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Economic package a lost opportunity; FY21 GDP to contract 7%: Bernstein

Finance Minister Nirmala Sitharaman announcing details of special package at a press conference in New Delhi
The stimulus package announced by the government over the past few days is a lost opportunity, said analysts at Bernstein – an investment management firm based in the United States with nearly $623 billion in assets under management (AUM) globally. Their estimates for FY21 GDP contraction in India are the sharpest as compared to other foreign research houses such as Goldman Sachs and Nomura.

The desire to announce a large economic package, something that shows the world that they care about the economy and are willing to match global stimulus numbers, was perhaps the driver for the claim of a large package, Bernstein said.

“While the package started on important aspects but the need to announce measures that add up to this top-down number, made the entire package aimless, with several generic announcements which should ideally, have been a part of a normal economic agenda. Overall, we see it as a lost opportunity,” wrote Venugopal Garre, Ankit Agrawal, and Ranjeet Jaiswal of Bernstein in a May 17 report.

India, they said, does not have fiscal buffers and hence a large fiscal stimulus would have been a bold bet – as that could have impacted ratings and currency, if not executed properly. The government, Bernstein believes, has hence taken an easier path.

Over the past few days, the government has sought to alleviate several economy-related issues triggered by the rampant spread of the Covid-19 pandemic that stalled economic activity in India for nearly two months. While credit guarantee for fresh credit to micro small and medium enterprises (MSME) and supporting the poor and migrants via expanded employment guarantee program, provision of food for poor and migrants got a thumbs-up from the US-headquartered Bernstein, it cautions that the expansion of MNREGA could impact labour availability, as rural migrants may not rush back for jobs. As a result, the construction and transport sector will be impacted most.

“The focus should have been on urban, corporates, consumption, infra and impacted sectors, but it was on rural and strange-end markets such as space program. Rural is in control, as farm incomes are protected (good harvest season and a good start to summer crop sowing). Yet, several measures (in the form of loans) were announced for Agri, some of which are already existing programs,” analysts at Bernstein wrote.

The overall plan, in their view, was a general economic agenda and lacked substantive decisions to support consumption, promote manufacturing. “Even the broader reforms lacked the spark while urban and corporates (irrespective of impacts) were ignored. We believe that equity markets are likely to be less enthused, with the package, as it is less likely to support the economy in the near/medium-term. Our gross domestic product (GDP) forecast of 7 per cent contraction in the financial year 2020-21 (FY21) remains unchanged,” Bernstein analysts said.

Other foreign research and brokerage houses, too, retain a dismal projection of economic growth in India despite the Rs 20 trillion economic stimulus. Those at Goldman Sachs, for instance, expect the real GDP growth to fall 5 per cent in FY21 (earlier forecast of 0.4 per cent contraction).

“There have been a series of structural reform announcements across several sectors over the past few days. These reforms are more medium-term in nature, and we, therefore, do not expect these to have an immediate impact on reviving growth,” wrote Andrew Tilton, Goldman Sachs' chief Asia-Pacific economist, in a co-authored May 17 note with Prachi Mishra. Nomura, however, has retained its projection of 5 per cent contraction in India’s GDP in 2020 for now.

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