Economic Activities Back to Pre-Pandemic Levels

High frequency indicators such as mobility, power consumption and labour participation along with index for the economic activities suggest that Indian economy is on the fast track of recovery with economic activities only about 1.9% below the pre-COVID19 levels. These high frequency economic indicators have been improving continuously for more than six months barring a few exceptions such as mobility and labour participation indicators. PMI as well as IIP have also been showing upward movement. However it will take longer for the mobility and labour participation indicators to achieve the pre-pandemic levels.

Growth will Continue to Drive the Monetary Policy

The monetary policy committee (MPC) of RBI has decided to keep the benchmark policy repo rate unchanged at 4% despite the fact that the rate of inflation has remained above the upper threshold of 6% continuously for six months before CPI inflation falling to 4.6% in December 2020 and the risk of elevated core inflation. On the growth front, the central bank has found strong signs of recovery in the service sector and a resilient agriculture sector from the first advance estimates of GDP for 2020-21 by the NSO. The GDP growth rate for fiscal year 2021-22 has been pegged at 10.5% however it is lower than the IMF projections. MPC has also decided to continue with the accommodative policy till as long as it is necessary for the sustained recovery and growth in the economy as the CPI inflation for the last quarter of 2020-21 is expected to remain 5.2% and will be in the range of 5-5.2% in first half and 4.3% in the third quarter of 2021-22. 

Union Budget 2021-22

Post lockdown, the way Indian economy has shown the resilience with V shaped recovery, it indicates to an optimistic future and this good for Indian economy as a whole. This optimism in the environment has also been echoed by the stock market. However, it is very important this optimism in the economy gets strong fiscal support with proper anchoring from the government in the budget.

The government has tried to align the budget 2021-22 with the Atma Nirbhar Bharat Abhiyan which mainly focused on the supply side of the economy. In this budget can be termed as mixed budget as it has provided enough support to industries to increase the economic activities but has not be able to provide direct support to increase the income. There is no personal tax rate cut in this budget. Also at the same time, the fund allocation to the MGNREGA scheme has gone down by 34.5% from ₹1,11,500 crores to ₹73,000 crores. MGNREGA has provided huge support to Indian economy during the COVID period. This can be an indicator of the shift in the policy on the front of the employment. The government might be looking for the ways to increase the employment opportunities with formal jobs than informal jobs. However if this is the thing of scheme of the government, it is very high expectation (possibly unachievable in short term). But to some extent this will ease the fiscal position.

Healthcare Policy Needs to be Revisited in Budget 2021-22

I hope this budget would be a stepping stone in transforming the Indian economy as whole in general and the public sector healthcare system in particular. Extraordinary times like this require extraordinary policy responses from the government on every issue. Considering the bitter experiences that India had to have with the private sector healthcare service providers which single handily focused only on the profits even during the COVID19 pandemic than managing, responding and containing it efficiently.

Banking Licenses to Corporate May be a Bad Idea

As per the suggestions of the Internal Working Group of the Reserve Bank of India, the big business groups may be allowed to promote banks in India. The government must consult experts and follow due diligence before it takes the final decision as this decision may cut deeply than the benefits.

It is certain that the entry of big business houses in the banking sector's will increase the lending capacity of the banking sector as whole and accelerate the development of financial services and its penetration but at the same time the risk in the banking sector will surely increase substantially. It is quite possible that this single decision may jeopardize the whole banking sector in particular and the economy in general.

The Risk of Banking Licences to Big Business Houses

An internal working group of the Reserve Bank of India has suggested that large business groups including NBFC (with an asset size of ₹ 50,000 crores or more) should be allowed to promote banks in India. The reasons for such a suggestion has been cited as international practices and possible ‘management expertise, and strategic direction’ that these groups may bring into the banking sector. For a capital starved economy like India, it may prove to be a good decision to bring in more capital (which economy needs at this point of time post COVID havoc). However for four decades (last round of nationalization of banks in 1980), business groups haven’t been allowed to promote banks in India. Such a sweeping decision by the RBI would be revolutionary as it has earned a distinction of an extremely cautious and conservative banking sector regulator!

Lakshmi Vilas Bank and DBS Bank India Merger

Lakshmi Vilas Bank has been facing problems for more than three years. The financial position of the bank had undergone a steady decline in the last three years.The losses have been increasing. Non-performing assets (NPAs) and provisions have been increasing with gross NPA of ₹4,233.31 crores and ₹16,622 crores of advances and ₹20,973 crores of deposits at the end of September 2020 quarter. As a result the networth of the bank has been eroding. The tier I capital has slipped into negative to -0.88% and capital adequacy ratio has fallen to 1.12%.

Atma Nirbhar Bharat Abhiyan 3.0

Indian economy before the pandemic induced shock was already under stress. The economic activities were de-accelerating and the financial sector was struggling to get back into the shape. The previous doses of stimulus have helped the supply and demand side of the economy to a huge extent. As a result there is growth in the economic activities across all the spectrums. Different indicators such as e-way bills, PMI and credit growth are improving.

Modelling Stock Returns in India: Fama and French Revisited

Since reforms, Indian security market has gone through significant changes and as result the efficiency of many models developed earlier might have been affected. The same may be true with three factors CAPM. This study aims to test the validity of three factors CAPM model proposed by Fama and French (1993) in changed Indian context. For the study, assessment period is 1999-2013 and BSE-500 has been taken as proxy for market. Results show that in Indian market, no size effect and a weak value effect exists but size or value of stocks cannot discriminate stocks robustly. Beta is significant and none of the three factors alone can explain the variations in the expected return but two or three factors together can explain to some degree. The ability of three factors CAPM in explaining the expected return increases during low GDP growth period and falls during high GDP growth period.

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Reservation in Private Sector Jobs: A New Malaise in Making

Over decades it has been witnessed across the world that the governments have tendencies to resort to protectionism when things at domestic level get tough and their economic policies fail to perform. The protectionist tendencies of the central governments of the nation are often found to transact to the states to inspire them to indulge in such protectionist practices ignoring the fact that such practices in domestic markets often have only emotional outrage than any empirical evidence of bringing in any substantial benefits.

The empirical evidences suggest that protectionism often leads to inefficiencies in economies. However, to some extent, the limited protectionist approach to the economic responses at national level against import and dumping has quite a different dynamics due to heterogeneous global market conditions than such protectionist practices in domestic (homogeneous) markets.