Market waits for another stimulus; can we expect a fiscal bazooka?

As major economic indicators are wrecked by the coronavirus, the clamour for a substantial government stimulus is growing.

The equity market is wary—it sees profit-booking after every rise. Experts say a stimulus is much needed and will offer relief to the market and the economy, which has been ravaged by the virus and the subsequent lockdown.

Domestic economic reality is the biggest trigger for the market. In the short-to-medium term, the market is expected to tread water.

Investors have pinned hopes on the government, seeking assurance that the economy will not be allowed to fall to unprecedented lows.

Now, as the lockdown has been partially lifted and India divided into red, green and orange zones to reflect the severity of the virus, experts believe that aggressive measures from the government will help the economy.

Is there a room for stimulus?

The delay in announcing a stimulus package indicates the government does not have enough room as of now.

Even if a stimulus is announced, it is unlikely to exceed Rs 1-1.5 lakh crore, experts say, which appears to be inadequate.

BOBCAPS (a wholly-owned subsidiary of Bank of Baroda) highlighted that the government’s initial stimulus of Rs 1.7 lakh crore and more than Rs 3 lakh crore in liquidity inducement measures by the RBI are clearly falling short.

As per media reports, a plan for an additional stimulus to prop up MSMEs is in the works. The recent excise duty hikes could give the government headroom to facilitate such measures.

The government had begun to benefit from low oil prices via an about Rs 15 per litre hike in excise duties on petrol and diesel (yielding nearly Rs 2 lakh crore in additional revenues for FY21) and savings on petroleum subsidies (budgeted at Rs 35,000 crore for FY21), a BOBCAPS report said.

“The Centre could target cumulative gains of about Rs 4 lakh crore in order to neutralise potentially lower GST collections and divestment revenues, implying a further excise hike of Rs 10 per litre in FY21," the report said.

However, the government has a huge fiscal gap to plug so the hope of a big-bang move appears irrational.

What does market want?

The market is not expecting a bazooka from the government as it has limited fiscal space, say experts.

The stimulus will be more of limited and specific relief that will mostly be filtered via banks.

While a delay is getting investors worried, the most important thing to watch out for will be its area of focus.

Sameer Kalra, Founder, Target Investing, said the stimulus would not address the urgent need for a cash-flow boost required by corporates and individuals.

"The market is mostly peaked out in terms of expectations, now real numbers getting disclosed by corporate results and the macro data will start the second leg of broad-based selling," he said.

G Chokkalingam, Founder & MD, Equinomics Research Advisory, said the market should not expect too much.

"The market cannot expect the stimulus similar to the US and Europe. People understand that the target of fiscal deficit is already breached. The RBI has already done a lot from whatever was possible from the balance sheet," he said.