CEA’s stimulus remarks spook markets

Is the government serious about a stimulus package for industries battling an economic slowdown? The yes-no approach seems to have put markets on the edge, as the equity market tanked on Thursday.

At a business event in New Delhi, Chief Economic Adviser Krishnamurthy Subramanian said the Indian economy does not need a fiscal stimulus to tackle the ongoing economic slowdown, and that policymakers need to be careful while deciding on any such stimulus.

“Using taxpayers’ money to bail out companies going through a ‘sunset’ phase will create moral hazards and such a step is an anathema to the market economy. Profit is private and losses are public is not good economics,” the CEA said.

After the statement, there was a rout in the market, with the 30-share BSE Sensex plunging by 669 points before making a small recovery to close the day at 36,473 points. It finally ended with a drop of 587.44 points or 1.59%, while 50-share Nifty slumped 1.62%.

His remarks — which came within hours of Finance Minister Nirmala Sitharaman’s comment that the government shall be facilitator for ‘wealth creators’ — erased the gains of the day in the markets.

“On my way to Mysuru, Karnataka, to interact with @cbic_india @IncomeTaxIndia officials/administrators. We shall be facilitators for ‘wealth creators’, is the message. Shall also meet and interact with traders, MSMEs and Industry and Commerce associations,” the finance minister had tweeted hours before Subramanian’s comments.

But after Subramanian’s comments, auto, banking and metal stocks became the biggest losers.

Vedanta, Bajaj Finance and Tata Motors declined up to 7.75%. ONGC, SBI, Hero MotoCorp, ICICI Bank, Tata Steel, HDFC twins and RIL ended in the red. Yes Bank was the biggest loser, as it fell 12%.

Rupee too lost 0.42%, hitting an eight month low to close at 71.97 against the dollar.

Power Secretary Subhash Chandra Garg, too, echoed the same sentiment, saying low interest rates and availability of credit to private sector are better tools than a fiscal stimulus.

Traders said other than global cues, the uncertainty about a stimulus package has hit the market sentiment. Investors are also waiting the US Federal Reserve chair’s speech on Friday for clues on future US interest rate cuts.

Automobile, housing and consumer goods sectors have pinned their hopes on a stimulus package and tax cuts to lift muted rural and demand. But sources told DH that the government is awaiting the April-June quarter economic growth numbers before announcing any such sectoral concessions.