THE ROAD TO ECONOMIC RECOVERY
WHY IN NEWS?
- The return of economic activity and declining active Covid-19 cases in India have raised hopes of recovery
IS THE GLOBAL RESURGENCE OF COVID-19 A THREAT TO THE STOCK MARKET RECOVERY?
- The stock market has responded enthusiastically with large cap indices trading a little below their pre-Covid highs.
- Investment Flows and improving fundamentals have pulled the market to current levels. Undoubtedly, we are not out of the woods.
- Factors like the ongoing second wave in the US and Europe, the US election results etc will impact our markets, albeit on a temporary basis.
FACTORS THAT DETERMINE THE RECOVERY PATH FOR FIRMS
- India’s economic recovery will be a function of top-down factors like fiscal and monetary stimulus as well as bottom-up entrepreneurial efforts.
- Firms with less leverage, good governance, and the ability to raise capital, cut costs with the precision of a surgeon‘s knife, and innovate to adapt in the current situation will not only survive but also prosper.
FACTORS THAT RAISE HOPES OF RECOVERY
- Active cases are coming down despite normalisation of economic activities.
- A vaccine breakthrough seems to be on the horizon.
- Macroeconomic Stability: Lower oil, gold and Chinese goods imports have made India current account-surplus. Foreign exchange reserves are about to exceed foreign exchange debt.
- Foreign Investment: Global firms are opening up their purses for direct as well as portfolio investment.
- Agriculture reforms will materially benefit a large rural population.
- Labour reforms and postal life insurance schemes are steps in the right direction for India becoming a manufacturing hub.
WAY AHEAD: AREAS WHERE POLICY FOCUS IS NEEDED
- Credit Transmission: The monetary policy is accommodative but credit transmission needs to improve further.
- Borrowing Costs: Policy rates are at lifetime low levels but the cost of borrowing needs to be lowered for below-AA rated borrowers.
- Sector Specific Stimulus: Fiscal stimulus has supported growth at the bottom of the pyramid but sectors like travel, tourism, hotel, retailing, aviation, infrastructure etc require more support.
- Non-Tax resources: The path of fiscal prudence is important but it needs to be achieved by raising non-tax resources like proceeds from strategic divestment and monetisation of assets, unlocking capital stuck in gold deposits etc.
- Rule of Law: Ease of doing business has improved but rule of law needs to be improved. Our laws are being made for the lowest common denominator as crooks escape without adequate punishment. This increases the cost of compliance for the rest. Investment cannot pick up sustainably unless rule of law is experienced by investors.
- Inequality: Big has become bigger in these challenging times, but eventually small and medium firms need to become competitive and prosper.