We have already spoken about the stimulus thing in our report. We have highlighted that about 1% of GDP worth stimulus needs to come from the central government, which is also what the CII has recommended; that’s about Rs 2 trillion worth of stimulus package that should go to different affected sectors. Now this can be done through different ways; through putting money in Jan-Dhan accounts or increasing PM Kissan allocation and direct intervention in certain sectors which need the stimulus like aviation or tourism.
Remember that RBI will also play a very big role in ensuring that there is financial stability in the market. We know how equity markets have reacted negatively. We know that the corporate bond market is not functioning properly; even the G-sec market is pretty illiquid. So rate cuts are a given; we think 100 bps rate cut at least is coming in the next few months; possibly 50-75 bps rate cut coming on April 3 or before. But that itself will not do the trick. Given that the government will have to give stimulus, it means the fiscal deficit will be increasing. There will be higher market borrowing in FY21. Our call is that RBI will be doing a lot of OMO purchases through FY21 and even probably buying government securities after a long time in the primary markets to ensure that yields do not go up.
We also think that there will be a special liquidity window for NBFCs, housing finance companies, mutual funds and RBI will probably directly intervene in the corporate bond market at some stage to ensure that the credit market does not freeze completely. Remember that even before this COVID-19 hit us, we had a lot of problems in the credit market and growth was anyway expected to be below normal; so now we are expecting growth in the January-March quarter to be only 1.5% or thereabouts. In April-June, we are expecting a downright contraction and that contraction could be as large as minus 5% because you are shutting down the whole country the size of India for a whole month. It is for two weeks and that can get extended easily till the end of the month.
So you are going to have to fight with problems on the growth front. You have problems on the financial sector front which was there even before the COVID-19; so you need coordinated response from the government as well as the RBI. Possibly RBI has done the right thing of not announcing cuts in advance because then they would have had to announce it again after this shutdown announcement came through. So on April 3, when the RBI meets, you will get a big package and the government package will come sooner than the RBI meeting probably.
What is the kind of hit to economic growth that you are anticipating if it doesn’t meet expectations?
We are expecting growth in the January-March quarter to be about 1.5% which earlier we thought would be about 3.7 or 4% but after this seven-day lockdown in the end of March, it will be a direct hit to growth; so expect real GDP growth to be about 1.5-2%. So overall, FY21 growth could be as low as 1.5-2%, which we were earlier projecting to be about 4.5%. So you are working with 1.5-2% real GDP growth, which means your nominal GDP growth matters more for corporate sector profitability will be just about 5% or 7.5%. Government had assumed in the budget 10% nominal GDP growth for all its fiscal calculations and to give general guidance so that 10% becomes 5% in FY21; it halves.
Therefore, you will have problems related to corporate sector profitability and partly the market is reflecting that fear in advance although there is a lot of algo related selling that has happened. Once you get the announcement on stimulus, probably the market will bounce back as we have seen in the US just now with the $2 trillion stimulus that has been approved. So these are good signs and this will help to kind of shield the slowdown in growth that we expect but these things take time to stabilise; so it is not like if you take out the lockdown immediately, activities will start going back to the pre-lockdown stage. So it may have more lagged impact; so April-June and July-September, we would expect activities to remain very weak and then from October-December probably you will see some activity settling in the economy but there will always be a fear factor given what we have seen or heard all across the world. So people will not rush to go to the movie halls or restaurants or even travel within the country; so this will have a negative impact much beyond the 14-day lockdown.