![](Update on Government stimulus package - part 1_files\bg2.png)
Update on Government stimulus – Part I
Government unlikely to step up spending which is need of the hour
While the stimulus of ` 20 lakh cr. by the Government may address some of the
issues faced by MSMEs, NBFCs and the power sector we believe that the need of
the hour was for the Government to increase its spending significantly and put
money into the hands of the consumers which would then have been spent and
helped kick start the economy. However given fiscal constraints the Government is
not in a position to do significantly large cash spending.
Given that the Government lacks fiscal space to provide direct stimulus to the
economy in the form of cash spending we believe that trying to extend credit to the
agriculture, MSME and power sector is the next best thing that could be done by
the Government as it would ensure that the credit is available to the critical part of
the economy.
While the ` 20 lakh cr. stimulus package may seem large at ~10% of GDP, it is
still smaller in size as compared to the stimulus packages announced by other
countries like the US. The US Government has so far announced fiscal package of
~USD 2.7 trillion (13% of GDP) which includes cash transfers while the US Fed has
provided monetary stimulus of ~USD 2.5tn (11.5% of GDP) so far. Both the US
Government and the Fed have indicated that they are going to do more.
The Government has also highlighted that it would focus on land and labor and
there are expectations that there could be some announcement by the Government
on land and labor reforms in the next tranche. While such structural changes will
be positive for the economy in the longer run it would still not address the near
term issue of supporting demand which has collapsed as the economy has virtually
come to a standstill due to the lockdown.
View and outlook
The package announced by the Government may not be able to stimulate the
economy to the extent required and hence the markets disappointment by the
measures announced so far. While proactive measures by the Indian Government
to shut the economy early has so far prevented a widespread Covid - 19 epidemic
there has been a recent acceleration in new cases which is coinciding with gradual
relaxation to the lockdown. Therefore there is a risk that there could be an
outbreak in the future which is a cause for worry.
Therefore post the announcements so far we do not see any material change to
our investment strategy and continue to prefer businesses which are either
engaged in essential activities or could benefit from increased digitization. We
maintain our preference for sectors like agrochemicals, chemicals, FMCG,
pharma, telecom and IT which have better revenue visibility. We also maintain our
strategy of avoiding sectors which are vulnerable to the slowdown like aviation,
automobiles, hospitality, banks & NBFCs.
Government may not be able to step
up spending due to fiscal constraints
India’s Package at 10% of GDP is
inadequate and lacks cash spending
We continue with our strategy of
focusing business with better revenue
visibility