesses, except in four strategic sectors, has been enthusiastically embraced by the market. The Nifty gained more than 11% over the next fortnight. Companies are cheering the 34% increase in capital expenditure. The massive allocation of Rs 5.54 lakh crore to create assets in the coming fiscal year and the allocation of Rs 1.97 lakh crore for productivity-linked incentive scheme covering 13 sectors over the next five years will trigger private investment, essential for growth to sustain. The proposed development financial institution is a break from the piecemeal approach to infrastructure. The targets to build roads, railways and metros will spur offtake of commodities, capital goods, transport, and power. The resultant generation of employment will see higher inflows into savings and investments, apart from discretionary and non-discretionary buying. The surging stocks captured the enthusiasm of investors, particularly after the resilience displayed by most companies in Q3 December 2020 despite the lingering challenges of supply and distribution.  The Nifty Bank index flirted with a new high, spurting more than 11% since the budget, on the prospect of public sector banks cleaning their balance sheets by disposing of toxic assets to a bad bank and getting Rs 20000-crore capital infusion to prepare for the anticipated increase in appetite for credit. The Nifty Realty index galloped 15% in 10 sessions since end January, reflecting the change in the outlook for developers due to the growth-oriented budget, low interest rates and profit booked from a resurgent stock market looking for diversification.

 

There is more on the plate for the cautious investors looking for alternatives to the volatile equities. With the next fiscal year’s borrowings pegged at Rs 12 lakh crore, there is urgency to attract investment to the debt market. Infrastructure debt funds can issue zero coupon bonds below face value to capture current yields. Real estate and investment trusts can get dividend income without TDS to turn them into hot destinations for FPIs. The most significant change is freeing government securities to all categories. The jump in individual clients of brokers even during the lockdown and simultaneous redemption of mutual fund units indicate retail investors are snatching back decision-making from fund managers. Small savings schemes will continue to be an important option for a resources-hungry government. Surprisingly, even the finnicky ratings agencies have been circumspect. Instead of scolding the government for allowing the fiscal deficit to spiral to 9.5% of the GDP this year and to 6.8% in the next, there have been murmurs of understanding. The expenditure splurge, with the potential to bolster inflationary pressure, has sought to be offset by divestment and strategic sale of PSUs and monetizing dedicated freight corridors, airports, and railway infrastructure.

In fact, the four Atmanirbhar Bharat packages have created a new template for pulling the economy back from the brink by marrying loose fiscal policies with calibrated monetary measures. The standard operating procedure of liquidity infusion, found so effective in the aftermath of the credit crunch of September 2008 and repeated during the current pandemic, has been enriched by step-by-step policy support. Instead of dispatching monthly cheques, India deposited cash into the Jan Dhan accounts of the poor. Besides the quarterly instalment in farmers’ accounts, free ration to the urban and rural poor ensured food security. Access to low-cost money was eased for the vulnerable sections. Collateral-free loans to the unorganized sector and partially guaranteed credit lines to NBFCs smoothened the flow of money in the desired direction. The targets were MSMEs for their ability to create jobs, home buyers to set in motion demand for housing-related inputs and farmers, whose disposable income is a magnet for consumption themes such as consumer durables and non-durables. In the process, India has created a toolkit to be mimicked to contain future economic crises. The most heartening outcome has been Prime Minister Narendra Modi’s assertion that damning the private sector is insulting the youth. After the 1991 dismantling of licence raj, which was a covert nod to entrepreneurship but celebrated as coexistence of a mixed economy, the statement in parliament is the most overt acknowledgement by any government of India of the contribution of promoter-owned businesses in the country’s development.

 

 -Mohan Sule

 

Atmanirbhar Bharat 4.0

 

Union Budget 2021 draws a roadmap for growth after previous stimulus packages brought the economy back from the brink

 

 If Budget 2021 evoked memories of Budget 1991, it was not without reason. Both the exercises were undertaken against the backdrop of a perilous situation. If socialist practices had drained India of forex reserves, a global pandemic had sapped resources due to supply disruptions. The economy had contracted in H1 of the fiscal year. Timidity was not an option. After dismantling the licence raj that had turned Corporate India into a cosy club of cronies, India had to wait for three decades for a decisive about-turn on pampered PSUs. Many were draining cash without contributing to growth. Several central enterprises including LIC have been lined up for divestment. Besides IDBI Bank, two more government-owned banks and one general insurance company are to be sold off, reaffirming the intention of maintaining minimum PSU presence in strategic sectors. Additional capital infusion of Rs 20000 crore and the setting up of a bad bank to park non-performing assets will prepare public sector banks to meet the demand for credit as the economy returns to normal due to the vaccination drive, for which Rs 35000 crore has been allotted. If the aim of the three Rs 27.1 lakh-crore, or 13% of the GDP, Atmanirbhar Bharat fiscal packages announced in March, May and November and a series of intervention by the Reserve Bank of India was to support the vulnerable sections through cash infusion and loosening the loan availability to farmers, urban poor, micro-and-small-and-medium enterprises, home buyers and realty developers, Budget 2021 took forward the process by focusing on infrastructure, well-being, and minimum government.

The highest-ever GST collections in December 2020 suggest that the de-railed economy is getting back on track and ready to enter the next cycle of development. The launch of Swatch Bharat 2.0 for waste disposal, after Swatch Bharat 1.0’s nationwide coverage, is illustrative of the Modi government’s ahead-of-the-curve thinking. The unexpected hike in FDI ceiling in the insurance sector from 49% equity to 74% implies the time for incremental measures is over. In addition to spending Rs 1.97 lakh crore over five years on the 13 sectors identified for production-linked incentive scheme, setting up seven textile parks over three years will boost Make in India and generation of employment. The agriculture credit target has been ramped up to Rs 16.5 lakh crore. The outlay on highways and railway infrastructure will be Rs 2.28 lakh crore next fiscal year. Over Rs 3.06 lakh crore has been earmarked for power distributors over five years to upgrade their systems. Allocation to rural infrastructure fund has been enhanced by Rs 10000 crore and micro irrigation funds corpus doubled. Support to MSMEs is up 100%. Capital expenditure will be around 34% more than in FY 2021. The fiscal deficit of 6.8% of the GDP in FY 2022 is to be met, not by higher taxes, but through Rs 12-lakh-crore market borrowings, Rs 1.75-lakh-crore share-sale, monetising non-core assets, and handing over the running of freight corridors, sea- and airports, power transmission assets, oil and gas pipelines, railway infrastructure and sports stadia to private players.

The ease-of-living thrust comprises the Rs 5-lakh-crore AtmaNirbhar Swasth Bharat Yogna to strengthen the healthcare system and the urban water supply and waste disposal missions over five to six years. The gas distribution network is to be expanded to 100 more districts. Various legislations governing securities transaction will be clubbed into a single code. Investors will have a charter of rights. Continuing the targeted strategy implemented in the previous doses to help sectors that have a multiplier impact, the excise duty on petrol and diesel, whose end utilisation might get diffused and dispersed, has been substituted with cess to funnel resources into agriculture infrastructure. Loans to Food Corporation of India will be through the budget mechanism to bring transparency. A timeline for closure of sick PSUs will unblock assets. The tinkering with customs duties was restricted to a few items to promote local manufacturing and cool inflation and not to replenish the treasury. Concerns of rising bond yields due to government crowding out private borrowers are expected to be offset by higher investments by FPIS in infrastructure through development financial institution, zero-coupon infrastructure bonds and debt of infrastructure and real estate investment trusts. The key to success of these measures is the rollout of the reforms. The finance minister and her team deserve applause for attempting to restrict the government’s role to the social sectors.

 -Mohan Sule

 

 

Divide to grow

 

 Instead of one-size-fits-all approach, Union Budget 2021 should mimic the targeted pandemic fiscal and monetary packages

 The market’s reaction to the Union budget can range from temporary exuberance, despondence, or indifference. The exercise always has elements of shock and awe. The comeback of the long-term capital gains tax on equities in the 2018 Budget was expected. There was debate happening about how India was turning into a tax haven. Scrapping of the dividend distribution tax and shifting the burden to the recipients in the 2020 Budget came out of the blue. The old regime had grown comfortably familiar to induce complacency. The introduction of retrospective taxation in the 2012 Budget was disturbing but inevitable. If not, Rs 2500-crore capital gains due from the sale of an Indian telecom asset by the foreign owner to Vodafone would have to be let go after the adverse Supreme Court ruling a couple of months earlier. Some insertions are so innocuous that they sink in only after a scrutiny of the fine print. The backlash against increase in surcharge to 25% from 15% for non-corporates, with taxable incomes between Rs 2 crore and Rs 5 crore, and to 37%, for those earning Rs 5 crore and more, taking the effective tax rate on them to 39% and 42.74%, in the 2019 Budget was brutal. FPIs pulled out almost US$150 billion in the subsequent three weeks. Nearly 40% of them were structured as trusts or associations of persons. The Nifty wiped out all the gains made in the year in the month since the presentation of the budget on 5 July. The misadventure was scotched end August. Each budget, therefore, is unique. It cries of desperation, confidence, or prudence, hinging on the spending record of the government. A dispensation focused on its vote bank will rarely bother about income-expenditure mismatch as when the 2008 Budget granted Rs60000-crore loan waiver to farmers. 

 

The possibility of the 2021 Budget turning out to be a routine ritual is stronger than throwing sucker punches. The checklist of what remains to be done is getting shorter. Standalone peak corporate impost is now a competitive 22%, without exemptions. The September 2019 announcement was two months after the annual event. 2020 Budget revised personal income tax, exempting earnings up to Rs 5 lakh. The rate up to the Rs 15 lakh slab has been slashed 10-15%. The scope for tinkering with the goods and services tax is outside the scope of the budget.  State finance ministers meet periodically to review the levy. Only 19% items have a 28% burden, with 60% in the 12-18% range. Bringing fuels in the uniform indirect tax regime is overdue but unlikely as it will plug a lucrative loophole to boost revenues. The fiscal deficit has already crossed the estimate of 3% and might spiral beyond 5% by the end of FY 2021. The temptation to tinker with surcharge and cess on corporate and personal tax rates will be strong. Going by the Securities and Exchange Board of India’s directive of collecting margins on each intra-day trade, instead of at the end of the day, points to a hike in the 15% short-term capital gains tax. Such a move will blunt criticism that the 500-basis-point difference with the long-term capital gains tax punishes serious investors.

Tempering the excitement of a buoyant capital market presenting plenty of opportunities to squeeze out juice will be the sombre reality of contraction of the economy in H1 of the current fiscal year, and a fragile recovery since then, resulting from the lockdowns to contain the outbreak of covid-19. Any misstep will be a setback to the Make-in-India campaign. At the same time, the circumspection might not last till next February. Turning hawkish will pivot on how fast the economy rebounds. Most multilateral and domestic institutions are forecasting double-digit, and the highest compared with other countries, economic expansion for India next fiscal year. Another important reason why the leadership might not want to spook the stock markets with short-sighted measures to cap borrowing is the elephant in the room: PSUs. The pandemic de-railed the divestment timetable of Air India and BPCL. Successful stake-sale of the long line-up in the space will achieve two objectives: keeping interest rates low and getting funds for social schemes, whose penetration is crucial to win states going for elections this year. Saddled with a huge vaccine bill, the finance minister can take a leaf from the three Atmanirhbar Bharat packages and the central bank’s two major fiscal initiatives during the peak of the pandemic: targeted support. Differentiated import duties based on the country of origin is a potent weapon. The proceeds can be used to enlarge the production-linked incentive scheme and offer subsidies to encourage local manufacturing.

-Mohan Sule

 

The Year of Rebalancing

 

What to do with growth stocks, PSUs, and legacy blue-chips in the portfolio on return to pre-covid-19 normalcy

 

If 2020 was the year of triumphing adversities, the New Year will be a period of introspection. Priorities will change as life gradually returns to the pre-covid-19 normalcy. The vaccination coverage is set to encompass the globe by the first half of 2021. Multiple products will compete on effectiveness and price. The challenge will be last-mile delivery. It is likely the entire western world and the prosperous nations in Asia will have completed the exercise entering the second half of the year. Equities’ rebound from the bottom anticipated the pandemic coming under control eventually. The record-breaking spree that followed is accounting for growth. The question is if the economy, hobbled by disruption in supply and distribution chains, has the stamina to sprint. The aim of the monetary and fiscal packages was to tide over the temporary slump in business. The outcome has been lopsided consumption. The shopping cart predominantly comprises food, hygiene products and utilities. Emerging from the medical crisis, the possibility is that demand for discretionary items will explode. The stock market is already visualizing such a scenario. Traditional industries are attracting attention for their tested business models as against the in-flavor tech providers with plenty of promise at high discounting. Buying is shifting to mid and small caps as investors wrestle with slowing returns of large, safe bets and untapped upside of promising risk-takers.

 

 

The problem is producers of non-essentials have absorbed the major impact of lockdowns. Capital expenditure has been put on hold to conserve cash. They might be not in the best of shape to meet the release of spends. The return to Old Economy boosted crude beyond US$50 in December, indicating inflation is gearing to recoil. Many manufacturers have taken a hike in prices beginning January.  The Reserve Bank of India will not be comfortable with consumer prices beyond 6% and the Federal Reserve will be happy if the 2% target is breached. The rollback of liquidity will begin. Investors’ dilemma will be whether to ignore the pressure on the margins for top-line growth. Companies balancing the pull of revenues and the pressure of higher input costs will see valuations soaring. Obviously, they will be at the top of the market or have a unique presence without comparable peers. In the crosshairs will be banks, expecting improvement in demand. A series of interventions has insulated them from the effects of the infectious outbreak. The central bank allowed one-time restructuring of non-performing loans. The Supreme Court put off recognition of bad assets after the end of the six-month moratorium on servicing. Dear and scarce money will test the mettle in managing slippages.

 

It will be make-or-break time for PSUs.  They have lagged in recovering from the March lows. There is no clarity about their future. IPOs used their monopoly as a bait. Many have minimum public float required to stay listed. Yet they are constituents of benchmarks because of their size. The opening up of practically the entire economy to the private sector has erased even the scarcity premium. Attempts to extract whatever juice is left through offer for sale in dribbles is worsening their plight. The Union government is squeezing cash from those quoting below book value through buybacks. Profitable enterprises have been told to ramp up dividends. The shareholders will have to decide between cutting losses and waiting for strategic sale, triggering an open offer, to unlock value. Some legacy holdings in the private sector, too, are evoking mixed feelings. Besides their foreign lineage and professional management, what is common between HUL, ITC and L&T is their mediocre growth record. Their five-year CAGR in revenues is in single digit and profit in teens. Ex-core competency contributors, tech and financial services now make up nearly 60% of infrastructure player L&T’s turnover. Branded foods, personal-care offerings, apparels, hotels, farm products and paper together consist 55% of cigarette maker ITC’s sales. HUL seems to be ceding space in the hygiene category in favor of the discretionary beauty- and personal-care portfolio, comprising 56% of the profitability. Risk-averse investors looking for longevity and transparency have a difficult choice: A pricey fare whose valuation seems to derive from sticking to being a play on its sector, a chameleon running helter-skelter, with over 30 subsidiaries and associates operating in diverse industries, to overcome its identity crisis, and an ageing thespian trying to be trendy by injecting the growth elixir of happening sectors to experience the adrenaline rush. 

 --Mohan Sule

Echoes from the past

 

When 2020 appeared lonely as 1961, reimagining 1984, deviating from 1995, reliving 1999 and full of hope of 1969

28 December 2020

                                                          

Here comes the sun, do, dun, do, do/Here comes the sun, and I say/ It's all right

These lyrics by the iconic music band Beatles celebrated the imminent arrival of spring after months of a cold winter. As the sun sets on 2020, it does seem like 1969, when the resistance against rules broke free. After nine months of havoc wrought by a deadly pandemic, release from confinement looks possible in the New Year. History has a strange way to mutate over slices of periods. The Berlin Wall is a prominent example of physical demarcation to mark geographical boundaries. Countries transformed into clones of East Germany as they locked down their population in April, turning into ghettos after being flat, following the birth in 1995 of the World Trade Organization to demolish tariff barriers to ease inter-nation trade flows. If the restriction on free movement in 1961 was to insulate from the influences of fascism, the clampdown in the passing year was to contain the covid-19 outbreak. It took 27 years before the man-made edifice, executing social distancing in its worst form, was brought down. The battle to vanquish coronavirus has been shorter. The relief at the unification of people, who habituated the cyber world to bridge the separation in the real world, has been no less, with equity indices scaling new highs. The euphoric reception accorded to tech companies, which helped to remain connected, is an energetic replica of the 1999 dot-com boom.

The lapping of Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet is reminiscent of the craze for Intel, Microsoft, Oracle and Cisco Systems two decades ago. The similarity between the IPOs of a room-rental aggregator and a cloud-storage provider now with internet properties then, such as Priceline.com, which bought airline tickets and sold them at prices passengers were willing to pay, extends not only to the 80%-100% pop over the offer price but also to their billion-dollar market cap on listing. If the tradition of romancing loss-making debutantes due to their outlook continues, so do rescue acts of failing institutions. Brining back from the brink two private lenders evoked memories of 2002, when the value of UTI’s underlying assets was lower than not only of its declared NAV but also of face value. The state-owned mutual fund-cum-financial institution was split into two entities to house rotten and performing assets. If social media seemed like a savior during the long spells of isolation, the dependence on these platforms thrust into reckoning the dangerous downsides. Their dominance and tracking of every move of the user seemed like reliving the chilling dystopian society conjured by George Orwell. The vivid portrait of life under surveillance in 1984 is coming alive 36 years later. Echoes of how data could be misused in the quest for information dominance reverberated in the recently concluded US president polls.  The scary control of a few American corporations on words capturing our thoughts, images of our best faces, snappy chats and snarky tweets have snowballed into a consensus that it is time for a break. The last time such a pervasive presence was chipped to size was, ironically, in 1984, when AT&T, a huge conglomerate that, once again in a bit of irony, controlled communications.

 

In India, another hulk was expanding its overarching influence, offering access to the internet, facilitating voice and data downloads, generating entertainment, enabling online- shopping and dotting outlets to pump fuel. RIL’s divestment of 25% stake in the digital arm to foreign investors to raise over Rs 1 lakh crore in less than two months and the Future Group’s subsequent clash with investor Amazon over sale of the retail business had shades of EM Forster’s 1924 classic, A Passage to India, depicting the tensions arising from the West’s fascination with a mysterious land set against the 1920 independence movement. Even as the Atmanirbhar Bharat packages and monetary support was infusing Rs 30 lakh crore to encourage Make in India, the US’ two fiscal stimuli of US$4.5 trillion and the near-zero interest rates were sending stocks soaring as green shoots of recovery sprouted on a landscape that appeared as desolate as Chernobyl after the 1986 nuclear meltdown. A resurgence of infections and the discovery of a new variant during the last lap of the old year did create doubts about surmounting the challenge like the skepticism greeting the idea of a manned mission in space. With the availability of over 90% efficient vaccines, the obstacles seem as conquerable as in 1969, when the images of  Neil Armstrong gingerly sidestepping the craters on the moon reaffirmed faith in future.

-Mohan Sule

 

The winner takes it all

 

An orderly market rally is spreading out to encompass stocks of different sizes, sectors and ages

 

14 December 2020

A striking feature of the record-breaking market rally is its democratic characteristic. There is order instead of chaos. Unlike in the past bull runs, when buying would be concentrated in frontline stocks in some flavor-of-the- season sectors, investors are spreading their benevolence across the board. Doomsday predictors, true to form, are not impressed. They are out with their usual warnings of bubbles as viewed from different angles such as the market cap-to-GDP ratio, historic valuations and divergence between economic health and trading optimism. Expressions of pessimism amid the giddy euphoria can be irritating. The toll taken by the pandemic has no like-to-like comparison. There was no roadmap to tackle the emergency. The plunge in consumer confidence was not due to runaway asset prices. The fear of an uncertain future without any timeline for a concrete resolution cannot be on par with seven-year cycles of boom and busts. Pumping cash had to be accompanied by progress in containing the outbreak. Supplementing monetary agencies’ determination to keep interest rates zero and buy bonds, which were effective in pulling out the economy from the 2008 mortgage blowout, is the realization by law makers to periodically come out with newer editions of fiscal stimuli. Instead of the one-size-fits-all solution of cheap money and tax concessions that is dusted and brought out during a downturn, the Reserve Bank of India and the clever Modi government have directed resources to the vulnerable, with the potential to become GDP multipliers.

Matching the large-caps’ rebound from the bottom initially, side counters raced past the leaders by the middle of July. Small scrips’ returns more than doubled as against the giants recovering three-fourths and the in-betweens about 85% by early December from the March lows. The mid- and lower-rung players climbed back to growth in 2020 by the third week of October. The mainline indicator managed to swim to the shore the next month. Due to preference for high float and index constituents, it is unlikely entrepreneur-driven entities are a craze among overseas fund managers, who have been net buyers of equities for six of the seven months since April.  With domestic institutions’ shopping restricted to May, reports of bumper profit and enrolments by brokers in the last two quarters point to retail investors occupying vacant spots in the trading ring. The resolves of central banks and governments to support the weak till the pandemic is capped is likely to have emboldened risk-averse individual participants in believing the diminishing downside of volatile bets. Besides profit-booking in big players trickling down the pecking order, percolation is also from segments that stood to benefit from the disruption to those, such as consumption and infrastructure, devastated from the stoppage of cash flow due to lockdowns but eager to roar back on unlocking. The Nifty Pharma index’s January-to-date gains had soared from 14% early May to 50% after five months as the focus on treatment for covid-19 patients shifted to developing candidates to prevent infections. After a slow start, the Nifty IT index had galloped 42% by the beginning of December as businesses rushed to transit into the digital era for contactless transactions.

 

 If drug makers got discounting on actual sales, tech solutions providers’ wealth creation was due to revenue visibility on the premise working from remote locations will persist in some form. The Nifty Energy index’s tanking 39% in the calendar year till early April and eventually bouncing back 6% so far pivoted on the prospect of normalcy in the medium term. The Nifty Auto index’ turnaround, from being a loser after the urban population was confined to work from home to advancing 13% as the year was setting, factored the present and future. Sales of low-end cars and two-wheelers spurred by the desire for personal mobility and the expected expansion of productivity from the December quarter is tipped to lift commercial vehicles. The dispersion of attention is not only between companies of varying shapes and sectors. Legacy and emerging plays are attracting eyeballs simultaneously. If the IPO of new-age Happiest Minds Technologies was subscribed 151 times, that of veteran Mazagon Dock Shipbuilders received bids 157 times, traditional specialty chemical manufacturer Chemcon 147 times and hard-hit consumption play Burger King 150 times the size. It is becoming clear that no industry is going to get shunned. Big and small enterprises, value and growth picks, and innovative and proven technologies will coexist. Policy assistance will be a mix of loose and calibrated measures.

 

-Mohan Sule

 

 

 

Mix and match

 

 

The lesson for Corporate India from the Atmanirbhar Bharat packages and targeted lending is to blend rewards with restructuring

 30 November 2020

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