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ARBITRAGE March 2020 Covid-19 Vol 4 Issue 1 Edition Special
SPECIAL EDITION
CORONAVIRUS Reviving Indian
Impact of
Economy amidst
Measures for
Coronavirus on
slowdown and
COVID-19 Revival
Global Economy
coronavirus impact
and India
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INDEX
S.No.
Article
Page No.
1
Reviving Indian Economy amidst slowdown and corona virus
3
outbreak 2
Measures for COVID-19 Revival
12
3
The global Macroeconomic Impact of Covid-19 Pandemic
17
4
Global Debt Crisis
21
5
Covid-19 may begin a new era in the management of sovereign debt
27
6
Corona Virus and the stock Market
29
7
The One Where Venture Capital Financing Felt the Panic of
35
The Pandemic 8
Covid-19: Is recovery phase of Indian Economy over?
38
9
Impact of Coronavirus on Global economy and India
40
10
Impact of Covid-19 on Financial Markets
42
11
The Poultry Debacle
45
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Reviving Indian Economy amidst slowdown and corona virus outbreak By: CA Tanvi Sawant and CA Jatin Chawda (IIM Banglore)
Current Scenario
Some important figures…
The global economy experienced a synchronized slowdown in 2019 due to various reasons such as trade barriers, growing geopolitical tensions, delay in Brexit deal, oil-market disruptions, etc. Global trade has sunk into contraction, with knock-on effects impacting investment and industrial production, especially manufacturing. Reflecting this, commodity prices slumped, with crude oil prices tumbling. To make it worse, Corona Virus (COVID 19) outbreak all over the world in early 2020 is dragging the world economy towards global depression. The Moody’s Investors Services has forecasted India’s growth at 2.5% for year 2020. Issues faced by India India, which was touted as one of the fasted growing economy was started to be seen in crisis since 2018. Some of the determinants of economic slowdown are as follows: • credit crunch due to NBFC crisis • mounting NPAs and banking frauds • rising unemployment • improper GST implementation • demonetization, • unimpressive resolution of insolvency cases under India’s Insolvency and Bankruptcy Code (‘IBC’), • slump in consumer demand • fluctuation in oil price, foreign exchange market, etc. Determinants of GDP We need to understand the components of GDP in order to revive each of these factors of Indian economy.
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How to revive the Indian economy? There has been a lot of debate over whether the slowdown is structural or cyclical. Whether a fiscal or monetary policy is effective? Whether it is domestic or global? The slowdown is partly structural and cyclical. The cyclical part is a year old i.e. shadow banking stress (NBFC crisis) and weaker global demand, while structural is ongoing for 5-10 years i.e. declining investment-GPD ratio, productivity stalling, etc. At the macro level, a structural slowdown normally comprises supply-side solutions like infrastructure, increased capacity of production, which are long term. However, cyclical slowdown is often due to low aggregate demand and can be corrected through counter-cyclical measures which are short term. As per Keynesian economy, government expenditure i.e. deficit spending should be spurted to increase the aggregate demand. Hence, we need supplyside solutions to a demand-side problem. Consumption Matrix
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1. How to increase private consumption? ➢ Increase in income of middle & lower-income groups The bottom half of the income distribution provides for demand impetus in India. There is inadequacy of labor incomes in India, especially when 71% of regular wage and salary earners are contract workers. Rather than gifting corporate sectors huge tax cuts, the Government could have used the funds for minimum wage legislation or providing employment under the MNREGA scheme leading to rise in income. India should also try to increase the per capita income ($1878) to reduce poverty and increase consumption. Also, it is the only G20 country in the low middle income (below $3896) category and ranks globally 144 which is a bad indicator for private consumption . • Simplified tax collections Reduction in personal taxes at least for lower-income groups will also help increase household consumption since household savings rate has gone down from 23% to 18%. GST Council should increase the rates on lowGST items with inelastic demand and reduce rates for high-GST items with elastic demand. This will reduce rate differentials and discourage GST evasion and corruption, boosting consumer demand. However, tax buoyancies cannot be expected to arise when there is growth slowdown. •
Agricultural & rural sector reforms
The current slowdown is an ideal time to implement doable agricultural reforms since the sector is a potential employer and enabler for 50% of India. It has the potential to revive the animal spirits, ensure reforms on land, market, price as announced by Agriculture Development Council and GST council to make agriculture the lead of sustainable growth by 2022. Promotion of occupations like farming handicrafts, handloom which is less affected by slowdown is a must. There is a need to change the distorted framework of agriculture relying on water scarcity and climate change and improve inefficient system of pricing, procurement, storage and distribution system of food (40% of food is wasted during supply chain). Growth in rural income needs more macroeconomic attention like affordable housing, clothing, health and education of reasonable quality which will help to increase both economic activity and employment. •
Credit offtake and infusion of liquidity in certain sectors
Sectors like automobile and construction are fighting with liquidity crunch due to the stress of shadow banks and certain regulatory norms. However, slowdown of these industries has led to forward and backward spillover effect on the linked industries leading to amplified effect. Hence, it is important for credit offtake which can be possible through co-origination or co-financing of loans between the public sector banks and
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NBFCs to provide retail loans for vehicles and homes. This will set the cycle moving in the right direction. Also, special fund for last-mile funding of housing projects and expedition of GST refunds to MSMEs will boost these sectors 2. How to increase investment and capital formation?
•
Increasing confidence of the public and ensuring no liquidity trap
A liquidity trap occurs when there is small rate of interest and public prefers to hold cash rather than invest. (e.g. Japanese economy). This happens when the animals are dispirited due to uncertainly i.e. low confidence. There must be a continuous demonstration of intent on all fronts i.e. economic, social, political and economic. Investors must be assured not to be vilified if they fail and even one event like IL&FS will make them highly risk-averse. Economic Survey states that unleashing animal spirits help drive private investment which drives demand, create capacity, labor productivity, new technology and generates jobs. •
Increase in long-term capital formation
Huge correct public capital expenditure can help attract or crowd in private investment (better infrastructure) or crowd out by huge government borrowings. Private investment showed a 34% fall in 2019. Hence the driver is missing which needs to be brought back as follows:
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•
Improve the quality of human capital formation
Demography affords India a sweet spot since it has a demographic cycle which is 10-30 years behind other countries which means greater productivity, savings & competitiveness due to fewer dependents. However, India has not been able to capitalize on the sweet spot as it has lowest labor force participation amongst G20 countries. India needs to form new flexible and consolidated labor laws with minimum wage code to encourage employment in formal sector. It should set up skilling institutions and education in collaboration with industry information based on a large-scale enterprise survey. This will help to increase workforce in manufacturing, service and agricultural industry which shows decline currently. •
Increase in Total Factor Productivity (TFP)
The momentum of growth in India should be contributed by TFP. The government should invest in the changes in TFP which can be interpreted as a measure of the collective contribution of non-conventional inputs such as improvements in input quality, market access, economies of scale, and technology apart from land and labor. As per the given figure, there has been a stagnation in contribution from TFP leading to a decline in the growth.
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•
Introduce asset recycling
It includes disinvestment of government stakes in companies and selling/auctioning off government-owned assets like roads, ports and airports to foreign and domestic long-term investors who are averse of construction risks but are ready for operational risks. Thus, it creates new assets thus recycling without endangering the fiscal deficit. This is however different from public-private partnership. Here government constructs and sells off to private. 3. Increase share through export competitiveness Indian exports are uncompetitive due to the high cost of funds as compared to China, prices of land and skilled labor, erratic supply of power and basic infrastructure. We need some solid reforms like engaging more proactively in Regional Comprehensive Economic partnership or reducing higher custom tariffs and reversing overvaluation of rupee etc. which has led to current account deficit making India vulnerable to volatility in capital flows and high prices. It should not be restricted towards tinkering around subsidies or tax rates for exporters.
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How can India tackle Coronavirus outbreak?
As India fears entering the third phase of coronavirus transmission - community transmission, its primary focus must be on 2Ts. i.e. Testing and Treatment. India needs to ramp up the healthcare system to accommodate the rising number of infections. In such scenario, Govt should encourage private players to step up and join hands in testing, providing safety suits, treatment and isolation space. Garment makers should be encouraged to reshape their manufacturing lines to produce protective masks and suits. Under this scenario, chemical industries should endeavor to produce the materials required to create fabric for medical gowns. Further, encourage engineering goods makers to manufacture ventilators. The government should commit to buying everything from these manufacturers, provided standards are met. The decision to lift the lockdown and to restart the economy should be made considering the second wave of the Corona Virus outbreak. Reviving the economy would require increased government expenditure to generate new jobs, restoring international trade, providing credit to consumers through tax waivers, Direct Benefit Transfer schemes and deferment of bank loans, boosting businesses confidence, safeguarding SMEs from falling, etc.
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References
•
Crisil Research Report – Covid 19 Impact Note
• •
Monetary Policy Report – October 2019 https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=19331#III1
•
Going full tilt -Monetary Policy Review - March 27, 2020
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https://www.theindiaforum.in/article/understanding-india-s-economic-slowdown
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https://www.livemint.com/news/india/15-ways-to-define-india-s-slowdown1565715613762.html
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https://www.business-standard.com/article/opinion/fixing-the-growth-puzzle119090200009_1.html
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https://www.businesstoday.in/union-budget-2020/expectations/budget-2020-indian-economicgrowth-slowdown-turn-to-john-maynard-keynes-gdp-unemployment/story/393889.html
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https://www.businesstoday.in/opinion/slowdown-blues-govt-needs-raise-income-levelsworking-population-boost-growth/story/373820.html
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https://www.business-standard.com/article/opinion/boost-labour-income-to-revive-growth119112400886_1.html
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https://www.business-standard.com/article/opinion/the-five-trillion-math119101900733_1.html
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https://www.thehindu.com/opinion/op-ed/a-road-to-economic-revival-runs-throughagriculture/article29611772.ece
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https://www.business-standard.com/article/opinion/growth-prospects-dim119091101461_1.html
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https://www.business-standard.com/article/opinion/india-s-distinctive-demographic-dividend117021401382_1.html
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https://www.business-standard.com/article/opinion/onus-on-private-investment119072501524_1.html
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https://www.business-standard.com/article/opinion/a-five-step-ignition-to-private-investment119050801395_1.html
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•
https://www.business-standard.com/article/opinion/big-bang-steps-119092301505_1.html
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https://www.business-standard.com/article/opinion/structural-slowdown-and-home-marketdemand-119080801921_1.html
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https://www.business-standard.com/article/opinion/new-fiscal-mindset-key-to-revivinggrowth-119070201179_1.html
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https://www.business-standard.com/article/opinion/confronting-macro-challenges119061300056_1.html
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https://www.business-standard.com/article/opinion/facing-another-slowdown119061100048_1.html
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Measures for COVID-19 Revival By: Vivitsa Upasti (XLRI)
Background Coronavirus originated in Wuhan, China in 2019 and was initially referred to as the novel coronavirus 2019. China reported it quite late till it was widespread in the country on 31st December 2019 to the World Health Organization (WHO). On the 30th January 2020, WHO declared it a “Public Health Emergency of International Concern� as it had become an epidemic. Currently, it has spread to all continents apart from Antarctica and is present in more than 100 countries. It has officially been declared a pandemic by the WHO. However, the global financial markets recognized and declared it as a pandemic on 24th February 2020 after the equity market observed at least a 10% drop.
Graph: Equity markets crashing Source: CRISIL
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Impact of Corona: China is the largest infected country with more than 1,00,000 cases reported; however, it has now spread world over with the current epicenter in Europe. Sales in China are a significant source of revenue for many MNCs and in the year 2019, the total imports of China were worth $2.2 trillion. Along with imports, China takes the lead in exports as well. It is responsible for manufacturing a lot of products ranging across industries, thus impacting economies around the world. It is a considerable producer of intermediate goods for pharmaceuticals, electronics, computers. It affects small scale industries in various parts of the world too, as due to globalization, somewhere across the supply chain, there may be suppliers involved from Corona infected countries. Demand can be met through inventory; however, a lot of companies follow Just-in-time practice thus cannot rely on stock. GDP forecasts for countries world over have been revised.
Graph: Lowered GDP growth forecasts Source: CRISIL It is imperative to realize that both demand and supply for products have taken a hit. Industries such as Tourism, Hotels, Apparel, Transport (Air services, Railways, Metros), Food (Restaurants, Take-Aways) have all undertaken a huge blow however online sales have grown as people are panic buying. Tourism and travelrelated industries are among the hardest hit at sectoral level, as "social distancing" is being promoted and people are staying indoors. The International Air Transport Association reports that coronavirus is likely to cost global air carriers revenues of between $63 billion and $113 billion in 2020; movie industry is set to suffer huge blows at the box office: over $5 billion in sales. However, products like sanitizers, hand wash, face masks have seen a surge in buying. Crude oil prices have touched new lows.
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Figure: Impact of Corona on both demand and supply Source: CRISIL
Opinion Businesses can deal with the outbreak of Corona in the following ways: Work-from-home: Identifying people who are not needed at the production plants/ offices to minimize human contact and get the work going. Once identified, deploy necessary IT infrastructure (CRM, ERP, cyber security systems) to facilitate smooth communication. IT security: By getting people to work from their own locations, hardware (company issued laptops or personal devices) and network (public or private) must be taken care of with adequate protection for sensitive data. Leveraging technologies: Corporates will have to use more of videoconferencing, messaging, online collaboration tools in the time of restrictions put on travel. Network companies will have to pay special attention to the coverage they provide as there will be an increase in the number of users along with the usage amount. It is imperative to provide people with the required training to be able to use all the facilities provided through the internet. Instruction modules and videos can be circulated to help in the learning process and make the transformation easier. Capacity for online queries: In order to meet customer queries, orders as well as cancellations. Companies must build chatbots, automatic reply emails, IVR systems to handle routine clerical questions. Customer service reps can handle more severe or complex matters this way.
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Shift in product/service: Embracing opportunities to meet the current demand in order to tackle COVID. Example: A Japanese electronics manufacturer has started to make masks on a short-term basis based on the current market need. Important to shift production to high demand products from low existing ones if there is some level of synergies or knowledge. Manufacturing protection gear/ providing treatment services will help organizations in running their businesses. Adept to digital resources and make shifts in production easy. Offering online services and helping people cope with the pandemic. Role of the government: It is essential for the government to provide enough public health care services for speedy treatment and to spread trustworthy information to ensure people can take correct precautions against the infection. Policies regarding health care need to be tweaked to ensure adequate infrastructure is provided to treat the virus. If the outbreak lasts for a long time, then health policies will have to be changed and certain schemes must be launched to tackle the same. Monetary policy Central banks globally have resorted to lowering down cut rates. In the United States, the Federal Reserve cut rates three times in 2019 and twice till now in 2020, inching them closer towards a zero bound. Central banks of countries all over the world: U.K., Australia, Canada, New Zealand, Indonesia have started to cut rates. While the European Central Bank reported increased purchases of assets and longer-term funding operations to counter the downside risks toCovid-19 demand. It is imperative to ensure that interest rates remain low therefore there is a need for stable macroeconomic policies which are supportive. This will help in boosting demand in the otherwise low demand times. Fiscal policy Along with low interest rates, proper usage of fiscal policy will help in boosting demand. Many countries have allowed for a leeway in their fiscal expenditure numbers to provide for expenditure on treatment: Canada, Japan, UK, South Korea etc. A few developed economies are under huge amounts of debt thus making additional expenditure a tough call however preventive stance can be taken whereby travel bans/restrictions can be put, proper information is disseminated, rechanging the tax structure etc. In emerging markets such as India and Brazil there should be a constraint on quasi-fiscal policies along with tighter fiscal measures. Revival Economies which are more self-reliant in terms of both input-dependence and demand for exports will recover more rapidly. India could be better off from that viewpoint than its emerging peers in the industry.
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Short term measures: Providing for adequate liquidity is imperative for all financial systems i.e banks must be in a position to lend to businesses even those which are facing cash problems. MSMEs should be helped if they are facing cash crunching problems and otherwise solvent firms must not go bankrupt. Relaxation for debt repayments, interests, delayed taxes must be provided for especially to the economically challenged citizens of a country. Spending on health services to be expanded and offering financial aid to those in need. Long term measures: Post coronavirus, it is highly likely that production will take time leading to accelerating prices and inflation which will lead to stagflation. There will be a sudden surge in demand by consumers so businesses can deal by taking orders as well as Central Banks reversing the cuts implemented right now. Once the crisis passes, there’s a good chance of a lopsided recovery with slow output growth with accelerating prices and inflation, in other words, stagflation.
References: 1. https://economictimes.indiatimes.com/markets/stocks/news/series-of-small-steps-canchange-sentiment-in-times-of-covid-19/articleshow/74704101.cms?from=mdr 2. https://www.csis.org/analysis/global-economic-impacts-covid-19 3. http://www.crisilresearch.com.xlrij.remotexs.in/#/economy/economy/economyhtml 4. http://www.epw.in.xlrij.remotexs.in/journal/2020/11/h-t-parekh-financecolumn/triggering-global-financial-crisis.html 5. https://www.entrepreneur.com/article/345759 6. https://www.cnbc.com/2020/03/19/what-comes-after-coronavirus-for-economy-worryabout-stagflation.html 7. https://www.nytimes.com/2020/03/16/opinion/coronavirus-economy-debt.html
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The global Macroeconomic Impact of Covid-19 Pandemic By: Abhijat Das (Delhi Public School, Hyderabad)
The Novel Corona Virus has affected nearly 450,000 people and killed almost 20000 at this point of time. On March 11th, 2020, the World Health Organization declared COVID-19 to be a global pandemic. The pandemic has taken the world by storm and has caused what could quite possibly be the next great depression. This paper discusses the global macroeconomic fall out of the COVID-19 virus and then focuses on the economic approach or policy tools that can be used by the countries to revive their economy along with some of the positive outcomes of this pandemic. Fallout from the Corona virus pandemic The shutting of businesses and limits on travel is causing economic activity to contract. Millions of people have already lost their jobs at a pace that exceeds job losses in the worst weeks of the Great Recession. COVID19 has reduced consumer confidence, making them worried about discretionary spending, and pessimistic about the immediate future. COVID virus has shut down production, disabled critical supply chain with layoffs. The tourism and travel industry are expected to be the most affected sectors as officials encourage social distancing and are enforcing lockdowns in major parts of the world. Airlines have cancelled most of their flights, lots of hotels & restaurants have already closed with huge layoffs. Movie theaters are all closed which is impacting the entertainment industry significantly. There are widespread cancellation of sporting events and community events which has also affected the society economically and culturally. There will be political ramification of COVID also and depending on its duration and severity, Covid-19 could even shape the upcoming elections of India and the U.S. presidential election. IOC declared the postponement of the summer Olympics in Japan. When college campuses empty out, stadiums don’t host games, or when conferences are cancelled, it means that low wage workers are out of work. Many of them lack paid sick or vacation leave, which results in no earnings at all. United Nations anticipates the pandemic to cost the global economy $2 trillion dollars. The European GDP is expected to suffer double digit contractions while the US economy is projected to contract by at least 14%. With Japan and USA already in recession territory, with economists predicting layoffs up to 5 million in just April 2020, the anticipated impacts on the global economy are only getting worse. Bloomberg warns that full year GDP growth could fall to zero in a worst-case pandemic scenario. The final economic impact will depend on the extent of the outbreak and how governments respond to it immediately. Manufacturing and Services have not only declined in China as shown by the graph, but it has also declined in a similar way in most COVID-19 impacted countries in the world.
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Global financial markets have been severely impacted due to COVID-19 spread. Following chart shows how COVID-19 cases in USA was responsible for the downturn of DOW. When COVID cases increased in USA, DOW fell significantly.
USA Covid-19 Cases impact on DOW 46000 44000 42000 40000 38000 36000 34000 32000 30000 28000 26000 24000 22000 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0
Dow Close
Covid USA Cases
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Oil Price War adding to the already aggravated situation Amid this outbreak, on 8th March 2020, Saudi Arabia started an oil price war with Russia triggering a major fall in oil prices throughout the world. US oil prices fell by 34%, crude oil by 26% and Brent oil by 24%. The oil prices were already on a downward spiral, owing to a fall in demand, and the situation has only worsened. This also led to a ripple effect throughout the world, with various stock markets crashing and currencies losing value. Most Gulf countries have taken severe blows due to shutting down of parts of their economies in a bid to contain the Corona virus and due to the oil prices falling to a 17-year low. Fiscal Plan to Revive the Economy, Help People and Businesses Policy makers must plan a rapid response that will foster sustainable economic and social benefits to create a brighter future. A strong & sustaining recovery needs immediate relief to be coupled with long term investment. Following are some of the approaches needed to speed up economic recovery: • Help the impacted workers directly by direct payments and extended unemployment and health benefits • Households, small/ medium scale businesses hit by supply disruptions and a drop in demand could be targeted to receive cash transfers, zero interest loan, wage subsidies, and tax relief, to meet household needs and businesses for their survival/to stay afloat. • Delay payments like tax filings, student/small business loan payments as much as possible to help households and firms through the most challenging months. • Central banks should be ready to provide ample liquidity to banks and nonbank finance companies, particularly to those lending to small- and medium-sized enterprises, to withstand a sharp disruption • The main priority is clearly to keep people as healthy and safe as possible going forward. Countries can help by spending more to boost their health systems, including on personal protective equipment, screening, diagnostic tests, and additional hospital beds. • Provide loans to the airline industry on meeting rigorous emissions reduction standards • Invest very big in infrastructure to significantly boost the economy. Roosevelt’s WPA was the largest infrastructure investment in America which took the country out of the Great Depression. • Invest/provide subsidies & tax breaks in wind and solar industries are a smart bet • Starting major programs to plant trees could put millions of people to work & will take out tons of carbon dioxide out of the atmosphere for years to come. • Broader monetary stimulus such as policy rate cuts or asset purchases can lift confidence and support financial markets • Build the infrastructure needed to power an all-electric fleet of passenger cars, trucks and SUVs. • Use an exchange stabilization fund to guarantee money market funds, protecting millions of individual investors and ensuring that there is a market for businesses to issue commercial paper. According to HBR, the path to recovery after Covid-19 will most likely be “V-shaped”. U-Shaped or L-shaped recoveries are less likely. In case of prior epidemics (SARS, H3N2, H2N2 and Spanish flu), the economic recovery was always a “V-shaped” one.
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The Silver lining in this pandemic induced macroeconomic crisis Despite all of this, there have been some positive things that have been taking place all over the world. Pollution levels in the world is markedly lower for last few weeks due to the shutting down of most economic activities. Remote working and various online collaborative tools have gained enormous traction with many people working from home. People can spend more time than ever with their families, albeit, at home. More people are relying on online shopping which is a boon for the e-Commerce industry. Consumption of petroleum has drastically reduced due to very less vehicles on the road and because of almost no air travel.
References: • • • •
Harvard Business Review – “What Coronavirus Could Mean for the Global Economy” by Philipp Carlsson-Szlezak, Martin Reeves & Paul Swartz Brookings blog by Jay Shambaugh on “COVID-19 and the US economy: FAQ on the economic impact & policy response” International Monetary Fund Blog – “Limiting the economic fallout through targeted policies” UN News - “Coronavirus update: COVID-19 likely to cost economy $1 trillion during 2020, says UN trade agency”
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Global Debt Crisis By: Aanchal Chadha (SSCBS, Delhi University) The worldwide economy has encountered four waves of debt aggregation in the course of recent years. The initial three ended with financial crisis in many developing business sectors and economies. During the present wave, which began in 2010, the increase in long term debt obligations in these economies has just been bigger, quicker, and wider than in the past three waves. The low rate of interest currently prevailing in the market have further aggravated the situation. In any case, the emerging market and developing economies have the risk of being affected by the elevated global risks, low growth and development prospects and mounting vulnerabilities. It is the need of the hour to adopt such policies and measures that will prevent the current debt wave from ending in a financial crisis. The World Bank, which provides loans and grants to developing countries to help them tackle poverty, has intimated the biggest build-up in borrowing in the past 50 years which may lead to the risk of a global debt crisis. In its half-yearly Global Economic Prospects (GEP), the Washington-based organisation claimed that debt was rising among emerging countries, in contrast with the previous phases when the debt accumulation was region specific, such as in 1980s. More than one third of the developing countries have been experiencing an increase in debt which is more than 20 % points of GDP. Adding on, the debt accumulation this time is being observed in both the public and private sectors, in contrast to the past phases when the build-up was found only in either of the two. In addition to the debt build-up, the EMDEs have been confronted with other problems as well that could cause debt distress; not just higher total debt but also a high external debt, higher short-term debt, lower reserves, and fiscal and current account deficits. In about 80% of emerging markets and developing economies (EMDEs), the debt has been substantially higher in 2018 as compared to 2010. These heavily indebted countries, which are facing weaker growth prospects in a fragile economy, should take measures to reduce the likelihood of crises and alleviate their impact. Building of resilient fiscal and monetary frameworks, infusing transparency in debt management practices and instituting robust supervisory regimes are some of the fundamental measures.
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Despite the higher leverage, strong investor confidence in the hard currency debt of major Western governments mitigates the danger of contagion. The high ratio of Chinese corporate debt domestic financing also reduces the risk of contagion, as we believe that the Chinese government has the resources and ability to avoid widespread defaults, "S&P said. S&P itself came under fire after the crisis along with rivals such as Moody's and Fitch for not raising warnings about the debt accumulation. During the recession, major Wall Street firms issued securities consisting of mortgage bonds that received high grades from rating agencies but eventually blew up and caused economic harm that spread from the U.S. worldwide. Various global trends related to the debt build-up crisis have been graphically presented below to further substantiate on the situation.
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GLOBAL DEBT
DEBT IN ADVANCED ECONOMIES
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DEBT IN DEVELOPING ECONOMIES
GROWTH AND DEBT IN DEVELOPING ECONOMIES
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GOVERNMENT DEBT AND INTEREST PAYMENTS IN DEVELOPING ECONOMIES
SECTORAL DISTRIBUTION OF EXTERNAL DEBT
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While there is no magic bullet of a policy prescription to ensure the current debt wave goes smoothly, the history of previous debt waves points to the critical role policy choices play in deciding the outcomes of these episodes. First, higher government or private debt and a riskier debt composition (in terms of maturity, currency size, and creditors) are associated with higher probability of crisis. Effective debt management and debt accountability will therefore help to reduce borrowing costs, improve debt sustainability and control fiscal risks, Creditors, including international financial institutions, can spearhead efforts in this field by encouraging common standards and by fostering risk and vulnerability through timely analytical and monitoring research. Second, solid monetary, exchange rate, and fiscal policy frameworks will safeguard the resilience of EMDEs in a volatile global economy. The advantages of monetary policy mechanisms geared towards stability and resilience cannot be overestimated. Flexible exchange rates can prevent large currency mismatches from building up and reduce the probability of large exchange rate misalignments. Fiscal rules can help prevent fiscal slippage, ensure prudent management of revenue windfalls during times of strong growth, and contain and manage contingent liability risks. Revenue and expenditure policies can be adjusted for priority spending to expand fiscal resources. Third, effective oversight and supervision in the financial sector will help identify and respond on threats that are emerging. Deepening the financial market will help mobilize domestic savings that could provide more reliable funding sources than international borrowing. Fourth, it became clear in several crisis cases that borrowed funds had been diverted towards objectives that did not raise export income or productivity or potential output. In addition to effective management of public finances, policies promoting good corporate governance will help ensure that debt is used for beneficial ends. Prolonged periods of sound bankruptcy processes will help prevent debt overhangs from weighing on investment.
References• Federal Reserve Economic Data • International Monetary Fund • Laeven and Valencia (2018) • World Bank Data
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Covid-19 may begin a new era in the management of sovereign debt By: Ritika Soni (IIM Udaipur)
There is no time to think about public debt. While cases of covid-19 soar and economic activities are grinding to a halt, governments are right to throw all the money they can at efforts to curb the human and economic costs of the pandemic. Given this urgency, the recession will drive the burden of sovereign-debt into new territories. In the past century, significant financial crises have always led to both large-scale government borrowing and changes -- often dramatic – in the way they treat their creditors. It's doubtful the fight against covid-19 would be an exception. Economic recovery plans that are now being drafted are expected to outstrip those implemented during the financial crisis; America's may be worth around 10 per cent of GDP. It may also be a larger blow to manufacturing and tax revenues. At least a few economies are expected to be well over 150 per cent of GDP with debt loads. Government borrowing history over the last hundred years or so can be broken down into three phases. Since the beginning of the First World War and that of the Second, war, reconstruction and the Great Depression all put major demands on government balance sheets. Governments were often at the mercy of market sentiment during this turbulent period. Britain tried to preserve market trust through harsh inflation by rising debt — which soared to 140 per cent of GDP right after the First World War. Throughout the 1920s, the government ran a primary-budget surplus of 7 percent of GDP. The findings were catastrophic. Austerity hindered economic growth: production remained below that in 1918, in 1928. As a result, debt started to grow to 170 per cent of GDP in 1930. Remarking on the bitter experience, John Maynard Keynes pointed out that "being nice certainly doesn't pay." Other countries did much worse, pushed into more desperate measures. Germany plunged into hyperinflation, devastated by war and unable to fulfill its debt obligations. The depreciation of the value of the currency decreased its debt burden as a share of GDP by an incredible 129 percentage points, although at considerable social and economic costs. Default was popular too. In 1933 countries which accounted for almost half of the global GDP were in some sort of default or debt restructuring. During and after the Second World War, advanced economies governments tried a different approach. Following the devastation of the previous 30 years, austerity was no longer a politically tenable way to manage the debts built up over the century. Some countries have had hyperinflations defaulted or witnessed after the war. Some governments turned to financial repression — that is, compelling investors on unattractive terms to lend to them. During the war, many of the tools of repression had been used to pay for the fighting. For example, in America the Federal Reserve bought Treasuries to prevent yields increasing above a set amount. The government also capped interest rates that banks could charge borrowers or pay depositors, and curbed bank lending. Capital controls stopped savers from searching internationally for better returns. In the 1970's a new period began. Advanced-economy policymakers loosened their hold on capital flows and financial structures, once again putting themselves at the mercy of global capital markets. Although bond markets still pressured politicians in the 1980s and 1990s, they gradually lost their power to instill fear. Cost of borrowing has gradually declined, even as debt levels have risen. The pattern was only exacerbated by the global financial crisis. Public debt grew from 59 per cent of GDP in 2007 to 91 per cent in 2013 in rich countries. But richworld governments over the last decade have been able to borrow at near-zero or negative levels.
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Covid-19 means more red ink is on the way. A new age of managing sovereign debt could be about to begin. It is not yet clear what the time will bring. The post-pandemic debt system may look similar to that of the immediate post-war period. The trials of this crisis could spur a new wave of development and infrastructure spending, leading to increased competition for the savings available and higher government-borrowing rates. Repression will allow governments to manage the surge, particularly when barriers to goods and capital increase in the wake of national lockdowns. Conversely, as the pandemic ebbs, development will prove hard to restart. Central banks are now buying up huge amounts of government debt in an attempt to offer relief to struggling economies. The Fed is buying infinite quantities of Treasuries; the European Central Bank recently revealed a bond-buying program of â‚Ź 750bn ($809bn). A weak recovery could force central banks to sustainably fund large fiscal deficits with freshly printed currency. Japan's history, although considered an economic oddity, would be more frequently replicated. Money-financed borrowing on that scale would turn common theories about the debt cap on their heads, with no inflationary implications. This would not be the first time a crisis got the rule book rewritten.
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Corona Virus and the stock market By: Amit Pandya (Akruti Financial Technologies) The World Markets were booming though valuations are always a cause of concern still markets were marching ahead and ahead. The economic factor that there is slowdown in growth everywhere doesn’t lead the stock market down, it was seeming that economy is on one side and the markets on the opposite side. But as Corona captured the supply chain of World Markets, correction started near the end of February. I consider that Corona Virus is over-hyped and the reason or an excuse that lead the market down. Even in such severe condition, some will make a killing in terms of money! We are not Scientists or Doctors but are Finance Professionals, that doesn’t mean that Science goes over our heads. We should first put the basic definition of a Virus and Bacteria. Virus: Viruses cannot live without a host, or another living creature to help them multiply. Viruses are smaller than bacteria and they attach themselves to another living cell and use that cells' genetic material to reproduce themselves. Most viruses cause disease. Examples of diseases caused by viruses include the common cold, herpes, shingles, measles, chickenpox and AIDS. Antibiotics will not treat a viral infection. Viral infections require either vaccinations to prevent them in the first place or antiviral drugs inhibit their development. Bacteria: Bacteria are one-celled organisms that can be found naturally throughout our bodies and in our environment. Most are harmless and do not cause infection. Bacteria in our bodies help us to digest food, protect us against other bacteria or microbes, and provide nutrients for our body. Seen under a microscope they look like rods, balls, or spirals, and they can multiply quickly under the right conditions. Less than one per cent of bacteria actually make us sick. Infections caused by bacteria include strep throat, tuberculosis, and urinary tract infections (UTI). Antibiotics are available to treat most bacterial infections; however, it is often best to let your body’s own immune system fight them if it is able to. When we talk about Indian Markets, I do strongly believe that there are fewer stories which can lead to wealth creation and the only reason markets weren’t correcting is the reason that there is too much inflow of money via Foreign Route and Mutual Funds. There are fewer value companies so the valuations are crossing the sky and even logic. The reason why markets fall so heavily is simple that there is some bubble which we are not seeing at present but Corona became the reason for the correction, I am using the word Correction because I don’t think that this is Depression. History says that bulls rule the market the whole year but bears need only a few days and hours to do their job. This isn’t something new which market people don’t know but we don’t learn from history which leads to the cycle of up and down. Markets will become strong but throwing away which doesn’t belong to markets. I have learned that bears do the work of washing machine, cleaning the markets because in the bull run, we don’t know that who is surfing the tide naked! I will also mention the other side that there are many conspiracy theories floating that it is Biological Warfare from China or USA, that the virus is made in some lab, we don’t know the truth and might never know because we cannot term very one guilty just because they are earning money from it. We need good health care and good scientists who can experiment and make life-saving meds. But people get excited listening or reading
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such type of things. But what we can do is that avoid handshake and do ‘Namaste’, as many World Leaders are following and have basic hygiene. What should be the cause of concern is that Retailers or Stockists always take benefit of such situations by artificially inflating prices of goods. Be it vegetables, medicines or salt! There is a strong message which Indian Politicians and Bureaucrats needs to learn that appoint people who are efficient and stop politics over the development of the country because as the Corona affected the supply chain from China we are exposed that how much we are dependent on the basic production material and all the major schemes are only propaganda managed by media, industries are facing trouble and if some steps are not taken then this is only the trailer and the whole film will be too horrible. China achieved such growth by becoming the world producer and India cannot match that by taking the leftover pie, we need to improve basic infrastructure and even before that we need to change mindset of living in some kind of aura of competition, no other country is competing with each other but our media editors brain is filled with only TRP and bullshit. We need to improve the tax system and un-necessary interference of Government and its Babus. Even when we talk about Digital India there is issues in the GST Servers, penalties are levied for late procedures, one way or the other way power in hands of concerned officer will create a system like license-raj. Around all the mess news came of Yes Bank being taken over by SBI and LIC, making the markets to fall and brokers giving rating of Re.1/- for Yes Bank. We believe that there are many skeletons in the system which will be unearthed time to time. Such incidents aren’t new in any kind of economy but we need to strengthen the rules and put the culprits behind the bars to create a trustworthy atmosphere in the economy. Because every time something will happen LIC & SBI cannot do the job of Fire Fighter we need to create a system to stop the Fire! There are experts who can do it but it needs willingness of Government and Bureaucracy right from the top. We need capital for building the indigenous industries so that to lessen the dependency over Chinese Products, only then problems of Economy at large and Employment could be solved because we have become too much dependent on Service sector to create employment. As USA have started bringing in back the capital, we have
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no need to do the charity by bringing in Foreign Capital which will ultimately take away the profit but to help our entrepreneurs build businesses. We are hopeful that the process of cleaning the system which has already began will bring in fruitful results for the public at large. US Markets are considered to be the Mother of all markets but Mr. Trump should understand that Markets will remain there whoever comes and goes in the seat of the President. While in the Visit to India the start of his election propaganda he said that markets will fall if he isn’t re-elected, I think that he would have got his answer that he is not so big that markets will listen to him. People love growth and when there will be growth Markets will move up, it is this simple but some people make it so complicated to understand. In US Markets also money is parked in fewer assets and when the bubble will burst it will be worse than 2008 it is for sure because Debt Bomb will explode only timing is unknown.
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(https://www.marketwatch.com/story/the-dows-tumultuous-120-year-history-in-one-chart-2017-03-23) [View in Full Mode click on the given link]
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Reports are there that in early December few people knew about the Corona Virus from seafood or bats but the Government censored the news but after that the way they controlled and made limited to some areas we can say that we won the war but because of them censoring such thing it has widely spread over more than 80 countries because Chinese are spread all over the World and also the tourism is the reason, many countries failed to react pro-actively. Chinese people are also fighting for un-censoring and having the freedom of speech in China. Also, the doctor who first detected was arrested and then released but he died from the same disease. Now millions and millions of dollars are being allocated from the budgets of various countries and International Organizations. This Virus cannot survive above the 35 Degree Celsius temperature it also seems that the cold regions are most affected. And it is not for this virus any of the viruses cannot survive, so we can say that India’s geological location is a boon and also the Africa region.
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THE ONE WHERE VENTURE CAPITAL FINANCING FELT THE PANIC OF THE PANDEMIC By: Adhya Faldu (Christ Junior College) Generally considered a synonym of risky capital Venture Capital Financing (VCF) is a significant innovation of the twentieth century. The core concept of VCF is a form of private equity and a type of risk-equity financing in which professionally managed funds are provided to start-up companies and small businesses which have accelerated, long term growth potential. It includes various stages such as early stage and seed financing; expansion financing; and lastly, acquisition financing and management buyouts. VC developed as an industry only after World War II, when Georges Doriot (generally considered the "Father of Venture Capital") started the American Research and Development Corporation (ARDC) in 1946 and raised a $3.5 million fund to invest in companies that commercialized technologies developed during the Second World War. Since then, the venture capital industry has spread to a multitude of developed countries due to 1) a large number of tax incentives available to venture capital firms and investors, 2) well developed avenues for buying and selling shares of the small-scale enterprises and 3) favorable social climate and government policy for encouraging entrepreneurial activities. Future prospects of VCF Being a subset of private equity (PE) can play a more innovative and developmental ole in a developing country like India. It could help in the rehabilitation and restructuring of sick units and people with ideas and turnaround management skills. A large number of small enterprises become sick and defunct even before the commencement of production. Venture capitalists could also assist small ancillary units to upgrade their technologies by providing technological and managerial expertise so that they can be in line with the progress of their parent companies. Yet another area where VFCs could play a significant role in developing countries is the service sector including tourism, healthcare, publishing, etc. They could also fuel entrepreneurial spirit by providing financial assistance to students coming out of universities wishing to start their own venture with fresh and unique ideas, but involving high risk. Apart from seed funding, they must also provide management, technical and marketing expertise- a real critical aspect of venture capital in developing countries. VCFs can improve their effectiveness by setting up venture capital cells in R&D and other scientific organizations, providing syndicated consortium financing and acting as business incubators. In sum, venture capital, by combining risk financing with management and marketing assistance, could become an effective instrument in fostering development of entrepreneurship and transfer of technology in developing countries. Impact of the COVID-19 pandemic The impact of the COVID-19 pandemic on venture capital funding can be illustrated through the following example- Adam Marcus, Managing Director, at Providence Strategic Growth. In March 2020, Marcus
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distinguished the present crisis from the financial crisis of 2008 saying, "The ‘08/’09 downturn happened more slowly. People were still spending money. Going out to restaurants, gyms, nail salons etc. Even at the worst point local commerce was happening. This COVID-19 market shift is like ripping the band-aid off. It’s so abrupt and intense. We went from a white-hot economy to basically a recession overnight. It’s unfathomable.” Amid the coronavirus scare and subsequent curbs on travel and large business events, many Indian VC advised their start-ups and portfolio companies to be prudent, conserve cash and spend less, as they moved towards uncertainty in the fund-raising environment. Analysts predict a global seed slowdown by 22% in Q1 due to the coronavirus outbreak. Despite the coronavirus outbreak, global Venture Capital investment is projected to only fall modestly to about $36B in Q1’20, reflecting a 2% decline from Q4’19. Corporate Venture Capitalist (CVC)-backed funding is expected to recede more dramatically during the same period, falling a projected 17% to $33B. Similarly, the number of CVC-backed deals during the quarter is anticipated to decline by over 19%. These figures reflect all deals with participation from a corporate venture fund or corporation. The sudden impact of the pandemic would be felt by businesses like boAT (a manufacturer of consumer electronics), which depend on Chinese sourcing. However, those companies having local manufacturing have not felt the immediate effects. Many such VCs felt that funding for later stages may be impacted as investors delay travel for due diligence. Furthermore, the parties (VCs and the company) may seek to invoke the doctrine of Force Majeure after a pandemic has been declared in order to extricate themselves from a transaction. Also, work-from-home (WFH) strategies and disruption of the business may lead to a need to reduce the number of employees and employment laws need to be considered. Some companies, including digital and B2C centric ones, are clearly benefiting from the prevailing market dynamics and the expansion of consumers’ online activity. Given the public health objectives of “social distancing”, remote-based industries and Over-the-Top (OTT) streaming media are attracting investor focus. These include online education and entertainment, telemedicine, cloud-based internet infrastructure companies and logistics and delivery services. Naturally, there has been renewed interest in the biotech and healthcare sectors. Coronavirus testing and vaccine development companies have received interest from investors. On the bright side, venture capital firm General Catalyst announced that it has raised $2.3 billion to spread across three new funds which are- early stage fund, growth fund and an endurance fund. Managing Director Hemant Taneja told Forbes that "This pandemic has shed light on how technology can be used to rethink many core services like healthcare, education, and small business. We're optimistic that founders will step forward and do some profound work." The Covid-19 pandemic, and the widespread social isolation necessary to fight its spread, has released a torrent of uncertainty on the investing world as entire sectors of the economy shutter, tens-of-millions of people shelter in place, and travel halts. Despite this, throughout this calamity, venture capital firms continue to invest and fundraise. What’s required is that the venture community continues to innovate and understands the paramount importance of technology, now, more than ever.
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Citations• • • •
https://www.forbes.com/sites/stevenbertoni/2020/03/30/venture-capital-firm-general-catalyst-raises23-billion-amid-coronavirus-crisis/#47127e746ed4 https://www.vccircle.com/how-the-coronavirus-pandemic-will-affect-venture-capital-dealmaking/ https://www.cbinsights.com/research/coronavirus-covid-corporate-venture-capital-investment/ Financial Management by I M Pandey
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Covid-19 Breakout: Is recovery phase of Indian Economy over? By: Aakanksha Jain and Ketan Aggarwal (Great Lakes Institute of Management) The recent outbreak of the Novel Coronavirus, declared a pandemic by WHO has undoubtedly left the entire world in a distressing situation. The measures taken to repress Coronavirus have impacted the global economy bringing the irregularity in demand and supply. The immediate impact will be a sharp rise in retail thanks to panic buying and stockpiling. This initial lift will be followed by a dip due to the restrictions imposed by local and state governments. Before we delve deeper into what could be the effects of Covid-19 on the Indian Economy, let’s have a look at the health of the Indian economy before a Covid-19 spread. The economic growth in India has been sluggish from the past years, more precisely for six successive quarters. The slowdown was a combination of various internal & external macroeconomic factors like demonetization, the introduction of new tax regime GST, the decline in domestic consumption mainly in the automobile sector, uncertainties due to the US-China trade war, the overall global turmoil, etc. The GDP has spiralled down from 6.58% in quarter 3 of the financial year 2019 to 4.7% in quarter 4, to a further 4.8% in quarter 1 of the financial year 2020. Sitharaman, in these troubled times, devised various relief plans to revive the economy. The corporate taxes were cut down, the RBI rate cut benefits were passed on to the borrowers, a sum of Rs 25000 crore was allotted to the realty sector, a sum of Rs 70,000 crore infused in the public sector banks, the government gave out money for holding land of up to two hectares under the PM Kisan Samman Nidhi Yojna for the upliftment of farmers and the 100% FDI was allowed in the single-brand retail sector. The aforementioned steps were taken as a desperate cry to resuscitate the ailing economy. Finally, after all the efforts, a ray of light can be seen at the end of this dark tunnel as various indicators started showing the up-rise of the economy like the manufacturing PMI shots up to 8 year high with an improved score of 55.30 points due to the growth of new businesses, exports and employment, the service PMI also rose to a five-month high score of 53.3 in December 2019 as per the HIS report, FDI for the first half of the fiscal year 2020 has increased by 17%
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on-year from INR 1.5 lakh crore to INR 1.8 lakh crore, according to estimates given by the department of agriculture, cooperation and farmer’s welfare: vegetable production was supposed to rise especially for staple vegetables like onion and potato. Apart from this, all other various non-financial indexes were showing promising growth. So, this was all happening before Covid-19 reached India. India reported its first positive case of coronavirus on 30th January, a student of Wuhan University, China who returned to his hometown in Kerala. The next two consecutive cases also belong to the same university and were travelling to Kerala. There was almost no increase in the number of cases in February but the cases rose exponentially in March. On the 18th of March, the total number of positive cases of Covid-19 reached 151, this is when PM Modi took much needed precautionary measures to curb the spread of coronavirus and levied “Janta Curfew” across India. This was a self-imposed curfew from 7 am to 9 pm on March 22 during which all business and offices were requested to shut down and only essential commodities were allowed to function. PM Modi further announced a 21-day nationwide lockdown effective from March 25th, when Covid-19 positive cases crossed the 500 mark. The government took measures to prevent the speedy spread of the virus. Covid-19 is the potential threat and can severely impact and hit the shape of our economy. But the long-term scenario will not be the same. The immediate impact will be on the global economy bringing the irregularity in demand and supply. To curb the pain, fiscal and monetary announcements have been made with IMF announcing $1 trillion. These announcements across the world will boost the demand to maintain consumption but not the supply side issues in the short run. The financial market received a huge shock because of Covid-19, owing to the closing down of markets in various economies. The Indian rupee is weakening every day. The Nifty and Sensex have fallen since the Covid-19 outbreak. This has directly affected to those who invest in mutual funds and insurance policies. “In Nifty, mid-cap fell by over 40 per cent and small cap fallen by over 45 per cent. However, across the board, mid cap and small cap shares have fallen by over 50 per cent,” said financial market expert Vivek Bajaj. As per the Care Ratings, a hit of Rs 35,000- 40,000 crore is on a daily basis on the Indian economy during the lockdown. If the lockdown is further increased then this will badly impact quarter 1 of FY21. The manufacturing industry which contributes around 16% in GDP was already experiencing a decline in sales and Covid-19 outbreak has further hit the recovery prospects. The impact is seen in all industries globally. The imports and exports are likely to be hit more depending upon the further spread of Covid-19. The Economist Intelligent Unit (EIU) has projected the revised FY21 GDP growth forecast post Covid-19 of India to 2.1% from 6% before the outbreak, which seems to be better off than all other G20 countries. The biggest sufferers in the GDP growth would be Italy and Germany. Any disruption in the major manufacturer and supplier have repercussion in the global value chain. China, major producer and supplier in many businesses and industries have reported lesser production. This slowdown has affected economic activities across the globe. The Indian market has a huge potential. Once we recover from Covid19, economic opportunities will prosper and India will be one of the potential manufacturing countries when companies would like to shift their base from China which has become a manufacturing hub. With this relocation of the supply chain, India will get a golden opportunity. India will become more competitive in the global market. There will be a scope to increase the export and as export rises, it will contribute to GDP, reducing the trade deficit.
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Impact of Coronavirus on Global Economy and India By: Avani Agrawal (Welingkar) The recent outbreak of Coronavirus has kept the entire world economy on hold and has caused a major plunge in investments and disruption in supply chains and financial markets worldwide which may require a decade to recover the losses. In an effort to curb Coronavirus disease (COVID-19) Pandemic many major nations such as India have enforced a complete lockdown, the adverse impact of which has been felt by everyone from the producers to the consumers due to extreme inequalities in both demand and supply in many industries. What began with China, containment measures in almost every nation such as quarantine, trade and travel restrictions, and shutting down of factories has resulted in a global economic disruption. As per the McKinsey report on the hardest-hit sectors, Industries such as Commercial Aerospace, Air and Travel, and insurance may take a longer time than usual to recover. Due to the crashing markets, the unemployment rate has also been increasing at an accelerating rate with more than 3 million claims of unemployment filed in America, China has recorded the slowest growth and here could be a total loss in output of approximately $2.7 trillion. Coronavirus will have a significant hostile impact on exports and tourism industry, which will result in fallout in the Balance of Payments Accounts of many countries which rely on it as a source of income.
Image Source: Image: McKinsey & Company
Measures taken to deal with the adversities Only supportive and efficient macroeconomic policies along with a strong emphasis on public healthcare measures to contain the virus can help to avert the adverse effects of an outbreak at such a large scale and prevent the economy from diving into an even dire outcome of prolonged recession or even economic
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depression. In order to restore the economy, the foremost step that needs to be taken is to prevent the virus from spreading, thus increasing the focus on healthcare facilities. It is also important to protect the economic interests of the general public and companies from the financial crisis they may face due to the outbreak. Several economies have been resorting to expansionary monetary policies, the banks have been cutting rates worldwide to infuse money into the financial markets. European Central Bank has launched a €750 billion stimulus program and has cut the interest rates to zero, followed by the US Federal Reserve. Governments have been launching programs to help people who have got affected by this pandemic outbreak of COVID19. UK government has said that they would pay up to 80% of employee wages for those unable to work due to the pandemic, while Germany has also announced an €822 billion stimulus package to cope with the COVID-19 hit economy. Canada, France, the USA, and many other countries have announced a flexible fiscal policy with a cut in tax rates and an increase in subsidies to stabilize the economy. Though several projections have been made, the recovery of the economy and the growth prospects are highly uncertain and are dependent on several factors, both controllable as well as uncontrollable, which might push the GDP growth to below zero too. India’s battle against COVID-19 Having a poor healthcare system which may not be able to sustain a massive outbreak, on 24th March 2020 India’s Prime Minister Mr. Narendra Modi announced a complete lockdown of 21 days in the country emphasizing on social distancing to curb down the transmission, allowing only a few industries to operate amidst the crisis. Starting from 22nd April 2020, all international commercial flights were banned till 14th April’20. The finance minister Nirmala Sitharaman announced a $23 billion relief package for the poor, farmers, women and the disabled as subsidies. As a part of the fiscal policy, the deadline for filing income tax returns has also been extended to the end of June. The Central Bank is yet to announce the Monetary Policies. Coronavirus and the recent lockdown resulting from it has caused major losses in India’s trading, manufacturing, aviation, hospitality, tourism sectors. Daily wage earners are amongst the hardest hit community in India which has one of the largest taskforces in the informal sector. Several states and the capital of the nation Delhi have announced aid packages to help the lower-income population access food or free rations. India has also pledged its support to the G20 to inject $5 trillion into the global economy to fight the COVID-19 outbreak and to counteract the social, economic and financial impacts of the pandemic. The government has allotted Rs 15000 Crore for the healthcare sector to fight coronavirus. The funds will be used to improve the medical facilities and healthcare infrastructure in the country. While the country is in a lockdown, the government has been taking several measures to contain the spread of the virus and to prevent an economic fallout. However, similar to other economies it may take a long time to cope with the slowdown that has been caused by the pandemic which has left the fate of the global economy uncertain for the time being.
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Impact of Coronavirus on Financial Markets By: Kaveti Hruday Kiran (IIFT) The recent outbreak of Novel Covid-19 (coronavirus) has rattled almost all major economies in the world. It has disrupted normal functioning and has unsettled the supply chains, creating chaos in the stock markets and intensified the fear of global recession. Sadly, Covid-19 outbreak took at a worst possible time as global economy was already on the verge of slowdown. Many businesses took painful hit and it may take some time before these businesses can scale back up. Consumption is getting affected with the increase in job losses and decline in the income levels of people especially those of daily wage workers slowing the activity in major sectors. Many industries had a bad start to 2020 and it is clearly evident as major stock market indices across the world collapsed. Though stock markets aren’t the economy, however it's a sign that investors are worried over the economic outlook for the coming year as a result of the Covid-19. Fundamentally, they're anticipating that the coronavirus will continue to spread and cause more disturbances, discourage demand and possibly cause a economic slowdown. This is clearly explained by looking at the exponential increase in number of cases worldwide.
Source: Statista.
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So, is this going to cause a global recession? There is still so much we don’t know about the coronavirus, which makes the potential economic fallout extremely possible for entire world. As we all are interconnected economies it can rattle the markets and strain the economies. Since February bond yields, oil prices and equity indices has fallen very sharply. Nobody would have thought barrel of crude oil will fall below $30 per barrel. Also there has been a massive stock market crash on march 12, as both Sensex and nifty crashed by more than 8 percent in a single day wiping out an estimated Rs. 10 lakh crores during this single day fall. Uncertainty about the future because of covid-19 has made the financial markets extremely volatile. As there is a widespread fear and panic among the people it has reduced the overall confidence level of the consumers leading to postponement in purchasing decisions. There has also been a pulled down in India’s economic growth projections. Given the difficulties that the organizations and individuals are confronting right now, the Indian economy is well on the way to encounter a lower growth during the last quarter of the current fiscal. It is coupled with the country’s economy which is growing at six-year low rate of 4.7% in the third quarter of current fiscal, had very high hopes of recovery in fourth quarter. Unfortunately, the new Coronavirus epidemic has made it very difficult in the near to medium term. It could certainly cause a global recession, but again it mainly relies on how long will the coronavirus last and how early this crisis is sorted out. So, what is the way forward (revival plan)? History tells us that during the previous pandemic’s markets fell too only to come back stronger than before giving sharp returns. It can be seen from the table that even though markets have fallen during the pandemics they have managed to generate absolute returns in the near future. But coronavirus is quite different to other pandemics mainly because of the rate at which it is spreading and number of fatalities. Period of outbreak
Virus Outbreak Returns during Returns after 1 Returns after 3 outbreak year years
Jan 03 to Mar 03 Sars
-10.07%
77.34%
270%
Jan 04 to Aug 04 Avian influenza
-12.43%
47.42
195.97%
1.06%
44.44%
36.76%
Nov15 to Feb 16 Zikka
-13.39%
13.72%
55.34%
Jan15 to May 15 Swine flu
-6.07%
-4.09%
26.45%
Jan 20 to present Covid-19
-29.26%
-
-
Dec13 to Feb 14
Ebola
Source: https://www.etmoney.com/blog/coronavirus-and-investing-what-can-we-learn-from-past-pandemics/
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tenth in terms of impact in the World Economic Forum’s Global Risk Report 2020 (WEF 2020, published on 15 January 2020). This shows that main focus was on traditional sources of business risk and also how unprepared we are for such pandemics. The impact of coronavirus is having a serious impact on the economy and making policymakers look for different ways to respond. Reducing the immediate impact of this shock would require providing support to the most vulnerable. Best way forward would be to reach the targeted vulnerable households and smaller firms. It can be done by channelling credit through various firms. We can learn by the way in which Chinese dealt with the Covid-19 outbreak where the authorities have quickly arranged subsidized credit to support the scaling up the production of health equipment and other important activities involved in outbreak response. Secondly government should step in early to provide financial support to firms under pressure. Other measures include guiding the banks to work with borrowers affected by outbreak; encouraging and incentivizing banks to lend to small firms through a special funding from RBI; and reducing the reserve requirements for the bank along with reducing interest rates. Stable credit access should be provided throughout by ensuring that banks lend generously. Finally, During the 2008 financial crisis, the US Government was able to restore order in the financial markets with $700 billion bailout fund which was used to purchase failing bank assets. A similar kind of intervention is required during this crisis as well. Opinion: This too shall pass Coronavirus outbreak has definitely created economic shocks all around the world. It has proved in the past few weeks that how health crisis can transform into financial crisis where liquidity stress and market disruptions amplify and enlarge. With the ongoing crisis on the supply and demand side there is a potential for further market downside. Business are already taking a hit and how bad it gets will depend on how long this last. Protecting financial stability requires decisive and well communicated action because dealing with health crisis isn’t like financial crisis. It former requires expertise and sustained resources for outbreaks. In general, if you look at the history of equity markets, there have been a plenty of crashes for various reasons from pandemics to financial crisis. But after every crash there will be recovery. Only time will tell how this coronavirus will compare to other pandemics. During its short three months, the virus has created havoc and took the world by storm. Once the government starts dealing with the situation in a way that gives investors’ confidence, that will be the point when things start to turn around. But once the recovery begins all the loses will be wiped off quickly.
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The Poultry debacle By: Rishi Kabra (MET Institute of Computer Science) INTRODUCTION Central Banks like to be in control, however, there are certain things that are beyond its control. One such concept is of “The Impossible Trinity”. As dilemma has two goals, trilemma has three goals. However, the issue is that not all the three goals can be achieved as they are mutually exclusive and selecting either of them would imply losing the other. A concept developed by Fleming and Mundell "The Impossible Trinity" or the "Trilemma" is a concept in economics which deals with three goals that an economy wishes to achieve. Exchange rate stability, free capital movement between countries and domestic monetary policy autonomy are the three important goals of any economy which are impossible to achieve simultaneously. For any country and the monetary planners of the country, they can choose at best any two of the three options. Any economy which wants to stimulate would want to increase its money supply but the moment the money supply is increased, the domestic rate of interest would fall. When the domestic rate of interest falls below the foreign rate of interest, capital starts outflowing (Free Capital Movement) from the economy. The reason for the outflow of capital would be to get better returns in the foreign market. For example, when foreign investors would be investing in host country, in order to get better returns on their investment they would be selling dollars, and in exchange would be buying their local currency. However, it is imperative for the central bank to maintain the stability of the exchange rate. With the increase in the demand of local currency, the central bank has to buy dollars to give local currency in return. Soon it may have excess of dollar reserves and will see appreciation of the domestic currency. The moment there is excessive appreciation, the goal of Exchange rate stability is disturbed. THE INDIAN SCENARIO EXCHANGE RATE STABILITY Exchange rate basically means how much your currency is worth when you trade it for another country’s currency. A country that has a current account surplus usually sees its currency appreciate over time, and vice versa. In India, RBI has the responsibility to keep a stable rupee exchange rate. But the rupee doesn't have a fixed rate of exchange and the RBI cannot interfere too frequently to fix it. The only major option available is to sell and buy dollars to take care of the fluctuations.
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USD INR 80
69.79 71.27 66.32 67.95 63.92 61.89 63.33
70 60 50
48.45 46.68 44.81
53.26 54.77
40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 USD INR
(Source: RBI) FREE CAPITAL MOVEMENT As the exchange rate of currency isn't stable, any foreign investment made would impact the rupee. When we buy dollars and sell rupee in return, to make foreign investments, there is a fall in the rupee. On the contrary, a foreign investment leads to the rise in the value of the rupee. So, a free capital movement affects the exchange rate of the rupee. Moreover, countries like India, which face Current Account Deficit, need higher capital inflow so as to fund the deficit in the balance of payments. However, due to the slowdown of the Indian economy and comparative robustness of the US economy India has been witnessing reduced inflows of capital flows. MONETARY POLICY AUTONOMY Since RBI doesn’t have the autonomy to fix the exchange rate nor the capital movement, then it’s quite unlikely it has the independence from the external factors to set interest rates. Having Control of one of the above factors is a prerequisite to be able to have autonomy in setting the monetary policy. In the era of globalization to stay relevant to other developed western economies, India too has chosen to go for autonomy in monetary policies. It fluctuates between fixing exchange rates and the free flow of capital but mostly goes with the first one. However, looking at the present scenario, the need of the hour is to allow the free flow of capital considering the increasing deficit in trade. India saw a deficit of $14.3 billion in Q1 of 2019-20, which is about 2.4% of the GDP. Though this number is encouraging compared to the previous year, being in deficit is a matter of concern. Moreover, with the rise in crude oil prices on the wake of US-Iran Tensions and the impact of Corona Virus outbreak and increasing gold and other capital goods inflow, India has been staring at an increased import bill. The trade deficit is a subset of the bigger problem called Current Account Deficit (CAD). The increasing CAD, which is 2.4% of the GDP now.
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Conclusion Considering the state of the Indian economy and the mutually exclusiveness of the options available in the “Impossible Trinity� the RBI has been time and again recalibrating its policies in the best interest of the economy. Reference: 1) Investopedia 2) Livemint
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