Strategy: 'Shotgun' fiscal stimulus - Kotak

'Shotgun' fiscal stimulus. In our view, the government may want to focus on specific measures to revive growth in the Indian economy rather than the usual approach of higher expenditure on rural economy and infrastructure. Financial and taxation benefits in vital areas of (1) informal economy, (2) jobs and (3) residential real estate may revive economic activity and sentiment given their multiplier effect on the Indian economy. The government's fiscal position will not allow for a large 'bazooka' stimulus anyway.

Specific measures may be better given limited scope for 'broad' fiscal stimulus

In our view, specific financial and taxation measures targeted specifically at important 'areas' of the economy (informal economy, jobs and residential housing) may revive economic activity and more importantly, sentiment. The government's fiscal position does not permit a 'bazooka' fiscal stimulus anyway and 'broad' stimulus measures generally take time to revive economic activity and sentiment, especially if the size of stimulus is limited to 30-40 bps of GDP.

Restoring sentiment in the informal economy through innovative taxation structures

Taxation benefits in the form of (1) tax amnesty for prior years (before FY2018) and (2) graded tax structure (10-30%) linked to revenues for three years may help in the transition of the informal economy to a GST-enabled formal economy. The government's tax revenues from the informal economy would anyway be low given under-reporting of revenues and income but the spillover effect of a slowdown in the informal economy may impact the government's overall taxation revenues. The informal economy, which employs about 80-85% of the total manufacturing and services workforce, has seen disruption from demonetization and GST.

Creating jobs through fiscal incentives (private) and direct recruitment (government)

We believe that (1) financial or tax incentives for the private sector for new job creation and (2) direct recruitment by central and state governments in the areas of education, health and police can revive the moribund job market. India is probably creating 10-15% of its job requirement of 1-1.2 mn per month but has an acute shortage of doctors, nurses, police and teachers with the current numbers around 25-50% of its needs. Congruent economic and political interests of the central government and states (many are BJP-ruled states) may encourage states to implement a 'structured' recruitment policy devised and financed by the central government.

Reviving investment through fiscal benefits to residential housing

The residential housing market could see conversion of latent demand into actual demand with additional government support (direct subsidies and tax benefits). We note that affordability has improved substantially (to the extent of 30-40%) over the past 3-4 years due to (1) flat residential prices in most metros and lower interest rates. In our view, investment pertaining to large projects may be still 1-2 years away given (1) excess capacity in most areas barring basic infrastructure and (2) weak private sector balance sheets and sentiment. We note that muted investment over the past five years has been a key reason for the slowdown in the economy with the economic growth being largely supported by private consumption and government expenditure (particularly in FY2017).

Source : Equity Bulls

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