The government's Rs 20 lakh crore fiscal stimulus package lacks major near-term support for the economy and may not be adequate to restore the country's growth, Credit Suisse Wealth Management said in a report.
On May 12, Prime Minister Narendra Modi announced a package worth Rs 20 lakh crore, or nearly 10 per cent of GDP, to mitigate the economic impact of the coronavirus crisis.
"India's response to the COVID-19 crisis lacks major or innovative near-term fiscal support, and fails to provide the much-needed impetus to stimulate growth and kick-start economic growth," Credit Suisse Wealth Management's Head (India Equity Research), Jitendra Gohil, said in India Market Outlook and Strategy report.
Of the Rs 20 lakh crore package announced, actual fiscal spending of around Rs 2 lakh crore (only 1 per cent of GDP) shows fiscal caution in the government measures, he said.
Given the country's deteriorating GDP growth, the lack of fiscal support could hurt the economy more than it helps, he added.
"With no nominal GDP growth, India's already high debt to GDP ratio (expected to cross 80 per cent in the current fiscal) - a key metric for rating agencies - could increase further and reach to levels that might be of a concern for India's credit rating," Gohil said.
While the government's continuous focus on providing structural reforms is positive, the implementation of these reforms should be swift and efficient, he said.
If the growth does not recover in the next couple of quarters, the country's macro-fundamentals could be at risk of significant deterioration, Gohil said.
He expects the government to announce more measures in the next few months once the lockdown ends and clarity emerges on the strength of economic activities.
The consensus estimates for the country's FY21 real GDP growth could be revised to a negative mid-to-low single-digit range from the near-zero to low-single-digit range a few weeks ago, he said. "A negative GDP print in the current fiscal year will have meaningful implications for tax collections, corporate earnings, and job creation," he said.
The report said the headroom for the RBI to significantly cut interest rates has widened as nominal growth is likely to shrink materially.
"It remains to be seen how the RBI pushes for aggressive rate transmission, which still is at precariously low levels," it said.
According to Gohil, the equity market may experience a deterioration in investor sentiment, given the already high expectations, and flows from foreign portfolio investors (FPIs) and domestic investors are likely to abate in the near term because of the prospects of reduced income levels and corporate profits.
"We continue to maintain our defensive stance on Indian equities with a preference for sectors linked to agriculture, telecoms, information technology, and certain consumer and utility stocks from a three-six month perspective," he said. The fixed income market may see some consolidation with a positive bias as the government's recent announcements do not impact the fiscal position materially, the report said.
The outlook for the rupee remains unchanged with three-month and 12-month forecasts of 76 and 74, respectively, against the USD, it said. FPI flows are less likely to come to India given the dwindling growth environment, it added.