Arbitrage Magazine - January 2021 - Finance & Investment Club | IIM Rohtak

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presents

January 2021 Vol 4 Issue 11

Our best read - Microfinance: An Indian Context

Special Mention: Changes in Banking and customer satisfaction during COVID; and India's latest GDP Results- Genuine Recovery or Pent-up demand?

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INDEX

S.No.

Article

Page No.

1

Microfinance: An Indian Context

3

2

Changes in Banking and customer satisfaction during COVID

8

3

India's latest GDP Results- Genuine Recovery or Pent-up demand?

10

4

Debt, MMT and the Fiscal Theory of Price Level (FTPL)

15

5

Production Linked Incentive

18

6

Making Financial Market More Inclusive

20

7

Ineffective policy measures? Incorporating ‘nudges’ is the way forward

26

8

29

9

International Outlook on Indian Cut Roses and Strategies to Increase Turnover Cryptocurrency in India

10

Will the Vaccine Cure Indian Economy?

38

35

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Microfinance: An Indian Context By: Ajita Ranade, (Jamnalal Bajaj Institute of Management Studies, Mumbai) What is microfinance?

Micro finance can be defined as a banking service provided to low income or unemployed individuals or groups, who do not have access to traditional means of finance otherwise. Microfinance attempts to provide basic financial services (such as savings account, loans, insurances) to the non-banked section of the society and attempts to bring them under the ambit of traditional banking. Generally, this model is useful in developing nations such as India, Sri Lanka, Uganda, Indonesia, etc. Dr. Muhammad Yunus is regarded as the pioneer of the concept of microfinance. He was awarded the Nobel Peace Prize in 2006.

To quote Natali Portman, Small loans can transform lives, especially the lives of women and children. The poor can become empowered instead of disenfranchised. Homes can be built, jobs can be created, businesses can be launched, and individuals can feel a sense of worth again.

The Need Developing nations largely need microfinance institutions as the target customers do not have access to traditional banking. Many microfinance institutions focus on helping women, in particular to make them independent and enable them to progress economically. Generally, small amounts are disbursed as term loans and the time for repayment and collateral requirements maybe longer than those offered traditionally by banks. Access to microfinance allows these low income classes to be able to develop themselves without resorting to informal channels of financing such as money lenders and heavily borrowing from relatives, who pose a higher risk to the financial health of the borrowers.

Characteristics of microfinance institutions (MFIs) Microfinance institutions generally exhibit the following characteristics-

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Small ticket size loans – Since the target segment for microfinance institutions is the low/ no income section of the society, loans are disbursed in smaller ticket sizes. As per Brickworks research, the average ticket size of loans disbursed in FY2019 was Rs. 25,543. The following chart shows the increasing average disbursement per account over the years FY2016-FY2019.

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Minimal appraisal- Many a times, these borrowers might be required to take a money management class, which would give them a basic understanding of interest rates, introduction to savings account, cash flow and debt management, etc.

Less or no collateral – As MFIs underwrite loans to the marginal sections of the society, they do so with nil collateral in most cases. Unlike a regular banking scenario, these MFIs focus in helping entrepreneurs succeed and become self-reliant.

Lending to groups- As many individuals cannot offer collateral owing to economic conditions, MFIs may pool borrowers together as a buffer. Often, loan repayments of these borrowers maybe clubbed together.

Microfinance in India The RBI defines micro credit as “Micro Credit has been defined as the provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve their living standards. Micro Credit Institutions are those, which provide these facilities.”

Microfinance in India plays an important role in delivering credit to the people at the bottom of the pyramid. These institutions serve largely in the rural and semi-urban areas characterized by low literacy levels, poor internet connectivity, with major borrowers being daily wage workers who tend to transact in cash.

Key features of the MFI segment in India • The MFI segment in India has seen a robust growth despite economic challenges. The sector grew at a CAGR of 33.87%. As at FY2020, total unique borrowers stood at 54.6 million.

Source: RBI bulletin, Motilal Oswal report (relevant links mentioned in references)

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Increasing concentration risk – As of H1-2020, top 5 states for MFIs in India, namely (Tamil Nadu, West Bengal, Bihar, Karnataka and Maharashtra), contributed for a total of 55 per cent of the micro finance loans availed in the country. Market share of over 50% (as illustrated in the table below) over a period of 4 years along with increase in ticket size signals caution. Among the states, high concentration was observed in West Bengal, Assam and Tamil Nadu. West Bengal had the highest average ticket size per borrower at Rs. 54,000 followed by Assam at Rs. 52,000 and Tamil Nadu at Rs. 43,000.

COVID-19 effect on the industry • Increase in unemployment due to lockdown The inherent nature of the portfolio of these NBFC-MFIs, makes them susceptible to systemic risks and shocks posed by COVID-19. After imposing lockdown in April 2020, small traders, hawkers and daily wage workers were the worst hit. As seen by everyone in the news, income of daily wage workers’ was significantly hit with many daily wage workers returning to their hometowns and being unemployed for significant periods of time, affecting the collection efficiency and NPA levels subsequently. As per RBI report, this sector accounted for 32 per cent of total employment, but has seen 75 per cent hit in April 2020. However, with situation easing and picking up of construction activities in various parts of the country, the unemployment rate recovered from 26.19 per cent on April 19, 2020 to 8.13 per cent on August 30, 2020.

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Drop in collection efficiency The collection efficiency of MFI portfolios witnessed a significant drop in the months of March-August 2020. Loan repayments, which are still largely cash driven are prone to suffer in case of such a systemic shock. Also, a large proportion of the borrowers availed loan moratorium, further pushing the collection efficiency down. The collection efficiency initially fell to 83 per cent in March 2020 and then moved sharply to a low of 3 per cent in April 2020 before recovering to 21 per cent in May 2020 and 58 per cent in June 2020. As compared to the other securitization pools (namely gold loans, personal loans,

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Loan against Property, HL - housing loans, LAP- loans against property, etc.), the effect was far less pronounced as evidenced from the chart below -

Way forward The sudden impact of COVID-19 on these MFIs has highlighted the risks involved in case of a tail risk event occurring and crippling the sector. However, as a response to the situation, migration of loan collections to digital platforms (which are usually done in cash), by incentivizing initially, may improve operational efficiency and create database for portfolio analysis maybe undertaken. Data analytics may also be used extensively for designing borrower centric products and analyzing various risk models.

MFIs may resort to portfolio diversification to balance event based disruption i.e. flash floods or storms in one geography. Further, these MFIs may also need to look at diversifying sources of funding in order to build capital buffers in order to manage liquidity.

References – 1. https://www.visionmicrofinance.com/en/about-microfinance/about-microfinance/ 2. https://www.brickworkratings.com/Research/BWR-MicrofinanceReport_Final.pdf 3. https://www.rbi.org.in/ 4. https://www.motilaloswal.com/site/rreports/637108738449104297.pdf 5. https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/SEPBULL2020EE691C2221314D8AB8FB5 5EBA28C39CA.PDF

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Changes in Banking and customer satisfaction during COVID By: Jaitrik Jay Singh (TAPMI, Manipal)

Image Source – centralbanking.com The need for a range of creativity and digital banking solutions was clear in the banking sector even before the pandemic struck. As technology has grown, consumer perceptions of banking have risen. FinTechs have demonstrated the scope and feasibility of a digital strategy that all banks need to survive in the modern world. In recent years, banks have been vying to provide the highest technology infrastructure, which has led to the widespread use of electronic banking services across a wide variety of websites to satisfy the needs of consumers. Despite the variations in the services provided in terms of pricing and types of electronic services, most banks use electronic banking services for the acquisition, distribution, and exchange of services via electronic portals known as electronic commerce. But what has changed during the pandemic? COVID-19 intensified the digitization of banking as the needs of clients shifted in the pandemic. COVID-19 has shown that features offered by banks in their e-banking platforms or applications increased trust, reliability, and loyalty amongst consumers. What should the banks do? Speed is the key for banks to keep up with the changing need of clients. There is no value in monitoring what the clients are thinking or watching them grow irritated with a certain procedure if you cannot adjust it easily.

Bank teams should ensure that their risk and regulatory teams are working in real-time and that controls are placed in place to minimize the risk of behavior and compliance. The ability to detect and easily smooth any bumps would be crucial to making customer service better and preventing

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harm to credibility. Banks can also enhance their web platforms by personalizing their experience by self-selection navigation, tailored online banking contact, and comprehensive FAQ content and functionality. All this benefits the consumer and can also ensure that there is no demand for additional call workers. Open banking APIs (Application Programming Interfaces) powered by advanced analytics and advanced AI can offer richer real-time customization than consumers currently get, and many FinTechs can deliver strong accelerators. It won't come as a surprise to learn that banks with stronger digital capability will benefit from peers who will fail to deal with banking in the lockdown. Customers are expected to use digital platforms and may look unfavorably at banks whose processes sound sluggish, cumbersome, or unnecessarily complex.

Banks must ensure that consumers using remote channels have a good experience both through and after the crisis. Irrespective of their digital prowess, banks could use the last few months to ingest the data they see from their digital platforms. We know that many banks have been overwhelmed by a surge in consumer requests, which has led to delays in the ability of consumers to access their bank. Customer insight, e.g. by call center demand analytics, can feed plans to banks to help them improve turnaround times and better serve consumers. Many, including technologically competent consumers, find that digital platforms are inadequate to satisfy their very basic, nuanced, and urgent needs. Banks should use the crisis to determine where the existing consumer path can be enhanced to maximize service before and after the crisis.

Banks should look forward to 1. Placing consumers and their interests at the forefront of sustainable strategies. Banks can regularly and always discuss co-creating with customers in a proposal lifecycle.

2. From contactless banking to account control, consumers demand product and service connectivity from their devices at a moment's notice.

3. Build strategies towards understanding what data they have, what data they need, what questions they need to ask about the data, and how to view the responses. The key is to centralize current databases.

4. When designing new services in operations with extensive legacy processes and properties, and subject to high levels of regulatory oversight as banking, it is important to select which platforms to use and how to use them.

For a bank executive now, a multitude of problems needs to be discussed. Economic, organizational, and regulatory pressures need to be tackled in the near term. There is also a complex discussion about which technology would be the most disruptive or crucial to transition.

Some assume, for example, that the cloud gives banks the greatest potential. It provides advanced, customized, and real-time offerings that consumers and customers demand everywhere AI offers the greatest payoff to others. But banks have a wonderful chance because they have maintained the confidence of their clients and should have the resources to execute the correct strategy.

Advanced technologies and a digital environment would be key to success, cost-effectively providing better goods and consumer service. This future digital transition, brought forth by COVID-19, would also allow banks to deal with the tougher operating climate that the pandemic has brought. In the longer term, this would be a crucial move in improving profitability and returns in the industry.

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India's latest GDP Results- Genuine Recovery or Pent-up demand?

By: Anuja Singhal (K J Somaiya Institute of Management) Introduction The COVID-19 virus was first detected in the Wuhan region of China in December 2019 and it was subsequently declared a pandemic in March 2020 when more than 200 countries and territories confirmed medical cases caused by this disease. This caused India to undergo one of the harshest lockdowns by any country. Due to the lockdown, there was a halt in all activities which in turn caused an economic arrest. Only essential goods and services such as agriculture, IT & financial services, utility services, and mining activities were allowed to operate.

India had been witnessing a pre-pandemic slowdown with exports-imports, energy, agriculture, manufacturing, stock market, and many other sectors falling after the lockdown was imposed. This was directly reflected in the first quarter of the FY 2020-21 where India saw the GDP decline to 23.9%. It exceeded many estimates which gave a figure of around 20 points of contradiction with the first Atmanirbhar Bharat package coming out in the latter part of the first quarter.

GDP Growth AS per Murphy’s Law, “Anything that may go wrong will go wrong.” It’s evident from the graph that Indian GDP was already in a phase of decline. The pandemic further shattered the Indian economy and India saw a negative GDP growth for the first time in its history since its adoption of quarterly results.

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Post the shocking results of the first quarter (due to the restrictions imposed during the lockdown), the second quarter was expected to recover with the ‘Unlock’ phases getting initiated from June.

This meant the resumption of economic activities in various sectors and a gradual return to a new normalization. This resulted in estimates still being negative but a V-shaped recovery was expected. Researchers used the ‘nowcasting’ method and arrived at estimates which ranged from 9-12 points of contraction. But the numbers were even better than expected with the second quarter of FY 2020-21 recording a GDP growth rate of -7.5%. Two straight quarters of GDP contraction means India has entered a period of a technical recession. This is the first time since India began releasing quarterly estimates of GDP in FY 1998-99.

Private consumption was clocked at 11.3% as compared to 26.7% in the first quarter of FY 202021 whereas Investments or Gross Fixed Capital Formation reflected a huge difference in the numbers, 7.3% in the latest quarter as compared to 47.1% in the previous quarter. A contraction of 22.2% in this quarter as compared to growth of 16.4% in the Government Final Consumption Expenditure was a shock since the central government had announced various relief packages through the Atmanirbhar Bharat scheme. An increase in investments came after the restart of various projects which were closed down but if the new investments are being manifested is not clear.

Source – Bloomberg Quint

Impact of the Stimulus Package On 12th May 2020, Prime Minister Narendra Modi announced the “Aatma Nirbhar Bharat Abhiyaan” with which there was a roll-out of an economic package of ₹ 20 lakh crore which is equivalent to 10% of the Indian GDP. The objective was to focus on making our country independent and also to make it competitive with the global supply chain and empowering the poor, laborers, and migrants. Following this, Finance Minister Ms. Nirmala Sitharaman announced various measures under the economic package.

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The government announced collateral-free loans for businesses up to ₹ 3,00,000 crores which will help many businesses to keep running as the lockdown was slowly lifted thereby contributing to the overall GDP. The Cash Reserve Ratio was also reduced by 100 basis points to 3% by the RBI which resulted in liquidity support of ₹ 1,37,000 crores. RBI also increased banks borrowing limits under the Marginal Standing Facility to increase the liquidity in the economy. This helps to keep the supply and demand cycle moving which encountered the dampening effect of the pandemic.

Highlights of the GDP numbers When the lockdown was lifted, the economic activity moved forward which resulted in positive growth in many sectors. This rebound of activities was seen in many sectors including services such as passenger vehicles and railways. We also saw the manufacturing sector, which had shrunk by 39.3% in the last quarter saw a rise of 0.6% in this quarter whereas the construction sector which is the second-largest employer in the economy contracted to only 8.6% when compared to the first quarter shrink of 50.3%.

We also saw a change in the electricity and public utilities which recorded a growth of 4.4% from a contraction of 7%. Agriculture remained stable at 3.4% with the onset of the Rabi season, providing support to the GDP. However, the contraction to 8.1% from 5.3% in the financial services sector due to the unchanged interest rates and the extending moratorium was a reason to worry about.

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Source – Bloomberg Quint

Pent Up demand The Indian economy was in a strict lockdown from March 2020 to May 2020. This hurt the demand-supply of some goods that are required but were not necessary, for example, Indian automobile companies like Maruti reported 0 sales in April 2020. Once the lockdown was lifted these were the companies that saw a surge in the orders and demand from the customers as the requirement was always there but the lockdown has restricted them from the purchase. Hence, we saw there was a situation where customers had to wait for their opportunity to purchase as the demand for the last few months came all at one time and on the other hand, the manufacturing companies were also not operating during the lockdown. This was the trend amongst majorly all the sectors in the Indian Economy.

The other major reason for the increased demand was the Indian festival season starting from the Ganesh Chaturthi followed by Navratri, Eid, Diwali, and now Christmas coming. It has been historically seen that there is an increase in the consumption amongst the Indians during the festivals. Earlier, in the article, we saw that Maruti was unable to sell a single unit but with the festival season around the corner, September-October months saw a huge spike in the sales reported by top automobile companies, including Maruti. Vehicle registrations in September grew by 14% compared to the previous month; electricity demand shot up by 10.2% year-on-year in October; exports went up by 5.3% after shrinking for six months; unemployment fell from a high of 23.52% in April to 6.67% in September this year. The real demand requirement amongst the Indian economy can be seen only after the festival season comes to an end, but as for now, it is driving on the Festive and Pent-Up demand. The Society of Indian Automobile Manufacturers believes that the automobile sales across segments will fall by 25-45% this fiscal year, despite the bonanza sales in September and October.

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Future and Conclusion Atmanirbhar 3.0 was announced after the results of the second quarter of FY 2020-21 with the key focuses on individual sectors to increase job creation. This will lead to more purchasing power with the consumers which will reflect in more demand. However, it is somewhat early to comment on whether the Indian GDP numbers are real recovery numbers or just the result of pent-up demand.

We will have to wait for another one or two quarters and then only we will be in a better situation to comment on this. When the Q3 results of FY2020-21 for many companies will come we will understand their sales, inventories, and future growth prospects. Many companies themselves have agreed upon the fact that the sales domestic figures and the actual inventory that would be left would reflect the real picture in the coming days.

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Debt, MMT and the Fiscal Theory of Price Level (FTPL) By: Arjun Tandon (Christ University, Bangalore) Debt is a vastly misunderstood tool, usually conferred upon with a negative connotation. While commoners might be wary of taking on debt, economists would argue that entire economies would collapse and financial systems would fail in its absence.

If money is understood in its most rudimentary form, it is nothing but a few metal coins and pieces of paper exchanged for goods and services. After close examination of a currency note, one can understand that it is nothing but a promissory note. With the gradual obsolescence of barter, these promissory notes to pay in the future became the norm. So, in a philosophical sense, stepping out of the ego-centric predicament, we do not actually pay for anything that we consume, we only promise to do so. In other words, we are all in debt.

While discussing national debt of a state, one must not necessarily associate large debts with an unaware or odious government. As unusual as this may seem, one must first understand the factors affecting the debt repayment capacities of the states, as well as the monetary implications of debt.

Since most debt issued to states is in International Dollars or US Dollars, the exchange rate plays a key role in determining how much more debt a country can take before a default becomes inevitable.

Developing countries usually tend to have weaker currencies owing to their unending race to become competitive exporters and hubs of production, which implies a higher Purchasing Power Parity (PPP) conversion rate.

Country

PPP

Debt to GDP (in %)

Argentina

20.979

22.34%

India

21.107

54.81%

USA

1

150.31%

Canada

1.194

218.45%

Australia

1.44

195.5%

Source: IMF DATAMAPPER (2018)

This affects both sides, the lender and the borrower. The lender is sceptical lending to developing countries with ever depreciating currencies, and sensible governments will also take into account the expected future currency depreciation.

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Countries such as India and Argentina, whose currencies have higher conversion rates are able to take on less debt. Conversely, a stronger conversion rate gives governments confidence to borrow much more. Why does this happen?

Certain currencies which are stronger, or are part of supply chains essential for global trade, countries usually amass of a lot of those currencies. The reserve currency being the dollar, the Federal Reserve holds immense power over the United States’ debt repayment capacity, unlike the central banks of developing economies. This is where Modern Monetary Theory comes into play.

To a large extent, the Fed can increase its cash reserves to write off interest or principal payments on existing debt, since they need to pay it back in dollars. For India however, swelling up cash reserves won’t help as most of its debt is not held in Rupees.

The limitation of Modern Monetary Theory, the notion that a country can just print away its debt, is that it mostly applies to the United States. If done in a gradual manner, to avoid causing too much price instability, the US can attempt to pay off its debt burden by ‘printing’ more money, which is essentially just ballooning up its balance sheet.

Repayment aside, overwhelming deficits may also have monetary implications. According to Marco Bassetto (2007), inflation is not just a monetary phenomenon. He argues that the price level in an economy is affected by the ratio of the Nominal Value of Government Liabilities to the Present Value of Primary Fiscal Surpluses.

The FTPL determines the price level as follows: Bt / PV of Primary Fiscal Surpluses = Pt Bt is the Nominal Value of Govt surpluses and Pt is the Price level.

Keeping government liabilities constant, if the value of primary surplus decreases, or becomes negative i.e., turns into a deficit, then the price level shall rise as the government will try to cut back on expenditure to help finance its deficits. A decrease in government expenditure results in an increase in the price level. Hence, the argument Bassetto makes is that the more a government borrows, the more it becomes prone to unstable price levels.

Excessive borrowing also comes with a trade-off. The more the current government borrows, the more it seeks to collect in tax revenue from the public in order to repay the recently taken on debt.

If the government understands the implications of an ever-increasing debt burden, and choses to act responsibly, it will raise taxes. When a current government increases taxes, it limits the ability of future governments to raise taxes again. Differently put, the more a government borrows today, the more it discourages other governments to borrow in the future.

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References

Bassetto, Marco - Fiscal Theory of Price Level (2007) Federal Reserve Bank of Chicago, University of Minnesota

Cochrane, J. H. (2001) – Long Term Debt and Optimal policy in the Fiscal Theory of Price Level Econometrica (Vol. 69)

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PRODUCTION LINKED INCENTIVE By: Meenakshi (Great Lakes Institute of Management)

How would you react if the government announces that it’s going to give incentives for every extra unit of good which you, as a producer, will produce? Let’s see how it can happen and why?

What is Production Linked Incentive?

The incentives given by the government to producers to produce more units of their product is known as production linked incentives.

The question which arises is this- why government is providing this incentive?

In recent times of COVID-19, many people are getting half of their salary or only some percentage of it and some have even lost their jobs. This dis-balance of employment is the result of weak production in various sectors which in return require less human resources. The economy is in the vicious circle, as the reason of production to be less is because there is weak demand in the market from households, which is the result of less consumption power in the hands of household because of not having a job.

For some of the sectors, government is pushing producers to continue to produce more to maintain balance or to avoid the dis-balance in the economy, therefore, the rewards which were not coming from the household will come from government through this incentive.

How PLI is going to benefit the economy?

1. Atmanirbhar Bharat Atmanirbhar Bharat is a policy formulated by Prime Minister of India, Narendra Modi for making India self-sustaining, resilient and competitive. The main goal of this policy is to make Indian producers competitive and skilled enough so that reliance on imports from other counties can be diminished. Many goods produced in India are quite expensive as compared to the same goods imported from another country which discourages customers to purchase Indian goods and go for cheaper imported substitute.

Mass production of goods leads to reduction in prices and some counties like china follow the path of mass production which help them in reducing the price and ultimately make them perfect seller of goods in countries like India where buyers are price sensitive to high extent.

Encouragement to producers through incentives can lead to the increment in production level which will significantly reduce the price and ultimately spike in demand can be seen.

2. Boosting Export Prospects Production of goods just to fulfill domestic demand would be a narrow approach to follow for developing countries like India which aspire to become developed in upcoming years. Many industries such as textile have potential to export their products to other countries but are

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unable to do so due to expensive raw materials and competition from other countries’ goods in the form of imports. Steps are being taken by government in the direction of attracting investments in many sectors which will help in pushing exports and reduction in corporate tax rate would help the producers even more.

Adding the element of incentives to encourage the producers to produce more so that they can export their products which will help them to capture global market and increase their market share.

3. Being Important Player In Global Value Chain China has followed the low cost manufacturing system which has helped it to become second largest economy in the world by 2010 as compared to the ninth largest in 1980. China has always been a big contributor of products through imports in many countries. Availability of cheap price product makes it easier for many countries to just import from china rather than producing them domestically but due to the COVID-19 spread and US-China war, some countries including India are becoming reluctant in importing goods from China. The gap in global market which this reluctance will create has to be filled by some country or bunch of countries. This can be the opportunity for India to pace up and fill this gap by substituting China’s products. Production Linked Incentives scheme will play an important role in empowering Indian producers to produce more and have the access of global market.

4. New Industries India is a growing country with a lot of competition across the world. New industries like renewable energy, MSMEs and many more sunrise industries find it difficult to survive let alone flourish because of the cut-throat competition. In order to help them expand, boost from the government is a necessary. Production liked incentive will provide the opportunity to them to produce more and expand exponentially.

Production linked incentive can provide the boost in the economy but absence of technological competence might hinder the ultimate result anticipated by government, therefore, duly attention is required in this area to get expected results. Basic formulation intention of PLI by the government is to improve position of domestic producers of India by incentivizing firms to grow big and become part of global supply chain.

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Making Financial Market More Inclusive By: Sudhanshu Upadhyay (K J Somaiya Institute of Management)

Introduction Financial market is where people buy and sell stocks, commodities, bonds, futures, derivatives, currencies, and other financial products with major players such as banks, large corporations, and insurance companies.

In this system, flow of funds take place from those who have surplus of it to those who have shortage thus providing basis for the continuous restructuring of the economy that is needed to support growth.

Risk involved As they say, market has its own mind. Any amount of understanding and long-term analysis can be demolished at a single stroke.

Financial market operates in a cycle of boom and bust, with busts commonly occurring due to over-speculation. Due to the speculative culture of the entire structure, investors are exposed to greater risks and restricted real capital formation.

For example: The panic of 1873, largely caused due to the speculation of railroad bonds.

Broad investing trends An average Indian household holds about 84% of its wealth in real estate and other tangible assets, 11% in gold and remaining 5% in financial assets but Indians are now shifting from traditional assets like real estate, gold, etc. and moving towards financial assets such as stocks and mutual funds. India Wealth Report by Karvy Private Wealth says, in FY19 the proportion of investments in financial assets increased to 61% as against 57.25% five years ago. In FY19, the highest allocation of money from individual investors was in equity investments. A significant surge was noted in the investments in mutual funds, pension funds and alternative investment funds (AIFs) with 17%, 21% and 20.19% y-o-y growth respectively.

However, the overall penetration remains low. Only 2.78 crore Indians invest in the stock market i.e. around 2% of the population, as compared to 50% in America and 7% in China. This indicates that there’s plenty of headroom for India’s financial market penetration to grow.

A worrying picture It’s imperative for India to have a developed financial market to become a developed economy but the financial habits of the population show we are nowhere close to this.

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Equity segment accounts for more than 75% of market activity in India and market for other financial instruments like bonds and interest-rate futures is not adequately developed. This trend is reverse in advanced economies with bonds accounting for more than 80% of trading in some markets.

Domestic debt market in India is about 67% of GDP, while the size of India’s corporate bond market is mere 16% of GDP, compared with 73% in South Korea and 46% in Malaysia. Indian corporate bond market has unstable and low trading volumes with largest investors being top-rated financial and public sector issuances.

Source: Economic Times

Why don’t more households invest in the financial market?

There are a lot of educated investors, in mid to high income category, who save yet do not invest.

Infographic given below shows the reasons behind non-participation:

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Hence, due to the typical impulse of risk aversion followed by dearth of information and lack of trust, most Indians stay away from the financial market.

Bridging the Gap Between India and Bharat Metropolitan cities have traditionally been the topmost contributors to the financial market.

However, increasing number of retail investors from tier-2, tier-3 cities have been contributing to India’s growth story.

Top five states in new registrations are: UP, Bihar, Punjab, Kerala and Madhya Pradesh. However, cities like Vadodara, Nagpur, Rajkot, Patna and Lucknow are not too far behind and recording a high volume of new investor registrations. There exists vibrant investor base in Rewari, Jhansi, Kottayam, Guntur, Valsad, Pathankot, etc. This reflects the booming interest in market among all socio-economic strata.

Coronavirus- The unexpected trip With people confined to their home, stock market investing appeared to be on the upswing.

Investments from domestic investors surged during the pandemic.

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People who were unable to follow markets during office timings, hooked to investing. This change can be attributed to increased education & awareness and availability of investment tools at everyone’s fingertips.

Investors looking for diverse set of assets Earlier, potential investors were unaware of the risk adjusted returns of equities and mutual funds and considered individual savings and investment instruments independently instead of calculating their optimal weights in a diversified portfolio.

With growth spreading its wings over more cities, Indians’ willingness to diversify their investments into newer asset classes is gaining pace. Increasing demand for accessibility to multiple investment avenues like trading member networks, exchange traded funds (ETFs), and mutual funds demonstrates that.

Untapped investor base at the bottom of the pyramid With India's growth story unfolding, it’s imperative to have strong financial market with broad participation to raise resources for companies in order to fuel the capital needs of the economy and ensuring that the benefits of growth percolate to bottom of the socio-economic pyramid.

Despite rising rural education and income, improved access to roads and electricity, and significant growth in financial inclusion, the rural rate of investments in the securities markets has been dismally low. Unlike in urban areas, riskier investments like derivatives are completely absent from their portfolios and equities lag behind safer debt investments. Hence, the risk aversion amongst the rural investors is undeniably palpable.

Awareness of Savings, Investment and Capital formation instruments

Source: SEBI Investment Survey

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This gloomy picture of investing amongst rural households is a direct consequence of the lack of awareness about different investment instruments.

Way forward Many instruments have been introduced in the market like PPF, Mutual funds, NPS, Fixed deposits, etc. to help middle class families participate in financial market. However, their participation remains low as Indians mostly prefer investing in tangible assets.

Various policy initiatives are undertaken in the last few years like IBC, SEBI’s bond market policies, RBI’s large borrower framework for enhancing credit supply and would take time to fructify. To further increase participation in financial market, following suggestions can be looked at: 1. For Mutual funds, tech-driven low-cost platforms like Paytm Money should be scaled up to increase the reach in rural areas to democratize this industry.

2. For Gold, reallocating some portion of gold holdings towards financial assets, households can achieve higher rates of return. Awareness campaign should be started to highlight the benefit of sovereign gold bonds.

3. For Micro-pensions scheme, broad innovative campaign highlighting the importance of pension holdings is necessary to break deep-rooted cultural preferences of relying on the next generation to support the elderly. A robust pension by using digital and innovative solutions should be implemented to cater to the entire population.

4. For Debt market, guidelines issued by RBI such as allowing banks to issue rupee denominated bonds overseas, corporate bonds as eligible collateral for liquidity operations, removing restrictions on seamless transfer of G-securities between RBI and depositories to promote retail participation are welcoming.

Additional recommendations: 1. Government should look into incentivising the supply side to innovate financial products and preventing households from predatory pricing schemes for broader participation in formal financial markets.

2. In the absence of any privacy legislation, collection of personal and sensitive data will give rise to privacy concerns that need to be tackled for maintaining investor sentiment.

3. Awareness programmes on fixed-income products such as government securities, corporate bonds, debt funds and hybrids will be salutary.

4. More financial technologies should be used in providing high-quality financial products to Indian households.

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5. Tax incentives nudge Indian investors in the direction of financial decisions. Tax incentives should be offered to investors in various financial instruments.

Conclusion For better or worse, financial markets are important for the economic world we live in today. India, with largest working age population, is becoming an engine for future growth. In today’s scenario, very low percentage of savings are invested in the domestic market, but with GDP growing at 67% annually, stable government and financial market, we will witness more money being pumped into the system as more investors will join India’s bandwagon. With broader participation of people in the market, we can see an equitable distribution of income.

References: 1. https://www.etmoney.com/blog/india-investment-report-2020-a-look-at-how-indiainvests/ 2. https://www.aegonlife.com/insurance-investment-knowledge/where-do-indians-investtheir-money-heres-a-break-up/ 3. https://www.nseindia.com/ 4. https://www.sebi.gov.in/sebi_data/attachdocs/1491452612271.pdf 5. https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/HFCRA28D0415E2144A009112 DD314ECF5C07.PDF 6. https://economictimes.indiatimes.com/markets/stocks/news/the-rise-of-small-towninvestors-in-indian-equity markets/articleshow/71270423.cms?utm_source=contentofinterest&utm_medium=text& utm_campaign=cppst 7. https://www.businesstoday.in/moneytoday/cover-story/mcx-ceo-joseph-massey-talksabout-what-will-boost-the-stock-markets/story/14169.html 8. https://cafemutual.com/news/industry/12632-less-than-15-of-indias-population-investsin-mfs

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Ineffective policy measures? Incorporating ‘nudges’ is the way forward By: Anvi Agarwal (St. Xavier's College, Mumbai) In 2019, India’s flagship economic policy vision document - the Economic Survey of India contained a whole chapter on policymaking titled ‘Policy for Homo Sapiens, not Homo Economicus’. It concluded with the words: “The proposal to set up a behavioural economics unit in the NITI Aayog must be immediately activated.”

In simpler terms, it conveyed the fact that in practical life, people react very differently than economic theories state. Therefore, it is beneficial for researchers and policymakers to take into consideration behavioural science data of consumers and the target population while formulating policies.

In Economics, it is assumed that every individual/consumer behaves rationally. For instance, say there are two options, A and B, where A is the more optimum of the two, but it is observed that in some cases, numerous people still choose option B. Illusions, perceptions, marketing of a product and other confounding variables that are not visible to the naked eye and the brain mislead the individual into taking such a decision.

This is where the significance of behavioural economics and psychology is seen as it takes into consideration the psychology of human beings and ‘nudges’ them towards the option that gives them the best economic and social gain.

Introducing Behavioral Approaches to Governance If behavioural economics contradicts the Rational choice theory and poses humans to exhibit irrational behaviours often, how does one make sure to incorporate it while framing policies?

Author of ‘Predictably Irrational’ and a key figure in the field, Dan Ariely explains various circumstances where human systematically behaviour irrationality, which can often be predicted and modelled into a policy. Incorporating behavioural sciences in policy-making is a two-fold process (sometimes broken down into four steps): 1. Define and understand the cognitive biases that lead consumers to choose less optimum routes.

2. Design and apply external stimuli that guide users to the best option. These stimuli are known as nudges or interventions.

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Source: Datta and Mullainathan (2014). ‘Behavioural design: a new approach to development policy’, Review of Income and Wealth, 60(1) This method is tried and tested - by governments, companies and international bodies. Dating back to 2010, the United Kingdom became the first country to introduce a ‘Behavioural Insights Team', a nudge unit set up in the Prime Minister’s Office. This phenomenon has now expanded to 202 government institutions including bodies in the United States, Australia, Singapore and even international bodies like the World Bank.

Behavioural Policies around the World Singapore is known for several innovations in governance. By providing the average electricity usage of the locality on the back of bills, it has successfully made households rethink their own energy consumption, driving them towards reducing about 4-12% electricity and possibly even higher. This was an example of using the groupthink effect to guide consumers towards a sustainable future.

The colour-coded footprints in Delhi’s Metro, guiding users to the correct metro line, are only a short step away from Copenhagen’s experiment of using green footsteps to lead to trash bins (helped reduce littering habits by 46%).

In India, companies like Final Mile and Briefcase are deploying behavioural sciences to support their businesses and policymaking. On average, eight deaths are recorded daily at unmanned railway crossings, which makes it a serious problem. Final Mile, a Mumbai-based firm, suggests that a yellow line drawn along railway tracks has reduced deaths by 75%. This is both easy to implement and budget-friendly. The Bleep experiment to curb honking conducted by Briefcase has shown encouraging results with a 61% drop in honking behaviour.

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Why Does India Need Behavioural Economics?

Some may ask, what is the urgent need for a structured and concrete nudge unit in India? Well, India is considered a low-income country and lags behind most developing countries in terms of expenditure on social welfare. Hence, it is extremely crucial that India’s policymakers squeeze the most value out of every rupee allocated to welfare and development programmes. Moreover, implementing some of these could be relatively easy and low cost if done at a micro-level, however new policy experiments require confidence and conviction to the pilot, which might take time.

Talks about a nudge unit in the country popularised in 2016, when NITI Aayog reportedly collaborated with Bill & Melinda Gates Foundation (BMGF) to provide insight into flagship programmes of the current government such as Swachh Bharat Mission, Jan Dhan Yojana, Digital India etc. In 2019, NITI Aayog finally announced the formation of a nudge unit. Announcements about recruiting behavioural scientists and economists have been made, but no known concrete issues and problems have been solved. Similar steps have been planned by the state governments of Maharashtra and Punjab but those have been stonewalled so far.

It is time India utilises behavioural approaches in order to implement policies in a better manner.

It is time for India to get a structured and concrete nudge unit.

The End

Also see: The author’s interview on writing this piece https://www.youtube.com/watch?v=Rd2bhC8D2VA&feature=youtu.be

References: •

https://www.behavioraleconomics.com/behavioural-science-rationality-and-publicpolicy/

•

https://www.indiabudget.gov.in/budget2019-20/economicsurvey/index.php

•

https://www.brief-case.co/projects/behaviouraldesign/invention/2/14/2/bleep.html#:~:text=The%20Experiment&text=When%20th e%20driver%20honked%2C%20the,like%20a%20seat%20belt%20reminder.&tex t=Bleep%20has%20been%20tested%20on,months%20travelling%20over%203800 %20Kms.

•

https://www.oecd.org/gov/regulatory-policy/behavioural-insights.htm

•

https://transfin.in/digital-india-missing-the-point

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International Outlook on Indian Cut Roses and Strategies to Increase Turnover

By Prasanna Venkatesan Kirupapuri (Institute of Public Enterprise, Hyderabad)

“Bloom where you are planted. Where flowers bloom, so does hope”.

India ranks 1st position of global cut rose production and China gives a tough competiton with India. This article has a brief research Indian cut rose production, demand, export followed by a rough financial plan and some strategies for an entrprenur to have a favourable cut rose export trade.

Introduction: We are surrounded by plants. During photosynthesis plants absorb carbon dioxide and give out oxygen which is essential for human beings to survive. Rose, has several importance like symbol of love, colour of fragrance, precious romantic gift etc… It has huge value all over the globe.

Conditions to grow: •

Temperature: 18.C–30.C and sowing temperature differs from 25.C–30. C.

•

Soil: Well drained sandy loam that are rich in organic matter.

•

Rainfall: 200 mm–300mm

Production: India’s rose production has been increased significantly every year.

Reasons for growth: •

The fragrance of rose can create a fresh and pure atmosphere creating a soft and sensual effect. (Perfumes and Scent Industry)

•

Rose is used in preparation powders, soaps, creams and lotions. (Cosmetics Industry)

•

Rose is heavily demanded among youth as it the symbol of their expression. (Flower shop business sector)

•

Rose is used for culinary purpose as it helps in making products like rose petal jams, rose syrups and rose essences etc… (Culinary Industries)

•

Rose is certified to be antiseptic and anti-oxidant. It contains rich sources of Vitamin A, E, D, C and B3. (Medical Industries).

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Figure 1.1, Source: Author Contribution

Figure 1.2, Source: Author Contribution

Figure 1.3, Source: Author Contribution

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Figure 1.4, Source: Author Contribution

Export Trade: Even though India ranked 1st in global cut rose production it stood around in 15th position in export. In 2018 – 2019 the total export of roses from India were 41 MT fetching a turnover around Rs.329.93 lakhs. If same trend continues in next 3 years it would fetch a turnover around Rs.277.2 lakhs with 29.2% growth rate. Indian roses are heavily demanded in UK, Malaysia and Singapore markets.

Forth coming export trade opportunities in COVID19 scenario: China contributed 23.68% of production of cut roses all over the world after India. Due to COVID19 China is heavily affected especially in agriculture sector. Many countries have cancelled trade agreements with China. Indian companies can use this opportunity to increase their turnover and can even try to conquer Chinese’s share.

Financial Plan: Roses yield 25 – 30 flowers per plant. In an acre about 5000 plants at an average yield of about 1,50,000 roses.

Cost involved in Rose farming per 1 acre: (approximate) Possible Expenses

Amount (Rs)

Land Rent (on the higher end)

2,30,000 (yearly)

Land Preparation

20,000

Planting materials

80,000

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Manures and Fertilizers

20,000

Plant protection

15,000

Irrigation cost

15,000

Labour cost

60,000

Selling and Distribution expenses (includes transport charges, air charges for export trade also)

1,50,000

Advertising in foreign land

50,000

Maintenance expenses

20,000

Normal loss (damage due to transportation, perishable nature)

20,000

Storage cost

20,000

Miscellaneous expenses

10,000

Total Expenses

7,10,000

Cut Rose farming income from 1 acre: (approximate) Note: This income is only through export trade of cut roses •

Cost of production/unit: Rs.4.73 (7,10,000/1,50,000)

•

Normal Loss: 2000 units

•

No of units sold: 1,48,000 units

•

Approximate minimum selling price: Rs.5

•

Total Revenue: Rs.7,40,000

•

Profit on cost of sales: 5.73% Particulars

Amount (Rs)

Expected Income

7,40,000

(Less) Expected Expenses 7,10,000 Expected Profit

30,000

Requirements/strategies to have good export trade.

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•

Either invest your own fund or borrow the amount from the financial institutions to start the business either in and around Chennai or Bengaluru as they have less air travel time to the targeted destinations compared with other cities in India.

•

Segmentation - Countries selected should have quick travel time as the perishable goods cannot be kept in transportation for longer time. UK, Malaysia and Singapore have heavy demand for Indian cut roses. So first it is advisable to concentrate Malaysia and Singapore as UK has higher travel time. (Geographic segmentation)

•

The research says that the youth of those nations see rose as a royal gift. Hence, we can target them initially and then we can target other cosmetics, medicine industries.

(Demographic segmentation).

•

The rose can follow skimming price strategy as it is not a necessary good and we cannot expect that everyone will come and buy the same. It can be sold at Rs.5.

•

Heavy advertisements are required to mark the arrival of the product. Discounts should be given initially to boost up the sales.

Image 1.1, Source: Author Contribution Approximate Air travel timings From

To

Duration

Chennai

Kuala Lumpur 3 hours 50 minutes

Chennai

Singapore

3 hours 50 minutes

Bangalore Kuala Lumpur 4 hours 10 minutes Bangalore Singapore

4 hours 10 minutes

Kolkata

Kuala Lumpur 4 hours

Kolkata

Singapore

4 hours 15 minutes

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Favourable climatic conditions: Valentine’s day is celebrated on February 14th. At that time roses are heavily demanded in Singapore and Malaysia. However, they cannot grow roses as it would be frozen in winter climate. Even North India has temperature below 2.C in winter months. But in Chennai flowers can be grown even in winter. Due to the sea breeze and humidity in Tamil Nadu the winter temperature would be 20.C to 30.C Increasing income through tourism: Garden can be allowed for the tourists to visit and through that the income can be increased.

These garden makes them to sit and relax themselves with their beloved ones in this workaholic environment. If opened, this would be the first rose garden in Chennai.

Uplifting Indian Economy: Unemployment is the biggest problem in India. From farmers to educated professionals, everyone would be benefited through this business and this would at least help Indian economy a little bit to overcome its unemployment.

Verdict: This is the right time to expand the turnover on Indian cut roses through export trade. Every entrepreneur can follow the said strategies to taste the success in the cut rose business.

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Cryptocurrency in India

by Sphurti Srivastava (Gargi College)

Cryptocurrency simply means digital currency and serves as a medium of exchange. You can purchase cryptocurrency by your credit card or by a process called mining. However, this currency has its own disadvantages. A major drawback of this currency is that it is not backed by the Government. Under a traditional banking system, if the bank becomes insolvent or shuts down, the Government will help you to get your money back. Cryptocurrency is not backed by the Government. So, if you lose your cryptocurrency, Government will not help you to get your money back. One very unique feature of cryptocurrency is that its value changes constantly. It might be worth thousands of dollars in one hour and might come down to hundreds in another hour. This makes investing in cryptocurrency a very risky process.

Talking in context of Indian Economy, cryptocurrencies are not recognized as legal tender in India.

Only cryptocurrency trading is allowed in India. The regulations on cryptocurrencies by the Government have made it very difficult for this currency to operate. RBI has strongly opposed cryptocurrencies. In 2018 RBI issued a circular which prohibited banks and other entities from dealing with cryptocurrency. This circular was later struck down by the supreme court in 2018.

A question arises as to why RBI opposes cryptocurrency?

While defending its circular Infront of Supreme Court, RBI said that the circular was introduced to uphold the integrity of Indian banking system.

Now what does RBI mean by that?

As discussed above, traditional currency is controlled by the Government. This control also enables the Government to track payments and transactions. Cryptocurrency is created in cyber space and is independent of the traditional banking system and it is not backed by the Government.

If cryptocurrency is recognized as a legal tender in India, there will be no need for banks. While this may sound good, there is another side to this story. In the absence of banks, you won’t be able to recover your investment if your currency gets hacked. You have anybody to assist you when your payments get hacked or you face technical glitches while transferring assets.

Cryptocurrency is based on blockchain technology which only provides the electronic address and not the identity of the person involved in transaction. This helps to cover one’s track of financial transaction. Moreover, untraceable financial transactions facilitate tax evasion, illegal trading, money laundering and so on.

These were the major reasons behind RBI’s circular in 2018.

However, every coin has two sides. Since we know one side, its important to know the other side as well. Cryptocurrency will also benefit the Indian Economy in the following ways

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•

Reduced Transaction Cost- Even though the cost of digital payments and transactions has been reduced, it is still costly for small merchants due to the involvement of third parties. Cryptocurrency involves zero transaction cost. A cryptocurrency-based economy will help these merchants to access digital payments at low cost.

•

Preventing frauds- in cryptocurrency, the holder has complete control over the transaction. The holder can decide the amount he/she wants to send without disclosing his/her personal information.

•

Enabling Instant settlement- Cryptocurrencies are based on blockchain technology which acts as a decentralized ledger. Therefore, the transactions can be settled instantly without involving third parties for verification thereby saving time. Moreover, cross border payments can also be made instantly.

Also, India has a strong digital ecosystem which can help in strengthening cryptocurrency thereby facilitating global capital inflow.

Current trends in cryptocurrency market

Sources: marketsandmarkets Figure 1: Estimated trends in cryptocurrency markets As it is visible from the above figure, cryptocurrency market is expected to reach $1.40 billion by 2024 as compared to current $1.03 billion (as per 2019) growing at a CAGR of 6.18% during this period. Moreover APAC (Asia Pacific) market will be a major market for cryptocurrency. This market has been further divided into China, Japan, South Korea, and the Rest of APAC (RoAPAC).

RoAPAC includes Singapore, Malaysia, Thailand, India, Australia, and New Zealand. India is

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expected to provide significant growth opportunities to companies which operate in the cryptocurrency market due to low transaction fees and faster remittance.

What can India do to use cryptocurrency to its benefit?

India can learn from the experience of other countries. China has completely banned cryptocurrency. However, India should not do so. Cryptocurrency has a large number of benefits as already discussed above which can help in strengthening India’s economy. Countries like Japan, Australia, Switzerland, Thailand and Canada have become aware of the economic benefits of cryptocurrency and thereby introduced regulatory mechanisms to reduce chances of misutilization and frauds instead of a complete ban. These countries have accepted cryptocurrency as a legitimate payment method. Malaysia and Phillipines have issued formal license to market operators who deal with cryptocurrency. European government is also working on developing anti money laundering directive to control suspicious activities financed through cryptocurrency.

India can follow the footsteps of these countries. India needs to develop an atmosphere which is favorable to the working of cryptocurrencies and at the same time prevent it from damaging our current traditional banking system.

Conclusion Cryptocurrency is a blockchain based technology that will prove beneficial to the world economy.

It has the potential to transform the Indian economy. It is not free from lacunae; however, efficient control and regulatory mechanisms will help India to reap its benefits and strengthen its position in the global market.

References •

https://www.financialexpress.com/money/eavesdropper-money-monster/2153880/

•

https://currentaffairsreview.com/cryptocurrency-in-indianeconomy/#:~:text=Crypto%20currency%20has%20the%20potential,an%20emerging%20 economy%20like%20India.

•

https://www.investopedia.com/articles/forex/042015/why-governments-are-afraidbitcoin.asp

•

https://thewire.in/tech/will-2021-be-the-year-when-india-finally-clarifies-laws-aroundcryptocurrencies

•

https://inc42.com/resources/5-reasons-why-india-needs-an-active-cryptocurrencyeconomy/

•

https://ameerrosic.com/5-benefits-of-cryptocurrency/

•

https://www.marketsandmarkets.com/Market-Reports/cryptocurrency-market158061641.html

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Will the Vaccine Cure Indian Economy?

By Athul Kishan S (Great Lakes Institute of Management) The biggest promise that could boost up the country’s economy has been the news on availability of vaccine. But in reality, it is hypocritical. Vaccines may act as a catalyst to boost the Indian economy but won’t be a critical factor that can revive the economy unless the other economic fundamentals of the economy is sound.

It is true the fact that the Covid pandemic has added to the decline of the economic activities in the country but on a wider scale the concrete reason for the economic downfall has been due to sluggish investments, capital constraints and lean credit flows during the past few years.

India’s ideal GDP growth went down to 6.8% in the FY 2018-19 compared to the previous years' growth rate of 7.2%. This was major because the level of investment by the profit-making companies had gone down during the financial years 2016-2019. India’s investment in R&D has always been at 0.6% of the GDP which is less compared to the expenditures of countries like USA (2.5%) and China (2.1%). The failure to reinvest the profits of low-profit companies in new means of production has led to a contraction of the economy.

Despite low CRR and SLR rates banks have been reluctant to transmit the money to private investments due to the previously accumulated NPA’s because of indiscriminate lending.

Meanwhile parallelly there was a decrease in the number of new job opportunities. This resulted in a decrease in nominal household disposable income and hence the demand for goods and services decreased drastically. * The subdued demand affected small sectors, entrepreneurs, MSME’s, and large scale MNCs. One more factor that added to the downfall of the economy was that the indiscriminate lending bank recapitalization was late. Banking sectors provided non-quality loans to many sectors and the accumulation of NPAs gradually increased. Also since there was a change in the governance in 2014, the NDA government required some time to analyze the economic situation before taking any decision on the recapitalization.

Mr. Aravind Panagariya has also quoted in his blog that, “The government must recapitalise in advance public sector banks (PSBs) on a sizeable scale. Resulting bankruptcies would resume the process of accumulation of non-performing assets (NPAs) and adversely impact credit growth, especially at PSBs, which have carried the burden of the repayment holiday and loan restructuring.”

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How to revive the Indian economy?

Growth factors such as private investments, consumption, etc. aren’t showing a positive outlook.

Hence the government can increase their spending to inject confidence into these private sectors.

The PLI scheme that the government has announced seems to be a promising one. This scheme eyes at the incremental growth of Indian manufacturing units. For many years Indian manufacturers have been producing high-volume low-value products. This scheme might motivate them to invest in technology and produce high-value products which will add value to the upstream producers and enable them to integrate with the global supply chain.

It will help the country to increase its exports by producing high standard products competing with our neighboring country China.

Along with these fiscal policies, if the government can reduce CRR, SLR even more on a short term and concentrate on the Capital infusion, there will be a huge impact on the regrowth of the economy.

CRR plays a vital role in the performance of the banking sector. If the RBI keeps the CRR at a higher rate, then most of the bank's cash will be held up, and the banks don't get to lend much to the private investment companies or the individuals.

Higher SLR reduces the bank's lending power, and hence higher is the rate of interest, and it becomes difficult for a business to avail of the loan. This reduces the bank's revenue as the interest revenue reduces.

The capital injection raises the mortal imponderables that banks will not take adequate precautions to borrow when they know that the government will assist if the loans go wrong. The government must therefore be very selective to distribute the additional capital among GNP. The GNPs who have worked hard and have shown an improvement in their NPA problem treatment have preferred access to fresh capital. The weakest GNPs should only receive capital to maintain their current process. Such market discipline is very important and necessary at the moment.

Especially in the quarters of September and December, when the pandemic's effects begin to decline, and the economy needs massive credit pressure to get back on its feet, it will be critical.

PSBs will have to do most of the work, mainly because shadow lenders' ability to lend will be seriously threatened by the crisis. NPCs (non-performing assets) could continue to be a problem, and the government may need to plan for some capital injection into state banks.

How can the Vaccine act as a catalyst to boost the economy?

With the availability of a vaccine, the equity market will see a sharp recovery. On the announcement of the vaccine, India’s equity market has seen a rise of 47% since March 2020.

There has been a hike in bond yields as an immediate reaction to the vaccine announcement.

Around 12.2 crore people lost the job due to pandemic. Most of them being from MSMEs and informal sectors which contribute to almost 80% of India’s job opportunities. Post-vaccination,

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the job participation rate is expected to increase. The buying behavior of the market which was affected due to Covid will get back to pre covid behavior and the sectors like Foodservice, Travel, Retail, Fitness, Real estate, etc. will rise. IMPLAN group has estimated that the covid vaccine will generate an impact of $32.2 billion.

Bharat Biotech, Serum Institute, Zydus Cadila, Panacea Biotec, Indian Immunologicals, Mynvax and Biological E , etc are working on Corona Vaccine in India. Since India is already leading the world in the production of Covid vaccines, foreign investments have drastically increased and the Indian rupee has strengthened in the spot exchange rate. Hence the funds in India’s financial market are slowly rising and will largely help for capital injection in private investments. *Source: 1. Statistica

2. India Today

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3. https://timesofindia.indiatimes.com/blogs/author/arvindpanagariya/

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