Final analysis: On the ₹20 lakh crore stimulus
Last updated: 20 May, 2020 | 11:34 am
Which sectors get positively impacted?
Food and supplies
- Better supply chain: The government has taken multiple measures to provide small farmers and cooperatives with access to funds and support to build better infrastructure. These measures will help in stabilizing the entire agriculture chain with better logistics, supply chain, and lower wastage. These measures taken should finally result in more affordable products for you.
- Better quality of products: India has for long grappled with poor cold storage and post harvest facilities for perishable produce. Strengthening this area through the ₹1 lakh crore Agri-Infra Fund will result in better quality of products and lower wastage of crop in the long-run.
- Street Food vendors to be incentivised to use Digital payments: A ₹5,000 crore special credit facility is being extended to street vendors. Government has said that it will launch a special scheme in the next one month to provide credit. Under this, a working capital loan will be given for upto ₹10,000. Under the scheme, 'Digital payments will be incentivized through monetary rewards and enhanced working capital credit would be made available for good repayment behavior.'
- The agriculture sector’s supply chain has been severely impacted. Agriculture remains the primary source of livelihood for 55% of India’s total population. Impact of cheaper loans, emergency working capital will be felt in the post harvest season. The support of the government to make money available even at the small and micro level will lead to a medium term boost for this sector to pay off debt and have working capital to grow. Key companies in this sector that will benefit:
Travel/ Aviation Sector
- This is the worst affected sector. Government's decision to ease restrictions on the utilisation of Indian air space will help in improving margins post lockdown. Airline companies would be able to plan more efficient routes and thus decrease their fuel utilization cost (40% of the cost of an air ticket are fuel charges).
- Although this would help the sector once the lockdown is lifted, a lot more is required in terms of stimulus in this sector to ensure airlines don’t go into bankruptcy. Listed companies in this space like Interglobe Aviation and Spicejet are suffering in an uncertain business environment though the analyst are still positive. The consensus recommendation is that you as an investor should not invest in the aviation industry as demand will not easily bounce back.
Core sectors (Coal, Power, Electricity)
- Coal is used extensively across the power, cement and steel industry. Coal-fired plants produce 72% of India’s electricity. Currently, Commercial mining and sale of coal was only done by Coal India, owned by the Government of India.
- The Government has opened up the sector and allow other companies to mine coal and sell it commercially. This is a transformational reform. Increasing competition helps improve operational efficiency across the sector.
- There are about 5 lakh coal miners in India. A large number of indirect jobs are also connected to the broader Coal industry (logistics and transportation)
- The Government New coal blocks will be offered through auction with minimal eligibility criteria. A revenue sharing mechanism for coal mining companies will be introduced to encourage new players. This will further stoke competition, boost quality and output in the sector.
The stimulus offered by the government will give a boost to companies like Hindalco, JSPL and Adani Power
What does this mean to you?
If you own Coal India, you may witness a fall in its share price as its monopoly is about to end. Revenue of the company is expected to take a hit. On the other hand, companies like Hindalco, Adani and JSPL already have coal mining operations for their personal consumption. Now they will be able to extend their business and add coal as a separate product with minimal efforts. This will be an additional source of revenue for these companies.
More leeway to defaulting companies: Currently for a company unable to repay banks and financial institutions, there is a 6 month window during which the company can’t be forced to liquidate to repay loans. This has been increased to up to one year. This is a massive blow for banks leaving them no choice but to make huge provisions in an already uncertain environment. Banks will be even more cautious to lend in this environment as they are left completely exposed.
More protection for MSMEs: In another blow to bank balance sheets, The government increased the minimum threshold of default in payment by an MSME to a financial institution from Rs 1 Lakh to Rs 1 crore. This is a massive jump that will allow a lot of MSMEs time to recover while putting more strain on banks and financial institutions who will have an even longer cycle to initiate insolvency against MSME’s in case of bad loans. Expect even more provisioning and eventual losses by banks while these debts sit on their books.
Raising funds becomes easier: Now, the government has permitted Indian companies to directly list in foreign exchanges, without the requirement of first listing in India. This will help unlisted firms to raise capital from primary markets abroad. Start-ups and unlisted technology firms would benefit from this, as it provides an easy exit route for foreign VC funds and angel investors. However, more clarity is needed on this reform.
More unskilled employment: MNREGA, a government of India scheme that aims to provide at least 100 days of employment to every rural household every financial year, gets a boost with increase in basic wage. This aims to address the massive unemployment problem India is staring at which currently is estimated at almost 24%! While the scheme is a welcome step, employment will need to be created at the industry level.
Break-down of ₹20 lakh crore package