New covid 2 fiscal stimulus
Ever since Covid-19, called a pandemic by the WHO, hit the world, it has been an unprecedented time for humanity and global economies. Nation-wide lockdowns resulted in steep losses for corporates and distress in credit markets. The economic upheaval could have been much more severe without fiscal and monetary stimulus.
On 28th June 2021, the Indian Finance Minister announced new stimulus measures to combat the impact of the Covid-19 second wave, boost exports, improve employment, and prepare the distressed sectors to brace for an impact of a possible third wave.
Healthcare, Tourism, Hotels, and other Covid-19 affected sectors will get a stimulus of Rs. 1.1 trillion (out of Rs. 6.28 trillion) from the government. Corporates other than the healthcare sector mentioned above would see a fall in credit spreads of their bond issuances and improvement in liquidity profile, which would stem the rate of defaults.
However, these sectors have been struggling to service previous debt due to operational inefficiencies & higher disrupting competition. A negative outlook on these sectors has further made it unattractive for lenders leading to liquidity crunch and increased rates of interest for the perceived risk. Hence, bond investors should keenly look at the credit risks of the issuers closely rather than make a move on the investments based on the fresh stimulus package. Equity markets would cheer the new stimulus package, as the markets would discount near-term revenue growth supported by the Rs.6.28 trillion stimulus package.
On a macro level, a fresh stimulus package means rise in fiscal deficit and an increase in inflationary pressures. The latest domestic inflation was reported above RBI’s targeted levels amid a rise in commodity prices & lower interest rates, fresh stimulus pressure would act as a catalyst to current inflationary pressures. Global central banks have mentioned inflationary pressures are transitory, however, markets are discounting a sooner rate hike than expected. US inflation surge in May 2021 is prompting the Fed to raise market expectations of rate hikes and taper bond purchases are on the cards.
The fresh stimulus package includes:
· Increase in existing Emergency Credit Line Guarantee Scheme (ECLGS) by Rs. 1.5 trillion to Rs. 4.5 trillion
· Fresh Rs. 75 billion scheme to guarantee loans up to Rs. 0.125 million to small borrowers through micro-finance institutions.
· Healthcare, Tourism, Hotel, and other Covid-19 affected sectors will get a stimulus of Rs. 1.1 trillion. A maximum loan of Rs. 1 billion will be given with a capped interest rate of 7.95% (for healthcare projects).
· Indirect support for exports worth Rs. 1.21 trillion over the next five years.
· The government will be spending Rs. 938 billion this year to provide 5 kg of food grains free of cost per month to 0.8 billion people.
