Expert Opinion

Published: Dec 29, 2021
Updated: Dec 29, 2021

Equity Boom Amid Overall Gloom

The BSE Sensex ended on the last trading day of the year at an all-time high of 47,751, booking a 15.8% yearly gain in 2020. The year gone by began and ended on a strong note for equities. Though Covid-19 led to huge swings for a brief period, the equity markets have chosen a bull path. Market sentiment has been supported by record inflows from foreign institutional investors, massive fiscal and monetary policy support globally, and the imminent roll-out of Covid19 vaccines.

The Subject Expert Committee, the panel that advises the Drug Controller General of India on new drugs and vaccines, in a meeting on January 1, 2021, held discussions over granting approval to a vaccine for emergency use in India. It granted emergency use approval for the Oxford UniversityAstraZeneca vaccine made and distributed by the Serum Institute of India. With this, India is likely to begin a mass immunisation programme. Concomittantly, the Sensex reached an all-time high of 47,980.36 in January of 2021.

Central banks across the world are expected to execute a second round of quantitative easing, whose impact may last for seven to nine months with an estimated quantum of $ 300 billion, a month through 2021. Further, the availability of vaccines should push up consumption and investment globally. The Covid-19 vaccines, the Joe Biden presidency, the last-minute Brexit deal -- though major challenges persist – with all these, there is cause for hope.

The government announced the first Covid-related economic ‘stimulus’ package on March 26, 2020. However, this stimulus package, which was worth Rs 1.7 lakh crore, was not in reality a stimulus package since it comprised items that were already in the existing budgetary allocations. The government also announced another economic ‘stimulus’ package on May 12, which was worth Rs 20 lakh crore. However, even this stimulus package could not be regarded as a stimulus package in reality since the actual government spending in relation to Covid-19 relief had been a mere 1% of the GDP. Approximately Rs 18 lakh crore of the Rs 20 lakh crore were meant for increasing liquidity and availability of credit in the economy through banks and other financial institutions. Therefore, these policies have truly little benefit to workers, MSMEs, peasants and other working Indians.

India is one of the countries that uses inflation targeting. The RBI uses an explicit numerical inflation goal to maintain the levels of inflation in the country. The RBI’s policy of maintaining inflation is in fact antigrowth, as the use of negative interest rates hurts banks, as they find it difficult to mobilize deposits and manage the mismatch in deposit and lending rates. This is one of the reasons why the RBI should set a higher inflation target and take up quantitative easing vigorously to boost the Indian economy.

India was hit hard by a stringent coronavirus lockdown. The economy is estimated to have contracted by as much as 9 per cent in 2020, but it is forecast to recover those losses and grow by about 10 per cent next year. However, that will be accompanied by tremendous dislocation, with larger, better-capitalised companies gaining marketshare at the expense of MSMEs. Despite strong headline numbers, many households and small businesses will still be struggling, a probable drag on the longer-term growth of India. We also do not know if preventive vaccines will slow the transmission of Covid-19. No one knows when we can stop talking about masks and social distancing.

If the real economy of India does produce, as of December 5, 2020, an unemployment rate of 6.8%, with a youth unemployment rate of 23.7% or anything close to that, it reveals the true story of the pandemic. The losers in the job market are disproportionately younger workers without the pension savings that benefit from a rising stock market. All said and done, higher share prices are good news, but they are not the whole picture.

(Dr. V.V.L.N. Sastry is a jurist and financial economist, and heads Lex India Juris, Mumbai)