Former RBI governor, D Subbarao, has warned that the combined deficit of the centre and the states
could go as high as 14$ of GDP in fiscal year 2020-21. Subbarao expects the central fiscal deficit at 6.5%
of GDP and the state fiscal deficit at above 7%. These would be unprecedented levels and could even
open up the possibility of sovereign rating downgrade. Subbarao has also been categorical that the size
of quantum of stimulus has been inadequate. He has called for more stimulus in 3 areas; expanding and
sustaining livelihood means, rescuing the financial sector and for boosting exports.
There was some respite in the month of May with Foreign Portfolio Investors (FPIs) infusing Rs.15,958
crore into the markets in the first week of May. This included an infusion of Rs.18,637 crore into equities
but an outflow of Rs.2679 crore from debt. However, experts have warned that the equity inflow
number could be misleading as it was entirely comprised of the block deal in Hindustan Unilever shares
between Glaxo and SOCGEN. However, one thing is evident that the selling pressure from FPIs is
nowhere close to March or April. Of course, the higher borrowing target could impact debt flows.
With the government announcing a sharp spike in the total annual borrowing target from Rs.780,000
crore to Rs.12,00,000 crore, the first impact could be on the bond yields. India 10-year benchmark bond
yields had settled below the 6% mark at a multi-year low of 5.97%. However, the sharp spike in
borrowings indicates a rise in fiscal deficit and also hints at crowding out of private borrowings. Both
these factors could have the impact of pushing up bond yields in the market by about 20-25 basis points
as investors could get wary of debt. It has also opened up the possibility of a sovereign downgrade.
The week ended May 08th resulted in the Nifty losing over 600 points; largely due to the sharp correction
on Monday. However, the top 10 stocks saw combined market cap eroding by over Rs.250,000 crore
during the week. TCS, HDFC and HDFC Bank took the big hits in the market during the week. The only
two stocks that gave positive returns during the week were Bharti Airtel and Reliance Industries. RIL
gained after Silver Lakes and Vista Equity took PE stakes in Jio Platforms and in addition, other players
like General Atlantic Partners and Saudi Sovereign Fund also evincing interest in a stake.
With the clamour surrounding Chinese investments increasing by the day, the government may finally
give a policy twist to these concerns. It is expected that in the case of FDI, the government may set a cap
of 10% beneficial ownership in the case of flows from 7 countries that have been identified. These seven
countries could include China and other countries contiguous to India. This will avoid any indirect flows
into India. The target of Indian policymakers is clearly to keep a tab on the flows from China to avoid any
tacit loss of control. The security bogey reached a crescendo after HDFC admitted that Chinese banks
owned more than 1% in the company. In addition, the government is also likely to insist on prior
government approval for any such flows. The focus here will be on Significant Beneficial owners (SBO).
As unemployment levels touched record levels in the US, Trump has come out with a master plan to
directly purchase $3 billion worth of agriculture, meat and dairy products directly from the farmers. The
hit has been huge as the US has already lost nearly 20 million jobs in the month of April and
unemployment rate touched 14.7%. The Coronavirus pandemic had badly disrupted supply chains with
farmers forced to destroy their produce to avoid a sharp price fall. Even China has not been too keen on
its commitment to buy $200 billion of American agricultural produce each year due to the pandemic.