May 2020: Relief for MSMEs and major agricultural reforms

India as well as most parts of the world have been under lockdown for more than 2 months. While Covid-19 presents its own challenge, the impact of the lockdown on the economic situation presents a different and equal challenge for authorities around the world. In the latest lockdown 4 which was announced by the government on 17th May, there has been a significant easing of the lockdown in India. Restrictions on having only 33% attendance in offices and factories were removed, and various other measures were undertaken which has allowed economic activity to begin to get back to a path to near normalcy, which is the best that one can hope for, given the situation. It will be a slow recovery as the world tries to find different and innovative ways to deal with the new way of life post-covid-19.

The Indian government finally released its economic package, partly to deal with the situation surrounding Covid-19 and partly to introduce reforms. While many announcements were made, a few things stood out for us. The first and foremost were the reforms in the agricultural sector, which many observers are calling path breaking. The primary thrust of the proposed reforms is to look at farmers as businessmen who need to be given access to free markets, rather than seeing them as needy people who constantly need support. The policy firstly proposes to give farmers the freedom to sell their produce to anyone and liberates them from the clutches of the local APMC mandi (marketplace). Second is to amend the Essential Commodities Act which will allow the buyers to buy and store in bulk and will provide a floor on the prices for the farmers during harvest season and create modern food produce storage infrastructure in India. Third is to allow the farmers to get into contracts with buyers which will give them a guaranteed buyer for the crops they sow at pre-determined prices. Needless to say, we need to see the fine print of the proposed law(s) as the devil is always in the detail. It appears, on the face of it, that this is a major reform for the agriculture sector.

The other noteworthy thing was the relief package for micro, small and medium enterprises (MSME). The key measure there was a 100% credit guarantee for MSMEs by the government for Rs 3 lakh crore of loans, limited to 20% of the borrower’s existing credit limit. There has been some concern expressed that this excludes those MSMEs particularly in the services sector, who don’t have an existing credit limit. Also, there has been some concern that the banks could use this to green existing NPAs. Notwithstanding these concerns, Rs 3 lakh crore is a large amount and will help in providing much needed support, to the MSME sector.

The question facing all Indian investors at the moment is: What should be one’s attitude towards investing in the face of the coronavirus induced economic crisis? On the one hand, you have a lot of uncertainty, as Covid-19 cases in India are continuing to increase. On the other hand, stock prices are down sharply over the last 3 months. When we look at our portfolio of stocks, we are comforted by the fact that except for the banking and financial services sector, all our companies hold cash on their balance sheet and that’s a huge comfort in these times of scarce liquidity. What we also find is that on our historical valuation matrix, valuations are very low compared to history. Can we continue to have drawdowns from current levels as the country faces this crisis over the next few months? It is certainly in the realm of the possible. But will we look back on this situation as a great potential investment opportunity 3 to 4 years from now? The answer to that is a resounding Yes for us.