Demystifying increasing prices of Petrol and Diesel in India during Covid19 period: After 67 days of lockdown, the economy finally opened up on June 1st. Since then most of us have been trying to bring our lives together and adapt to the new normal of living with COVID-19. In the midst of threats on our borders and the steady rise of corona cases, petrol and diesel prices have steadily increased in the background for 22 days. These added to the unusual events of 2020, as the diesel prices were higher than petrol.
Today we shed light on the rising petrol and diesel prices. We also try and answer the possible reason for the increase especially when just a few days ago the crude oil prices crashed into the negative territory.
How are petrol and diesel Priced?
Before we look into the causes for the price increase, it is best to figure out the chain that crude oil moves through in order to better understand where the price increase has come from.
Unlike other oil-rich countries, 80% of the crude oil consumed in India is sourced from other countries. This crude oil faces freight charges until it is transported to Oil Marketing Companies (OMC) which is dominated by public sector enterprises with very few private players. These companies go on to refine the crude oil into finished products. The public players include IOCL, HPCL, BPCL, MRPL, etc. The ONC companies then charge their cut of profits in addition to the cost incurred by them for refining. The next cut is taken as profits to the dealers in petrol pumps etc. It may be surprising but the portion of the charges mentioned above make up only one-third of the amount paid by the consumers for petrol or diesel.
The remaining two-thirds portion is made up of the taxes paid to the government. These taxes are levied in the form of excise duty, VAT and Cess charges. The excise duties are charged by the central government whereas VAT and Cess charged on petroleum are charged by the state governments.
Reasons for the increase in prices of Petrol and Diesel
— Crude oil price normalizing
One of the major questions we would be having is that since the prices had gone negative, how is it that we are facing an all-time biggest increase in a fortnight. It is important to note that there exist different types of crude oil varying based on the place they are sourced from and the sulfur content present in them. WTI from the US, Brent crude from the UK, and the OPEC basket from the middle east. Of these the most expensive has been the Brent and the OPEC.
Unfortunately for us, these are the ones that India imports. And further depressing news has been that it was WTI crude that went negative and not the Brent and OPEC. At their lowest points in April, the Brent and OPEC were priced at $16 to $20 per barrel.
These prices have since then been doubled crossing $40. The Brent and OPEC crossing $40 in recent times have been one of the reasons for the price increase. But this is not a major factor as these prices simply haven’t even touched pre-COVID levels of 2019.
— Setting off losses
As seen above despite Brent and OPEC being comparatively expensive, their global prices had reduced significantly in the months of April-May. This further raises questions as to why the prices of petrol and diesel were not reduced to match the global fall. The answer to these questions lies in the fact that the govt had chosen not to transfer the benefits to the consumers but instead use it to set off other losses.
These losses were primarily because of the COVID-19 environment. It had forced the government to move into a lockdown freezing most of the revenue channels for the govt. Which also included income from petrol and diesel as the consumption was dropped to only 30%.
Union petroleum minister – Dharmendra Pradhan
In this case, the government decided not to reduce the prices to match the crude oil price. But instead, they chose to maintain price levels to make up for the fall in demand for petrol and diesel and also fall in revenue from other sectors. This carried on till the lockdown was lifted at which point the crude oil prices kept increasing globally.
The fall in demand to only 30% of consumption also caused the OMCs to sell every liter at a loss as the profit made was not able to cover the cost incurred. The OMCs were forced to further increase their margins in the’ Lockdown-Unlock’ period to cover the losses they operated on during the lockdown which led to a 22-day steady increase till the prices touched levels where they were profitable.
— INR to Dollar exchange rate
The exchange rates also impact the prices of petrol and dollar as the crude oil is traded only in exchange for the dollar. The COVID-19 pandemic hammered the already weakened rupee. The rupee currently hovers at over Rs. 75 for a dollar. The rupee traded at Rs.70 for one dollar in December 2019.
The increase in the prices of petrol and diesel-only would kick off the inflation domino effect on other products as well. The Jet Fuel too has already begun to see its share of the inflation. And we already know that ATF being the major expenses for an airline company will further be transferred to the consumer fares. Other products too face inflation in prices as the cost of freight and transportation would increase too. The already ailing Automobile industry has already started to feel the burn as the Demand for diesel vehicles has already dampened.
Needless to say, the diesel and petrol price increase is not welcome considering the state of the economy where the people are already facing job losses, pay cuts, and fear public transport in COVID-19 times
My patriotic sentiments (which mean good) inspire me towards this call for a few minutes. But the reality where I type these words on a Chinese branded computer keeps me grounded. It goes without saying that none of us want to fund Chinese bullets that may be fired at Indian soldiers. Hence, today we have a deeper look at facts that may help clear this dilemma and also offer possible solutions.
Why boycotting China sounds right?
In the past, boycotting China has not only been called for because of Chinese military aggression towards its neighbors but also because of its human rights violations of its own citizens. Open firing at peaceful protestors in Tiananmen Square, the Chinese government has even been accused of illegally harvesting organs from Falun Gong (religious movement practitioner) and other political prisoners. This led to activists around the world calling for a boycott of Chinese products.
Sonam Wangchuk (whose role was popularly played by Amir Khan in 3 Idiots movie) has claimed that the aggression from China is only a means for the ruling communist party to divert the attention of the people away from its internal problems.
A Trade where Chinese products and services are bought by Indian consumers to finance aggression by the Chinese troops not only on its own citizens but also towards Indian soldiers is as far as it gets from being fair.
Have boycott movements been successful?
There have been various boycott movements throughout history. The US consumer forum tried to boycott French goods in 2003 in protest of France dissuading attacks on Iran. India too has had similar Boycott China movements in the past. #BoycottChina was trending in 2016 too after China supported Pakistan post the URI attacks.
A similar fact in all these boycott movements is that they have achieved nothing. After a few weeks, people lose interest or are caught up with the next most interesting issue. In other words, these movements eventually lose momentum.
Another important factor why the Indian Boycott China movement does not follow up with greater action is economics. When a consumer goes to buy a product he would find that Chinese products are not only cheaper but also of superior quality in comparison to their Indian counterparts. In such a situation a choice made to purchase a product which is expensive and at the same time of inferior quality in comparison to the Chinese is only self-destructive.
Why an immediate boycott of China doesn’t make sense?
But India is not the only country that has suffered this fate when dealing with China. Numerous countries around the world have faced this resulting in China becoming one of the countries with the largest trade surplus.
The trade deficit not only shows the dependence of Indian consumers but also of Indian industries on Chinese exports. Indian market leaders like Bajaj, TVS Motors, Mahindra, and Tata get their parts from China. Even pesticide and fertilizer companies based in India are overtly dependant on China. Take the example of United Phosphorous where over 55% of its products are sourced from China.
China currently has an investment of 8 billion in the Indian markets. The year 2019 alone saw investments of $3.9 billion by Chinese firms in Indian startups.
BigBasket, Byju’s, Delhivery, Dream11, Flipkart, Hike, Ola, Oyo, Paytm, Quickr, Snapdeal all these startups have secured funding from China. Even banks like HDFC have received investment from China. Although it may seem as if even though we are naming all renowned Indian companies it is apparent that there is no escaping China.
Almost every company has links to China, through ownership or have raw material sourced from China to make finished products. From our food that we consume, means to travel, our access to technology all can somehow be webbed back to China.
Let’s talk about “Aathma Nirbhar”
The Prime Minister in his most recent address has pushed for an Aatma Nirbhar Bharat. Say due to this influence Indians strictly buy only Indian products. If we are to look at the 1947 -1991 environment where due to the protectionist views of the government the consumers were forced to buy only Indian. This led to the producers producing low-quality products.
This was because they were certain of receiving a market share irrespective of the quality. The 1947-91 period ended up doing more harm than good. The same period also saw the Chinese producers preparing their markets for global competition. This gave the Chinese a 40-year head start over their Indian competitors.
What would Adam Smith the father of modern economics say?
Adam Smith speaks about competitive advantage in his book the Wealth of Nations published in the year 1776. He takes the example of two countries England and Portugal and also of two products, wine, and cloth. Here, Portuguese are the best in producing wine and England in producing cloth. According to Adam Smith, Portugal should focus on creating wine instead of focussing on both wine and cloth. This would only lead to substandard products. England should focus on cloth and both countries should reduce the scarcity of cloth or wine respectively through trade.
Let us take the example of TVS Motors. They are known for producing good two-wheelers in the mid and low-priced segments. An attempt to produce the two-wheeler 100% in India would only result in more expensive vehicles of poorer quality. Hence TVS Motors taking materials manufactured in China that are of high quality and lower cost has resulted in them suiting the Indian markets today. We may be ready to purchase the more expensive Indian alternative if available in the future.
Our current situation
But if we are still are not convinced and before we decide conclusively let us take a moment and come out of our privileged shells. The recent pandemic has shed light on the poverty plights of our nation. The first relief package of Rs. 1.7 lakh crore aimed at feeding 800 million poor people. The increased price alternatives would only shove two-thirds of a section further down the wealth ladder.
So far we have considered retaliation only from our end. Boycott China and dumping Chinese products will definitely have a two-factor effect when done on a large scale. A similar retaliation from China will further the consequences on the Indian producers and companies.
Role of the Indian Government
Why doesn’t the Indian government simply put trade restrictions on Chinese goods? India being a member of WTO is required to abide by its rules. As per the WTO, countries are not allowed to discriminate amongst their trading partners.
When it comes to investments the government of India has allowed investors from neighboring countries to invest only up to 10% in an Indian company. Despite this Chinese companies have found loopholes to invest in the Indian markets. Chinese giant Alibaba gained a stake in Paytm by investing through its non-Chinese subsidiary ‘Alibaba Singapore Holdings Pvt Ltd’.
What’s the Solution?
From all the arguments made above, it becomes clear to us than an outright boycott of China is not possible. Boycotting China would only cause the Indian industries that have received funding or use Chinese materials more harm.
An alternative here is to look for products from other countries as and when the need arises to replace the Chinese products we have in our homes over time. A long term solution would be to steadily keep improving Indian quality. The best solution for the current issue which involves a standoff would be diplomatic talks. A war waged by consumers would only be self-destructive.
Understanding the Telecom war in India and current Scenario: The Telecom industry in India has gone from being one of the most attractive to a cruel environment to all its players. The industry currently consists of three players i.e. Jio, Airtel, and Vodafone Idea. But if we look over the last two decades there have been over 16 players who have tried their hand in the industry.
We already know about the innate challenges the industry poses due to the ever-evolving technological environment. A newly arrived technological advancement may be completely obsolete in the next five years. But these are the challenges that a telco foresees and enters the industry with. Today, we’ll discuss the telecom war in India. Here, we’ll try to find out the key factors that have brought the industry to currently operate with barely three players and also look into the current telecom scenario.
Telecom Industry – The Story So Far
In the pre-liberalization period, there existed only state-owned companies like BSNL. The operations of these companies can be dated back to the British era. Post the liberalization the government began issuing licenses to private players in exchange for a license fee.
This license fee set, however, was in accordance with The Telegraph Act of 1885 set to govern the state players. The private telcos found it hard to adhere to this and constantly defaulted on the fee payments.
Noticing this the government introduced the National Telecom Policy in 1999 where the telcos were given the option to either pay the existing license fee or share a percentage of their revenue which was called AGR ( Adjusted Gross Revenue).
— The More the Better
During this period the government believed that the greater the number of players the greater the benefits the consumers would receive. This has bought up to 16 players in the telecom industry. This, however, ended up doing much more harm to the industry due to the competitive pricing practices followed by the telcos to emerge as the top players.
Telcos kept entering the industry and vanishing from the industry at the same time. The majority of the players were acquired or forced to merge with the top players. The remaining players went bankrupt or had their licenses revoked.
During this period the Department of Telecommunications (DoT) entered into legal disputed with the players. If must be noted that Revenue meant that any income received by the company irrespective of it making profits or losses. The companies agreed to pay AGR assuming that the revenues to be paid would be from the core(telecom related) activities of the industry. The DoT argued that a percentage of the revenue from all sources ( core and non-core) is to be paid.
This involved installation charges, value-added services, interest income, dividend, and even profit on the sale of assets, insurance claims, and forex gains. This meant that the telcos now owed 1.47 Lakh crore in AGR to the DoT. Other government entities like TRAI (Telecom Regulatory Authority of India) and TDSAT (Telecom Disputes Settlement and Appellate Tribunal) also voiced their concern over this claim.
Both TRAI and TDSAT supported the telcos in this against the DoT. The TRAI even recommended excluding non-telecom revenues from the AGR but DoT challenged the TRAI recommendations. This led to a 14 year legal battle between the telcos and the DoT. The decision ultimately came in favor of the DoT on 24th October 2019. The courts ordered the telcos to pay 1.47 Lakh crore in AGR to the DoT.
Interestingly government entities like GAIL and PGCIL also had acquired a license from the DoT. The DoT also a government entity now claims that it is owed 1.72 Lakh Crore from GAIL. This is after computing its share from any revenue that GAIL made. The amount sought by the DoT is more than 3 times the net worth of GAIL.
— Enter Jio: A Mukesh Ambani Offering
These troubles in the telecom industry seem monumental and we have not even considered other factors like the 2G scam that took place. The worst, however, was yet to come for the telcos. In 2016, a new player Jio entered the industry. The predatory pricing strategy followed by Jio offered consumers 4G data for free. This further put tremendous stress on the telecom industry.
When Reliance Jio entered the markets in 2016 there were up to 7 telcos who had a substantial footing in the industry. By the end of 2019, there were only 3 other companies competing. Out of the three only Jio was profitable by extremely slim margins and airtel running but on losses. Vodafone and Idea too in losses were barely surviving the pricing onslaught.
— Spectrum Dues
Apart from the AGR the telcos also owe the government dues from spectrum allocation auctions. The telecom industry makes the use of electromagnetic waves that are made available through a spectrum. Hence a spectrum is considered a national resource and allocated carefully by the government. The spectrum allocation charges are paid in installments to the government. With the telcos already in debt, they further started defaulting on these too.
All sympathies do not lie with the telcos. Prior to the Jio’s entrance, the telcos enjoyed a period where they charged consumers exorbitantly. This was the main reason why Jio already had their stage set in 2016. Their offer of charge-free services to customers enabled them to immediately gobble up a section of the market share.
This was followed by the telecom war in India and competitive pricing which forced existing players like Airtel, Vodafone, and Idea to lower their prices and profit margins.
How telcos are adapting to increased debt & 5G Preparation?
The telecom industry has forced its payers to adapt to raising funds from foreign investors in exchange for a stake in the company.
Airtel remains the only major player other than Jio which able to survive, compete, and raise capital with ease at this stage. It recently announced a 2.75% stake sale to raise 7500 crores ($1billion). In January, Airtel raised $15000 crores through qualified institutional placement and foreign currency convertible bonds for 7,500 crores ($1billion)
— Vodafone Idea
Vodafone and Idea have merged to form Vodafone Idea. This has enabled VodafoneIdea to become the top company in terms of subscribers. But this has only ensured their survival in the Indian markets.
Vodafone Group CEO Nick Read has vowed to not invest in the Indian markets. This can be justified due to the court ruling against the telcos with regard to AGR. This has made investing in India a lost cause for Vodafone as all incomes earned by the companies ill be used to pay back the existing AGR dues apart from the new AGR dues that will keep on accruing.
In an advent, if one of the 3 players does not survive it would lead to the Indian markets turning into a duopoly. The two telcos that do survive may form cartels which will eventually result in a pricing agreement. This in addition to the AGR dues to the DoT and 5G spectrum will result in the consumers holding the burden through increased prices.
Bharti Airtel Limited
Vodafone Group (45.1%), Aditya Birla Group (26%), Axiata Group Berhad (8.17%), Private Equity (20.73%)
Government of India
(Table: Mobile Operators in India as of 29 February 2020 according to TRAI)
This can be done by providing the 5G spectrums in exchange for the telcos agreeing to adhere to both floor pricing and price ceiling. By doing this the telecom industry will be provided some relief through 5G spectrum allocation as requested by telcos. The floor prices and price ceiling will ensure healthy competition and limit any adverse impacts on consumers.
The story of the Indian Telecom Industry so far shows that the government is just inches away from slaughtering the golden duck in an attempt to increase its revenue. It is high time the Center interferes so that both the industry does not lean towards a duopoly or monopoly and at the same time the consumers do not face the brunt. Any efforts from the government to recover unreasonable amounts from AGR will push the telcos to increase debt borrowing from the banks.
This increased debt in addition to the cost of surviving by further investing in the 5G spectrum will force the burden towards the consumers. In an event of intense telecom war in India where a major player throws in the towel to quit, the already ailing banking sector will be further hit. Other stakeholders like the employees who earlier dependent on the telcos will further be added to the casualty lists.
A study of best-performing Industries during COVID-19 / Coronavirus storm: Even after COVID-19 changing soo much in our lives we still are faced with the question, “What is life going to be like from tomorrow?”. Covid-19 has the governments and other influential intellectuals scratching their heads due to the level of uncertainty it poses. Will the virus just disappear in a few months? Or Will a vaccine come in time? Or Will we just have to learn to live with it just like AIDS? This uncertainty has even made it hard to get a peek at what the future will be like let alone predict it.
Despite all this chaos, some businesses have still found a way to make lemonade out of lemons and keep striving. Today, we are going to cover a few of the best performing industries during COVID-19 outbreak. Here, we’ll have a look at which sectors and industries these companies come from and why they were able to do so.
Best Performing Industries During COVID-19
1. Pharma Industry
Although the doctors and nurses battling the virus have had to face the risk of the virus, the pharmaceutical and healthcare industry, however, remains immune. This is because of our dependence on the pharma and healthcare at the frontlines against COVID-19. Due to changes in consumer behavior and hygiene practices any industry remotely connected has also benefitted. Disinfectants and sanitizers have recorded their highest prices and sales.
2. Information Technology (IT) Industry
The IT sector is in a relatively good position in the midst of the pandemic in comparison to others. This can be owed to the fact that a stable internet connection and laptop are all that is required in most of the cases, enabling them to work at ease from home. The Work From Home(WFH) approach adopted by most commodities has given rise to apps like Zoom.
Zoom has seen a 187% increase in its share prices since December. Other software companies that provide solutions for WFH have also seen a similar response. The inherent privacy concerns in WFH have also increased the demand for cybersecurity.
The current scenario will also see an increased push for technological acceleration. The Indian IT sector is majorly reliant on the US and European markets. Hence the impact it receives will also be dependent on the impact on the US and European markets.
3. Telecommunication Industry
The telecommunication industry may have been impacted in its day to day functioning but its market demand has increased. This is because of the increasing need to connect during lockdowns has led to an increase in the data used.
4. E-commerce Sector
Many countries have found lockdowns the only option to buy some time as they try to grasp the changes. This has been a silver lining for the E-commerce segment as many consumers have turned to them for their needs. This also involves E-Retail shops that deal in fast foods like BigBasket and Grofers.
The FMCG sector had seen reduced demand for the initial few weeks during the lockdown but these will return to normal during the easing period. The FMCG sector, however, will benefit from the reduced crude oil prices. This has come in two forms. Firstly the benefit if one of the components is crude oil or if crude oil is part of the manufacturing process. Secondly from the reduced cost of packaging which requires crude oil in its production. Packaging currently makes 15-20% of the cost.
6. Paint Industry
Companies in the painting industry will be benefitted from the reduced crude oil prices. This is because 45% of the raw material of these companies are crude oil derived. A few of the leading companies in the paint industry are Asian paints, Kansai Nerolac, Berger paints, etc.
Banking, Financial Services, and Insurance companies also have an opportunity to increase their demand post the lockdown. This is because the reduced rates will result in cheaper loans. In addition to this, the government has encouraged loans to the MSME sector by acting as the guarantor in many cases.
Insurance companies will also see an increase in their product sales. This is if they are tweaked to match the Covid-19 environment once the government stops playing a major role. Companies like Paytm which are an eCommerce payment service and in the fintech business have continued their growth from demonetization into the great lockdown. This is also because of the nature of the virus and people’s increasing aversion towards cash.
8. Online Streaming, Gaming and EduTech
With all forms of existing entertainment shut down, increased demand has been seen in online streaming websites and gaming companies. Netflix and Youtube have had to reduce the streaming quality in Europe to ease the pressure on the internet.
Gaming companies will have a good run during with issues being faced in its console production which will be fixed once the economy opens up.
The online education market in India was already forecasted to grow to become an $18 billion market by 2022. The great lockdown has only given a boost as numbers will be met much sooner.
9. Home Fitness
The nature of the virus has made accessing Gyms and other public areas to maintain fitness dangerous. Companies like Peleton which offer an interactive experience along with their equipment have seen a rise in their share price this year.
Post Corona Environment
The post-Corona environment will be rigged against industries that have been affected during the lockdown. This is due to the changes in behavioral patterns. A level laying field can only be expected after a year or two after the pandemic. Be it a business or a human, sticking to old behavior patterns and not adapting to suit the environment will get you killed!
Understanding how crude oil prices impact Indian market & Indian economy: The Liquid Gold, as the name goes, is the most important factor in understanding Global economic health. We have seen a 150% fall in the prices of WTI crude oil over a period of the last four months (Feb-May 2020) and a bounce-back of nearly 75%. Therefore, this year has been a year of massive swings in the prices of crude oil.
The price at the beginning of the year was above $60 per barrel and we saw the price of negative (-) $30 per barrel on around 20th April 2020. Hence, in all practical sense, one was paid to buy a barrel of oil. The current price of WTI crude is $35.46 per barrel (1st June 2020). This has caused a crisis in OPEC nations and other countries like Russia, which are dependent on oil exports.
How Crude Oil Prices Impact Indian Market?
Let us now understand how crude oil prices impact Indian market and its effect on different segments of the economy like current account balance, fiscal deficit, stock market, and more.
1. Impact on Current Account Balance
India imports nearly 84% of its domestic demand and it is one of the largest importers of oil in the world. Indian Oil imports account for nearly 27% of its total imports. Therefore, a fall in the prices of oil will reduce the cost of importing oil from other countries. And this in turn has a direct impact on the current account deficit (the amount that India owes in foreign currency).
Therefore, in the current crisis time (COVID-19 pandemic and economic slowdown), reduced crude oil prices have been a blessing in disguise to the Indian economy. In general, a 5 % increase in oil prices will impact the trade deficit by nearly $4 billion.
2. Impact on Fiscal Deficit
The price of the oil is fixed by the government and it is at a subsidized rate. And then the government compensates the companies for selling the oil at lower prices. These losses are also called under-recoveries. Therefore, the losses incurred because of compensating the companies losses, adds to the Fiscal deficit of India. But with the reduced oil prices, the compensation to be paid to these companies also reduces and which in turn helps in narrowing the fiscal deficit.
3. Impact on Stock Market
Now, if research and history are to be believed, then there is an inverse relationship between the oil price and the Indian equity market. This is because the Indian oil industry is majorly an importer of oil. Therefore, industries like tyre, lubricants, logistics, refinery, airlines, paints, etc are directly affected by a change in oil prices.
Further, as we are aware, energy stocks have nearly 12.5% weightage in Nifty 50 and nearly 15% weightage in Sensex. So, strength in crude oil prices adversely affects these oil-dependent industries and weakness in oil prices, usually signals strength in these companies’ stock prices. If we were to take an example of the paint industry, companies like Asian paints, Kansai Nerolac, etc use oil as a major ingredient in their paint. So, any movement in oil prices directly impacts their performance in the stock market.
(Fig: Nifty Energy Index – 10 Yrs Chart)
(Fig: Crude Oil WTI Futures – 10 Yrs Chart)
Now, if we were to look at the two charts above. The one on the top shows the line graph of the Nifty Energy index for the last ten years and the one at the bottom shows the performance of WTI crude over the period of the last ten years.
At first glance, it may be very clear that there is an evident negative correlation between the performance of two. During 2011-12, when oil was trading near its peak of $140 per barrel, the Nifty energy index was trading near its low. And, when the Nifty energy index was nearing its peaking in early 2019, the per-barrel cost of crude oil was hovering around $55.
Now, we all must be wondering, that our equity market should have really outperformed when the oil prices crashed to sub-zero levels. But the global pandemic (COVID-19) has slowed down all global economies and we are no exception to it.
4. Impact on Exchange Rate
Rupee, being a free currency (value of rupee depends on the demand in the currency market), its value depends on the current account deficit. Therefore, if the oil prices are high, then the country will have to sell rupees and buy dollars to pay for oil bills. Similarly, if the price of the oil is low, then the current account deficit is low and the amount of dollars required to pay for oil bills are also low.
5. Impact on Inflation
India, being a vast country, the goods need to be transported from one place to another. And oil is a very important catalyst in the movement of vehicles from one place to another. A rise in oil prices leads to a direct increase in the price of goods and services. And it has a direct bearing on the prices of petrol and diesel. And hence it contributes to the rise in inflation in the country.
Therefore, a reduced price of oil comes as a boon to the economy of India. Reports published by Moneycontrol.com and State Bank of India(SBI) suggest that a $10 change in the oil price, impacts inflation by 0.3%.
In conclusion, we can say that weak or reduced oil prices have a major positive impact on the Indian economy. India being an importer of crude oil, so higher oil prices imply, more payment needs to be made in foreign currency. And oil prices have a major say in the financial markets of our country. A weak oil price usually signals strength in the performance of the stock market. And a strong oil price has a negative impact on the performance of the stock market.
And similarly, if we were to take the example of oil-exporting nations, strong oil prices have a very positive effect on their incomes, balance of payments, and their financial markets.
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
Understanding corporate Spin-Offs and how they work: There are many corporate actions that act as a catalyst in the market and results in the prices of a share changing drastically within a short frame of time. A few common examples of such catalysts are mergers, acquisitions, bonus shares, buybacks, etc. The announcement of all these events results in rapidly increasing (and sometimes decreasing) of share prices in a short period. Therefore, share market investors and participants need to know what exactly these catalysts mean. One other typical example of such events are corporate spin-offs.
In this post, we are going to understand what are corporate spin-offs, how they work, their advantages, disadvantages and why does a company opt for spin-off. Let’s get started.
What are Corporate Spin-Offs?
A corporate spinoff is an operational strategy where an existing division of the parent company is dissolved and a new company is created in place of the division which is now independent of the parent company. Ownership in the newly formed independent company is given to the shareholders of the parent company on pro-rata based on the holdings in the parent company.
The new company resulting from this corporate action is known as the company spun-off. The company spun-off acquires its assets, employees, and other resources from the parent company.
A spin-off is a mandatory corporate action. In a mandatory corporate action, the board takes the decision and the shareholders are not permitted to vote.
To make the topic more comprehensible we shall be referring to the division of the company that is spun off and becomes independent as ‘Spinoff Ltd’. The portion of the company that remains with the existing company earlier will be referred to as ‘Parent Ltd’. The shares of the newly created Spinoff Ltd are distributed to the existing shareholders of Parent Ltd in the form of a stock dividend.
Why does a company opt for Spin-off?
There are a number of reasons why a company may opt for a spin-off. Here are the top grounds why a company may go for a spin-off:
1. Benefits of Focus
Companies that go for a spinoff generally have divisions that are least synergetic and have distinct core competencies from that of the Parent Ltd They find turning these divisions into independent companies i.e. into Spinoff Ltd would be most appropriate.
A spin-off would enable both the Parent Ltd and the Spinoff Ltd to sharpen focus on its resources and manage themselves better off independently.
Spinoff Ltd benefits from the spin-off the most because they get a new management that is focussed only on the goals of Spinoff Ltd. The newly assigned leaders present here would be experts in the field with focus only on the goals of the Spinoff Ltd. This would also help Spinoff Ltd override corporate bureaucracy that was impeding its growth in Parent Ltd.
2. Due to Failure to sell a division
At times Parent Ltd might have decided to sell off one of its divisions but does so unsuccessfully. In such cases, the company uses spin-off as a last resort to separate itself from the division.
3. Reduced agency costs
At times the parent company may enter sectors that are soo diverse from its core competencies that its investors may show no interest in the new division or may even oppose the new division. In these cases, the company incurs agency costs while resolving disagreements between the management and the shareholders.
If the new division is the cause of disagreement a spin-off will prove beneficial to Parent Ltd.
This will also result in satisfied shareholders.
4. Risk, Profitability, and Debt
If a division of a company increases its overall risk due to the sector it operates in the board may take a decision to spin-off that division.
A division may also have all the characteristics of growth in the future but its current performance or losses may be affecting the parent company. In such a situation the division may be spun off.
When a Spinoff Ltd is created it may take on the debt of the Parent Ltd. Or at times Parent Ltd. may give Spinoff Ltd a fresh start by not transferring any debt. This will depend on the strategic perspective of the board.
5. Reduced Overheads
Parent Ltd will benefit from the reduced overheads that pertain to the division which now becomes Spinoff Ltd. On the other hand, Spinoff Ltd will enjoy the freedom of taking care of its own overheads as required without any interference.
Although there are a number of reasons why a company may opt for a spin-off it is basically due to the fact that it feels that by doing so it would turn out to be beneficial to both Parent Ltd and Spinoff Ltd if they operated independently.
What is the Spin-off Process?
A spin-off may take anywhere from half a year up to over 2 years or even more to be executed. Once the board takes the decision there are multiple steps that follow. They include identifying well-suited leaders for Spinoff Ltd. Creating an operating model and financial plans to suit the business of Spinoff Ltd.
This is because the parent company is still responsible for its division. Proper communication about the terms of the spin-off to the shareholders is also necessary. This is followed by completing the legal requirements. The parent company also focuses and helps Spinoff Ltd to create a new distinct identity before the spin-off.
Types of Corporate Spin-offs
Here we classify spinoff on the basis of the ownership retained by the parent company.
– No ownership retained
In what is called a pure spin-off the parent company does not retain any ownership in Spinoff Ltd. 100% of the ownership in Spinoff Ltd is distributed among the existing shareholders of the company. Here Spinoff Ltd gets greater autonomy in its operations once the spin-off is complete.
– Minority Ownership Retained
Parent Ltd is also allowed to hold up to 20% of Spinoff Ltd. In such a case say if 20% is retained by Parent Ltd, the remaining 80% is distributed among the shareholders on a pro-rata basis. Here the parent company enjoys a greater focus on is operations and still retains some influence and decision making ability in the company spun-off.
There is also a possibility of a partial spin-off where the company may only spin-off a part of its division and retain minority or not retain ownership accordingly.
Effects of spin-off on price of securities of the company involved
Once a spin-off takes place the share prices of Parent Ltd will fall. This is because a spin-off involves the transfer of assets from Parent Ltd to Spinoff Ltd. This will result in reduced book value of Parent Ltd and hence its reduced price. However, the reduction in price is set-off by the share price of Spinoff Ltd. This is because Spinoff Ltd will receive the same assets transferred from Parent Ltd. Hence the investor will not face any immediate loss of value.
For eg. say the market cap of the company before the spin-off stands at Rs.10 crores and its current share price is Rs.100. Say the assets that will be transferred to Spinoff Ltd are worth Rs.2 crores. After the spin-off, the market cap of Parent Ltd will be worth 8 crores resulting in a post spinoff share price of Rs.80. The share price of Spinoff Ltd would be Rs.20 with a current market cap of Rs.2 crores.
Reduced demand from Funds
These prices will remain temporarily as the shares will be subject to market volatility. Spin-offs are said to cause sell-offs, particularly in the index-based funds. This is because an index shows the topmost companies in a market based on their market cap. The companies undergoing spin-off may no longer suit the requirements of the market index.
Parent Ltd too may lose its position among the top stocks due to the reduced market cap after the spin-off. This will cause funds that follow the indexes to sell the shares of Parent Ltd as well. Other funds may too sell the shares of Spinoff Ltd. This is because Spinoff Ltd may not suit their capital requirements, dividend requirements, etc. This will result in a reduced demand and fall in the price.
The cost of the spin-off will have to be borne by Parent Ltd. They will include legal duties and other costs of set-up.
2. Employee’s Discomfort
The employees in the division being spun may have joined the Parent Ltd owing to its reputation. They may be put in a situation where they will lose that identity and at the same time be confronted by the uncertainty of Spinoff Ltd.
Spin-offs as part of an Investing Strategy
The share price of Parent Ltd gets reduced after the spin-off. But this is made up for by the shares of Spinoff Ltd that the existing shareholders receive as a stock dividend. As discussed earlier due to market reactions the price may further fall.
After a spin-off takes place investors have the option to either hold onto both the shares of Parent Ltd and the shares of Spinoff Ltd. Or they have the option to sell both or either one. But before deciding which is better let us have a look at what historical studies have shown us about a spin-off.
— Parent company shares
According to a study by Patrick Cusatis, James Miles, and J. Randall Woolridge published in 1993 issue of The Journal of Financial Economics, it was observed that the parent companies beat the S&P 500 Index by 18% during the first 3 years. A study by JPMorgan showed the parent companies beating the market returns by 5% during the first 18 months.
A more recent study by the Lehman Brothers investigated by Chip Dickson between 2000 and 2005 showed that parent companies beat the market average by 40% during the first two years. Due to their strong market cap, holding onto shares of Parent Ltd will be well suited for those investors that look for stable and low-risk returns. This is because as we will observe ahead, the returns from Spinoff Ltd are higher in comparison. But the shares of Parent Ltd are observed to perform even in times of market downturn.
— Shares of the company spun off
According to the same study published in the 1993 issue of The Journal of Financial Economics, it was observed that the companies spun-off beat the S&P 500 Index by 30% during the first 3 years. The study by JPMorgan showed the companies spun-off beating the market returns by 20% during the first 18 months. The study by Lehman Brothers, investigated by Chip Dickson between 2000 and 2005 showed that parent companies beat the market average by 45% during the first two years.
All the studies show that the shares of Spinoff Ltd would not only beat the market but also would perform better than the shares of the Parent Ltd. It, however, should be noted that the share price of the spun-off companies is highly subjective to market volatility. They outperform in strong markets and underperform in weak markets. Hence they are much more suited for individuals with risk appetite.
Investors should also note that it is not the case that all spin-offs are successful. There have been situations where spinoffs have performed negatively. The best way to assess future performance is for the investor to find out why the company is attempting to have the division undergo spin-off. This is to assess if the company is using the corporate action to simply get rid of its debt or if the company is getting rid of a division in which they do not see much future prospect. In such situations, a study of debts and losses pertaining to the division in the companies books will help.
A detailed study on the 20 Lakh Crore Relief Package in India (First Tranche): Prime Minister Narendra Modi’s address to the nation on Tuesday will be remembered by many for a right smart spell due to two reasons. Firstly because the number we couldn’t fathom – 20 Lac Crore (20000000000000- 10% of our GDP) is now our relief package. Secondly for the word ‘Aatma Nirbhar’ (Self Reliance).
However, if observed the address holds much more gravity, especially in our preparation for the post lockdown economy. The direction chosen to move in is towards an Aatma Nirbhar Bharat. To achieve this the Abhiyan has focused on the five important pillars- the economy, infrastructure, system, vibrant demography, and demand. It seems like a throwback to the 20th century Swadeshi movement with national leaders calling for local purchases. It is however evident that the economy can be saved from being plundered by COVID-19 by robust demand for Indian products.
Finance Minister (FinMin) Nirmala Sitharaman announced on Wednesday the First Tranche of measures that would be taken to attempt at reviving the economy. The focus would be on the factors of production. However, the traditional factors have been recast to suit the purpose of this Abhiyan. They are:
Ease of doing business
Compliance and Regulation
Due Diligence Observed
The FinMin also clarified that becoming ‘Aatma Nirbhar’ would not mean turning into an isolationist state that only looks inward. But instead, it talks about a country that can rest on its strengths and at the same time contribute to the globe. Today we have a closer look at the measures of the first tranche, the reasons for their implementation, and the path intended.
Measures to revive the economy -Tranche1
Nirmala Sitharaman announced the fifteen measures to revive the economy. They are directed towards the following sectors/measures:
MSME (Micro Small Medium Enterprises)
The FinMin has focussed a considerable portion of the relief towards Micro Small and Medium Enterprises( MSME). Of the 15 key decisions, 6 are directed towards the MSME. MSMEs are our nation’s dominant job creator by employing 11 crore people.
MSMEs contribute to 45% of the country’s manufacturing output, 40% of exports, and to 30% of the GDP. Considering the figures a relief package not directed towards the MSMEs survival would result in their closure and eventually mass unemployment accelerating the GDP decline. From the numbers above it becomes evident that ensuring their survival would mean saving the economy.
It can be noticed from above that there is a huge gap between credit requirements and credit available to MSMEs. Such a huge lending ability to bridge the gap is only possessed by financial corporations in the country. The government would not be able to fulfill the requirements simply because it does not have that much money to be directed towards MSMEs during an ongoing pandemic.
What are the means adopted to achieve this?
The government has two options here. Either directly give loans to the MSMEs or to take over the credit risk of the loans received by MSMEs from other sources. It becomes evident that the government has chosen the latter as the measures in Tranch 1 focus on this.
If in a normal situation if an MSME would approach banks he would be required to place a collateral of a value higher than the loan in exchange. The property available with MSMEs will be affected too as the outbreak has caused a fall in their prices as well. The Government of India(GOI) has rolled out measures where instead of collateral it acts as the guarantor for the loan. This means that in a case where the MSMEs fail to repay, the banks would still be able to recover the loan from the government. With the government acting as a guarantor the banks are encouraged to give out more loans to the MSME’s
The reforms that enabled this are:
1. Three Lakh Crore collateral-free automatic loans for MSMEs
Here MSMEs that have no more than 25 crores outstanding in loans and a turnover of at least Rs. 100 crores are eligible. An emergency credit line to businesses and MSMEs has been set up from NBFCs and banks for up to 20% of the outstanding credit as of 29/02/20.
The loans will be provided with a 4-year tenure with no requirement for the principal to be paid for the next 12 months. They will be required to pay interest however but at a capped limit set by the GOI. Here the GOI will act as 100% guarantor for both loans and interest. This scheme can be availed till 31st October 2020.
The Finance Ministry has estimated that this will help 45 Lakh business units to resume business utility and safeguard jobs.
2. Rs 20,000 crores subordinated debt for stressed MSMEs
Here the GOI will facilitate a provision for Rs. 20,000 crore as subordinate debt. This is aimed at MSMEs that are stressed and would be considered NPA (Non-Performing Assets) but still have managed to keep functioning. These MSMEs classified as NPAs would not be provided credit by NBFCs or banks. Here the promoter of the MSME will be given debt by the banks which will then be infused by promoters as equity in the firm. This will increase his respective ownership but will be liable for the debt received.
3. Rs. 50,000 crore, equity infusion for MSMEs through FOF.
The GOI here will set up a Fund of Fund which in turn will invest in its daughter funds. These daughter funds will provide equity funding to MSMEs that show growth potential. The GOI will invest 10,000 crores into the FOF. The remaining amount will be funded from institutions like LIC and SBI.
The MSME, however, will be encouraged to get listed on the main board of the stock exchange.
4. New Definition of MSMEs.
The FinMin pointed out before the announcement that this change of definition will be in favor of MSMEs. The new definition will revise investment slabs for those companies to be considered as Micro Small and Medium. In addition to the investment, it will also consider the turnover before classifying an MSME.
The new definition will also have no distinction between the MSME involved in manufacturing and service.
Micro will be those with investment up to 1 crore whose turnover is LESS than 5 crores.
Small will be with investment up to 10 crores whose turnover is LESS than 50 crores.
Medium will be those with investment up to 20 crores and a turnover of LESS than 100 crores
5. For government procurement tenders up to 200 crores will no longer be on the global tender route.
According to this global tenders that are worth up to 200 crores will no longer be available to global players.
This reform would encourage and provide MSMEs with the opportunity to procure these tenders without facing global competition.
6. Other incentives for MSMEs
MSMEs in the post lockdown environment will face problems of marketing and liquidity due to social distancing requirements. For these reasons, the GOI will launch an e-market linkage for MSMEs which will be promoted as a replacement for trade fairs and exhibitions. Fintech also will be applied to enhance transaction-based lending using data generated by e-market linkage.
In addition to this, all dues from the GOI and Central Public Sector Enterprises (CPSE) will be released in 45 days.
This reform focusses on ensuring that the MSMEs are able to restart their business with ease after the lockdown as well. At the same time, their liquidity position would be improved to meet their immediate needs from the dues received.
Provident Fund Contribution
7. Reduction in rates for those covered in the first relief package.
Under the Pradhan Mantri Garib Kalyan package of Rs 1.7 lakh crores announced in the first phase of the lockdown, the GOI announced that it would contribute the employer’s portion to the PF. The companies eligible for this relief were those who had 100 employees earning less than 15000 per month. This relief was announced for a period of 3 months.
Moreover, this relief currently helps a total of 6 Lakh establishments during the months of March, April, and May. The FinMin announced that these establishments that are currently eligible would have these benefits extended to both the employees and the employer’s contributions respectively. The GOI will now pay 24% to the PF for a period of 3 months.
8. Reduction in rates for those not covered in the first relief package.
The FinMin also announced that those who were not covered earlier would now only be required to contribute 10% instead of the earlier 12% rate. This 10% contribution will be for both the employers and the employees for the next 3 months.
However, for state PSU and CPSE, the employer’s contribution will remain at 12% but the employees will be required to contribute only 10%.
The main aim of the PF contribution from the govt or rate reduction is to transfer more money into the hands of the employers and employees. The employers would have greater liquidity and hence would be able to use this to better survive. The employees, on the other hand, would have more cash in their hand which would cause a spurt in the demand in the economy. This will create liquidity of 6750 crores available to the employers and employees for the next 3 months.
9. 30,000 crore special liquidity scheme for NBFC/ HFC/ MFI
The scheme is available to those NBFC’s that are finding it difficult to raise debt in the COVID-19 environment. The special liquidity scheme of 30,000 crores was launched for this. Under the scheme, investment was made by buying investment-grade debt papers of NBFC HFC and MFIs. It is not necessary for the companies to be graded highly and be of high quality.
Purchasers of these debt papers will receive a guarantee from the GOI.
10. Rs. 45,000 crore Partial-Credit Guarantee Scheme(PCGS) 2.0 for NBFC’s.
With the PCGS already in place, the PCGS scheme is said to supplement it. This scheme will enable finance corporations that have low credit ratings to raise finances. In PCGS 2.0 the existing PCGS scheme will now be extended to cover borrowings such as primary issuance of bonds and commercial papers of these entities. Here ‘AA’ papers and below including unrated papers will also be eligible for investment. This will particularly benefit MFI that do not have ratings high enough to attract investments.
In this scheme, the first 20% of the loss will be borne by the guarantor i.e. GOI.
The main aim of both schemes is to provide liquidity to NBFC’s, MFI, and HFC. If they are provided with the liquidity it will lead to increased lending to MSMEs. So it can be said that even these 2 schemes are aimed at the MSMEs.
11. 90,000 crore liquidity injections of Discoms.
The working of the electricity sector requires Power Generation Companies(Gencos) to transfer electricity to Distribution Companie(Discoms) in respective states which is then transferred to the consumers and respectively paid for. The payments then trickle down to the Gencos. The Discoms currently owe Rs 94,000 crores to the Gencos. The lockdown unfortunately only alleviated the problems and troubles of the electricity sector as many industries were shut causing a fall in the demand. In the electricity sector, the units produced cannot be stored. Hence a fall in the demand causes a loss.
The FinMin unveiled that both PFC and REC will together infuse a total of 90,000 crores into all the Discoms against all the receivables they have. These 90,000 crores in loans will be extended against the state government guarantees with the exclusive purpose of discharging liabilities of Discoms and Gencos.
The loans, however, will be given to the Discoms for specific activities and reforms which include
Introducing digital payment facility by Discoms where necessary.
Liquidation of outstanding dues to state govt.
Plan to reduce financial and operational losses.
The benefits of this have also been aimed at being passed onto the consumers in the form of rebates for the power tariffs paid.
12. Relief to contractors
Central Agencies ( like Railways, Ministry of Road Transport and Highway, Central Public Works Department) have been directed to extend all contracts for up to 6 months. This covers both construction works and goods and service contracts. It covers obligations like completion of work, intermediate milestones, and extension of the concession period in PPP(Public-Private Partnerships) contracts.
To ease cash flows the GOI will partially release bank guarantees, to the extent contracts are partially completed. This move will also improve the cash flows for the contractors as they will be provided with liquidity which will help them meet immediate business needs when the lockdown is lifted.
TCS Chief Strategist Himanshu Chaturvedi said ‘ The Governments Aatma Nirbhar Bharat Initiative has recognized infrastructure as one of the 5 pillars. This is an acknowledgment of the sector’s role in India’s development and large scale employment generation.
13. Relief to Real Estate
According to this measure, the real estate is to treat COVID-19 as a ‘force majeure'(unforeseeable circumstances that prevent someone from fulfilling a contract) and extend registration and completion date by 6 months. The regulatory authorities may extend this for another period of 3 months if necessary. This was done so that the home buyers may get new timelines for delivery.
The GOI has also decided to provide projects that have been stalled due to a lack of funds with financial support. Projects that are NPA’s or undergoing NCLT will also be eligible for the proceedings. The maximum finance for a single project has been capped at 400 crores.
In order to provide more funds at the disposal of the taxpayer the rates of TDS for non-salaried specified payments made to residents and rates of the tax collected at source for the specified receipts shall be reduced by 25% of the existing rates.
This will be applicable for the rest of the year starting from 14/05/2020 to 31/03/21. These measures are estimated to release liquidity of Rs. 50,000 crore.
It has to be noted that this doesn’t bring down the tax liability of taxpayers, it leaves more money with them during the course of the FY. Individuals will still have to pay their tax liability every quarter or annually.
15. Other Measures
All pending refunds to charitable trusts, non-corporate business, from the GOI shall be issued immediately.
Income tax returns extended from 31st July 2020 and 31st October to 30th November 2020. The tax audit has been postponed from 30th September 2020 to 31st October 2020.
Ernst and Young Chief policy advisor D.K. Srivastava estimated that the measures announced on Wednesday amounted to Rs 5.94 lac crore, which includes both the liquidity financing measures and credit guarantees, although the direct fiscal cost to the govt. In the current financial year may only be Rs 16500 crore. As mentioned earlier the government has taken over the credit risk that the MSMEs and various financial institutions.
Hence the amount that the government would invest will depend on how much of the loans taken by the MSMEs and various financial institutions will default on. Furthermore, the real trajectory of the relief package can only be understood after it is viewed together with the measures in the Second and Third Tranch. Even more so on how many of these are successfully implemented. It still goes without saying that tranch 1 is nothing short of impressive.
Understanding Blue Ocean Strategy with Examples, Pros, Cons & More: Hello readers! It is a new day and we are back with a new topic of discussion exclusively for you all!
Almost all of us have been to beaches for a weekend getaway or long vacations! If not holidays, we have definitely come across visuals of oceans and seas on social media and televisions. Haven’t we? Well, oceans are vast, deep, massive, wide and are the most baffling natural wonders of the world. Proper explorations and researches can give way to incredible discoveries and provide us information about its scopes and untapped prospects.
In a similar fashion, a path-breaking strategy, known as Blue Ocean Strategy, was introduced by W. Chan Kim and Renée Mauborgne. It is a pacifist marketing scheme and is considered a strategic planning tool for assessing a business.
A Blue Ocean Analogy is utilized to unlock the wider, unfathomable, powerful and vast potential in the unexplored market space in terms of profitable growth. This strategic planning theory is an escape from the general notion of benchmarking the competition and focusing on lump sum figures.
What exactly is a Blue Ocean Strategy?
Blue Ocean Strategy is all about devising and acquiring the uncontested market forum by spawning a new demand.
Since the industries are in a state of non-existence, there is absolutely no relevance of peer comparison. The strategy bags the new demand by familiarizing unique products with advanced features that stand apart from the crowd.
In other words, the strategy spurs companies to offer extremely valuable products to the consumers. Thus, it supports the company to incur large profits and surpass the competition. The price tags of the products are generally kept on the steeper side because of their monopoly. Blue Ocean approach shuns the ideology of outperforming the competition and asserts to recreate the market boundaries and operate within the nascent space.
The kind of leadership and management required to initiate a Blue Ocean Strategy differs from the management of corporations that have short-term ambitions and mainly concentrates on increasing shareholder value by pushing up the stock prices via buybacks, mergers, and acquisitions. The Blue Ocean Strategy can be applied to all the sectors or, businesses and is not limited to just one kind.
On the contrary to the concept of Blue Ocean Industries, there exists Red Ocean Industries. Let us understand the concept in brief before moving to further analysis.
Red Ocean Industries
Red Oceans are those industries that are currently in existence or, what we call the contested market forum.
In Red Oceans, there are well-defined industry perimeters that are known and out in open to all. Due to the acquaintance with the competitive rules and acceptance of the drawn boundaries, the market space gets crowded and there is a consequent reduction in growth and profitability. When the product comes under the burden of pricing pressure there is always a chance that a firm’s operations could come under notable menace.
Companies under Red oceans strive to outperform their rivals by grasping a higher proportion of existing market share at another company’s loss. In order to keep themselves afloat in the marketplace, proponents of Red Ocean Strategy concentrate on creating competitive advantages by examining the blueprints of their peers/competitors. Such a saturated market space makes way for a toxic competition which ends up as nothing but an ocean full of rivals fighting over a dwindling profit pool. Such firms mainly seek to capture and redistribute wealth instead of creating wealth.
These kinds of market forums can be correlated with the shark-infested ocean waters which remain spilled with blood. Hence, the coinage of the term Red Oceans. Thus, the business world has pulled up their socks and is striving to skip the “Red Oceans” to create their very own “Blue Oceans”.
Let us learn how organizations that have followed the path of Blue Ocean Strategy has undergone outstanding growth and profitability!
Uber Cab is a brainchild of the Blue Ocean Strategy and has dramatically transformed the picture of the transportation industry by discarding the nuisance of booking cabs, denial of services, meter issues and unwanted arguments.
It is a ridesharing service that enables customers to book their rides with the ease of swipes and taps. It also permits users to trace a driver’s progression towards the pickup point in real-time through the medium of a smartphone application called Uber App.
Uber devised a new market by the amalgamation advanced technology and modern devices. It tried to differentiate itself from the regular cab companies and in turn developed a low-cost business model that offers flexible payments, pricing strategies and generates good revenues for both the drivers and the company. In the initial stages, Uber was successful in capturing the uncontested market space but was eventually flooded by the competitors. In spite of that, it continues to command the market and is speedily expanding across the world. As of 2019, Uber approximately has 110 million riders worldwide and holds 69% of the market share in the United States.
Apple headed into the space of digital music with its unique and eminent product ie. iTunes in 2003. In previous days, conventional mediums like compact discs (CD) were put to use to disseminate and listen to music.
When iTunes ventured into the market, it solved the basic problems which were faced by the recording industry. As a result, iTunes cut down the practice of illegally downloading music while simultaneously catering to the demand for single songs versus entire albums in a digitalized version. High-quality music at a reasonable price offered by Apple became a talk of the town. All the available Apple products have iTunes to download music and have largely ruled the market space for decades. It is also recognized for driving the growth of digital music.
These examples of the Blue Ocean Strategy can enlighten future startups regarding the execution of a strategic planning scheme and successfully unlocking new demand.
How to find and develop/Launch them?
Blue Ocean Strategy becomes the need of the hour when supply surpasses demand in a market. When there is limited scope for further growth, businesses try and search for verticals for discovering new business lines where they can enjoy the advantage of uncontested market share or ‘Blue Ocean’.
In order to find and identify an attractive Blue Ocean, one needs to take into consideration the “Four Actions Framework” to devise the aspects of buyer value in creating a new value curve. The Four Actions Framework emulates strategic triumphs and guides towards the path of launching a Blue Ocean initiative.
The framework poses four key questions, namely:
It includes points that must be blossomed by industry in reference to the line of products, price tags and caliber of services. A startup must analyze the pros and cons of the existing organizations and their strategies for key aspects of differentiation.
It points out the arenas of an organization’s product or, service which foreplays a crucial character in the industry but is not absolutely essential in nature. Therefore, the proportion of the products can be curtailed without entirely eradicating them.
It points out the arenas of an organization or industry which could be eliminated absolutely for the purpose of cutting down the costs and also to fabricate a completely new market. At times, newly invented products can lead to self-assassination of the existing products and thus, leads to an unwillingness to interfere with the current revenue source.
It nudges the companies to shape up trailblazing products. The introduction of an entirely new product line or, service leads to the establishment of a new market and points of differentiation. Identification of the needs of the target market provides sound knowledge regarding the addition of unique measures and consequently tracking the progress for illustrating a Blue Ocean.
Now that we have discussed the Blue ocean strategy and how to find them, let us also discuss the pros and cons of this strategy.
Pros of Blue Ocean Strategy
Here are a few of the advantages of using the blue ocean strategy:
Blue Ocean Strategy cooperates with organizations to find uncontested markets and avoid matured and saturated markets.
It assists to move from the impediments of competing within the existing industry and cost structure and to gradually migrate towards constructive value improvement. In short, it demonstrates how to break free from the traditional strategic models and to expand profitability and demand for the industry by using the analysis.
Value innovation is the backbone of a Blue Ocean Strategy. Value innovation is the alliance of innovation with price, utility, and cost positions. It eventually creates new value/demand for consumers and thereby, expands the chances of growth potential.
Blue Ocean Strategy enables a fundamental transformation in mindset. It develops mental horizons and helps in recognizing the opportunities.
Blue Ocean Strategy is based on “time and again” proven data rather than unproven theories. It is based on practical approaches that have proven results during live market executions.
Products under the concept of the Blue Ocean Strategy doesn’t make a consumer choose between value and affordability. It is the simultaneous pursual of differentiation and low-cost theorem.
Creating blue oceans is non-zero-sum with high payoff possibilities.
Cons of Blue Ocean Strategy
Let’s us also look at a few of the common cons of using this strategy:
It’s quite difficult to come up with futuristic ideas and identify colossal and untapped markets.
Nominating an articulate Blue Ocean Strategy is a result of a calculated and detailed research process backed by extensive analysis. It is to be kept in mind that there is no magic formula or, silver bullet.
Venturing into a market in the early phase comes with baggage of risk. There is a high possibility that the customers might not understand the grass root of the products and services because of the absence of a fully developed technology.
Production of a new market is never easy because an organization has to be smart and clear regarding its customer base and ways to impart education about new ideas, new products, and new solutions. It also requires clarity about the trade-offs, obstacles and the workforce.
Opting for a different ocean i.e the Blue Ocean, requires a lot of patience, persistence trust, preparation, and faith. It is also extremely paramount to look at initial indicators for confirming the fact that “fishing” is not being done in a dead sea.
On finding a new ocean, other sharks from the saturated markets aka the Red Oceans and other adjacent oceans will be lured to the new market. Thus, building strategically defensive alternatives would be a wise step. Defensive alternatives majorly consist of brand power, technological advancement, and speed of execution.
Let us quickly summarise what we discussed in this article.
A path-breaking strategy known as Blue Ocean Strategy is a pacifist marketing scheme and is considered a strategic planning tool for assessing a business. It is all about devising and acquiring the uncontested market forum by spawning a new demand. Since, the industries are in a state of non- existence, there is absolutely no relevance of peer comparison. The strategy bags the new demand by familiarizing unique products with advanced features that stand apart from the crowd. Blue Ocean approach shuns the ideology of outperforming the competition and asserts to recreate the market boundaries and operate within the nascent.
These days, the Blue Ocean Strategy becomes the need of the hour when supply surpasses demand in a market. In order to find and identify an attractive Blue Ocean, one needs to take into consideration the “Four Actions Framework” to devise the aspects of buyer value in creating a new value curve. The framework poses four key questions, namely, Raise, Reduce, Eliminate & Create.
That’s all for this article. Let me know what you think about the blue ocean strategy in the comment section below. Cheers!
Understanding Why Alcohol Prohibition Lifted in India: On May 4th the Central Government lifted the prohibition on liquor sales. What followed was a parade through all news outlets exhibiting Indians risking their lives in thousands just to feel half-seas over. Media focus on movie box office records has been replaced by alcohol day to day sales records being reported during the pandemic. Today we try to unravel why the center decided to do so and what possible implication it could lead to.
What does alcohol mean to the government?
— Alcohol and the Soviet Union
Mikhael Gorbachev, although some might know him as the Soviet Union President during its collapse, our generation will famously remember his character played in the TV show Chernobyl ( Another disaster he oversaw as President). In 1985 Gorbachev started an anti-alcohol campaign due to its ill effects on health and crime in society.
In the first half of the 1980s, 13000-14000 deaths were drunk accidents. Over 800,000 people were caught for drunk driving and by 1985 these numbers kept increasing. The soviet union faced multiple problems due to the influence of alcohol. Accidents at work were common and at a period the condition worsened to a point where crops were not even gathered due to intoxicated farmworkers (Socialism, SMH).
Gorbachev’s campaign was a success and the government claimed increased life expectancy in males and even reduced crime rate. But all this was just a silver lining to a darker cloud. The loss of 100 billion rubles of revenue from alcohol sales led to an economic crisis after the alcohol sales moved to the black market. The campaign ended in 1987. The Berlin wall fell in 1989. The Soviet Union collapsed in 1991.
The data presented above shows the revenue a state earns from the sale of alcohol. Alcohol revenues make up to 20% of a state’s revenue. In the midst of the pandemic states like Delhi have faced a 90% fall in their revenues. For the state governments to fight the virus without any source of income will only lead to a nationwide economic crisis.
Punjab was the only state to officially request the government to ease restrictions over the sale of alcohol. Several other states like Karnataka, Maharashtra, Haryana, Rajasthan, Kerala, Tamil Nadu, Goa, and those in the Northeast raised the issue informally.
The states named in no way represent a stereotype of the people’s dependence on alcohol but instead how the state governments depend on alcohol. Investing in alcohol has been the simplest and most profitable source of income for the state governments. In 2017 as per the Kerela State Beverages Corporation (BEVCO) earned around Rs.600 for every Rs. 100 spent on alcohol. This example sums up why a government would actually consider investing in alcohol-based businesses. It incomes earned also explain why the prohibition on alcohol sale had to be lifted.
Problems with alcohol prohibition
Gujarat, Bihar, Nagaland, and Mizoram are the states in India that have prohibited all sale of alcohol to its citizens. It can already be estimated that just like Delhi, these states too will face a huge loss of revenue due to the lockdown. But these are just the beginning of their financial troubles as they would not be able to raise revenue from alcohol sales either.
If we believe that these dry states are successful in the prohibition of liquor it would present us to be too naive. By banning liquor the governments have only succeeded in diverting the funds from their pockets to the black markets.
Similar bootlegging practices can be expected in a nationwide prohibition. But what is even more troubling features of the prohibition are the thefts and the scams. An alcohol store, for example, was looted for 4.18 lakhs in Bengaluru. Scams promising delivery of alcohol had already begun to see the light of day during the 40 days of prohibition.
Even the manufacturing of illicit liquor saw an increase. The consumption of such illicit liquor is much more dangerous and harmful to health. All these crimes have resulted in wastage of police resources. The energies that could be focussed on controlling the virus were spread to solve these cases which could have been avoided.
Raising the price of Alchohol
After the confusion and the idea of social distancing being flouted on the first day of the alcohol prohibition being lifted, the government resorted to discourage guzzlers by raising the taxes. The Delhi government added a 70% corona tax. The state of West Bengal levied a 30% tax. However, the highest increase in the prices was from the Andhra Pradesh government. The prices were 75% higher after 3 revisions. The Karnataka and Tamil Nadu government also raised the excise on alcohol.
— The relation between prices and Alcohol
The reasons for the increased price lie in obtaining the twin objective of raising revenues and discouraging alcohol purchase. This is so that lesser people venture out of their homes in search of alcohol. A survey conducted in North West England with 22,780 in 2008 speaks differently. It was conducted to explore alcohol consumption changes if the prices were adjusted.
According to the survey, 80.3% considered a lower alcohol price would increase consumption. 22.1% considered that rising prices would reduce consumption. This meant that alcohol consumption was lower price elastic. This meant that you could lower alcohol prices to increase its consumption but an increase in price would still keep consumption at the regular levels. In other words, you can increase the harm by reducing the prices but not reduce the harmful effects of alcohol by increasing prices.
— Alcohol and Growth
( Source: The prices above are from the year 2017. The government would earn over 600% in the case above)
In India, a major portion of alcohol consumption is from the middle and lower-income groups. An increase in the prices of alcohol would not discourage a habitual drinker as discussed earlier. This increase would just decrease the disposable income or savings available for essential goods. Their spending on alcohol would deprive their children of nutrition and families of other essentials.
We just had a look at the impact of increased prices from an individual’s perspective. Let us have a look at what would be the case if due to this the consumption of essential goods is reduced in the economy. At the end of the day, it is essential goods that have the ability to kickstart the economy and not alcohol products. It is the demand for essential products that will enable industries to employ more labor. A study of the US states between 1971 to 2007 found that a 10% increase in per capita beer consumption resulted in a 0.41 percentage point drop in the annual income growth. The government has successfully increased its revenue but unfortunately directed demand away from essential products.
The points raised above have built walls to every decision taken in association with alcohol prohibition being lifted. The only exception being the decision to lift the prohibition itself.
Firstly the economy is too dependant on alcohol. The government cannot harvest any other source of income and liquor stores increase the risk of contraction. Secondly raising taxes does not discourage drinkers. Instead, it slows the opening of the economy. Thirdly a complete alcohol prohibition will only finance the black market and increases other crimes.
The following action taken by some state governments or possible consideration would help the government find a middle ground. Their application through states would result in being beneficial to both the government and the people.
— Open Alcohol outlets only after planning for appropriate social distancing measures.
The Supreme court on May 1st suggested the states to consider home delivery of alcohol. This would not only encourage social distancing the increased demand for home delivery would increase employment in the home delivery service. The food delivery company Zomato has already shown interest. This can be taken up by other delivery apps too. In a worst-case scenario even if any one of the parties comes in contact with someone who has contracted the virus, the linkage would be able to be traced by the app. This, however, should only be applied after ensuring age restriction are in place. West Bengal and Chattisgarh have already adopted the home delivery model.
The Delhi government has started issuing E-Tokens to buy liquor. Allowing only limited people at a set time only at particular stores with the pass. This also could also enforce social distancing but still involves the risk of venturing out.
— Reduce the price to levels the same as before the lockdown
The price increase has to be curbed. It is understood that the government is in dire need of income. This, however, will not even benefit the economy in the long term perspective as all revenue will stop once people run out of their savings. A habitual drinker will continue drinking even at higher prices. Also, the present condition involves people losing jobs and taking salary cuts. The price increase would do greater harm than good.
— Set a limit on Quantity
Settling a limit to the quantity available person is a very important step. We have already seen the survey earlier which concluded that a reduction in the prices would lead to increased demand. Hence applying the previous point without ensuring this will only negate all benefits. When clubbed with the first point, tracking the quantity via App or an online portal makes it easy.
All decisions being taken with the expectation of the worst would help us better prepare and forsee such situations. With no vaccine in sight for a year, all decisions must enable us to live accordingly for at least a year. The pandemic already has and will keep changing the way we live forever. Online Delivery with limits is the new Black!
Barriers to Entry Definition, Types & More: Any entrepreneur or company that ventures out into a business faces challenges. The external challenges that have a considerable economic impact to stop new entrants are termed as Barriers to Entry. Generally speaking, there have been many definitions of barriers to entry. Franklin Fisher defined it as “Anything that prevents entry when the entry is socially beneficial”. The vagueness of many such definitions has led to them being disregarded. If considered then even psychological barriers to becoming an entrepreneur would be included.
As per Investopedia, Barrier to Entry is the economic term describing obstacles from easily entering an industry or area of business. It goes without saying that these barriers are beneficial to existing players. This is because they result in increased profit from the market due to the reduced competition, thanks to the barriers. Today, we take a look at what exactly are Barriers to Entry.
Types of Barriers
The barriers to entry may involve innocent or deliberate factors. Innocent factors are those that may have come into existence without much direct influence from any of the stakeholders. Deliberate factors are those that have come into existence due to the actions of the stakeholders. The barriers are generally outlined under the following:
– Legal Barriers
Legal barriers are those that have been constructed by government or regulatory bodies. These may include licenses or permits required to conduct business, the red tape system or other standards and regulations to safeguard consumers. The legal factors vary from country to country further depending on the industry. According to the ease of doing business Index, India currently ranks 63rd.
Although it may seem that the legal factors may be independent of influence from existing players, this is not the case. Lobbying plays an important role too. Lobbying is the practice where an organization may undertake campaigns to pressure governments into specific public policy actions. In the US it is completely legal and protected by the law.
In India however, the legal status of lobbying is not clear. It is at times is mistaken for bribery. Bribery provides scope for favoritism but lobbying does not specifically ask for special treatment. Yet it is a means to influence legislative action. Lobbying by existing companies may result in barriers being put up by the government towards new entrants.
– Technical Barriers
The technical factors are industry-specific. They may pose themselves as barriers due to startup costs, patents, monopolies, etc. Patents are exclusive rights given to individuals or organizations for inventions in products or processes that are innovated and premiered in an industry. When the new entrants are not allowed to replicate similar products or processes it leaves very little scope for entry.
Startup costs act as barriers in industries that require huge capital to be invested in the initial stages. Some startup costs may also be classified as sunk costs. These are non-recoverable once invested eg. advertisement. The airline industry and petrochemical industry can be said to have a huge start-up cost barrier.
– Strategic Barrier
Strategic barriers are caused by existing players. One of the strategies is Predatory pricing. This may be done by pricing lower on purpose. This will make it difficult for new entrants to survive as it removes all possibility for them to break even. The cash-rich existing players may then look at the possibility of acquiring these new entrants.
Monopolies or Oligopolies may also use aggressive marketing to drive out new entrants. Zomato has continuously used competitive pricing to its advantage. Also, they then acquire new entrants(Ubereats) unable to survive.
Brand loyalty from consumers is another barrier in itself. In some industries, existing players have had such a stronghold for a period of time. This has resulted in the product name itself being replaced by the brand name. Eg. Colgate. The cost to new entrants to acquire and keep new consumers is too high.
Markets generally with high entry barriers have few players and thus high-profit margins. Markets with low entry barriers, on the other hand, will have lots of players resulting in lower profit margins.
Advantages of Barriers to Entry
– Ease of regulation
Sensitive industries will involve the government premeditatedly imposing restrictions. This is generally seen in industries that involve natural resources or pharmaceuticals. Industries based in natural gas will face this as the economy is affected gravely by their prices.
The pharmaceutical industry too due to its sensitivity cordoned off most of the probable players. In the US due to the FDA regulations, 93% of the applications are not approved in the first cycle. As per Forbes it may cost between $1.3billion to $12billion and may take up to 10 years before it is approved for a prescription.
– Benefits to Consumers
The greater the barriers the more benefit the consumer gets as only the best and standard products would reach the consumers. These barriers also protect the industry from subpar products.
Although barriers may seem impossible to pass and then also compete with, however, most successful companies exist today because they were able to. Innovation in these aspects has the strongest ability to clear barriers. A disruptive pricing model too has been known to be effective. In the case of the telecom sector, the entry of Jio providing not reduced prices but free services revolutionized the sector.
However, a pricing strategy can be pursued only by cash-rich startups. It is also necessary for new entrants to clear barriers. Doing this will ensure that they are taken seriously. This seriousness will be reflected in the investor community with a more positive response towards the new entrants.
10 Severely Affected Industries by Coronavirus: Late into 2019, we were made aware of the ongoing battle China was forced into by a novel virus called the Cobvid-19. At that time, we were also soon assured by the World Health Organization (WHO) of no clear evidence of human to human transmission of the virus.
Fast-forward to today, there are over three million cases and the virus wreaks further global havoc. There hardly remains any industry around the world that hasn’t been impacted. Over the last 20 years, the healthcare industry was seen as recession-proof. However, the pandemic has physicians and dentists reducing staff to cope with the changing times.
Today we take a look at the ten most severely affected industries by coronavirus and the subsequent lockdown. Let’s get started!
10 Most Severely Affected Industries by Coronavirus
Preventive measures of the airborne virus have led to the devastation of any business even closely associated with the tourism industry. The restrictions were first imposed against East Asian travelers and further extended to Europe. WHO also released a statement where they acknowledged that the transmission of the infection may occur between passengers in the same area of the aircraft. With no vaccine in sight, countries were forced to close their borders and eventually led to the suspension of all forms of travel.
The Economic Times has reported the aviation sector in India may lose as much as Rs 85,000 crores along with 29 Lakh jobs. The total stimulus package-1 stood at 1.7 lakh crore. Here, the workers in the airline industry that were not fired were forced into unpaid leave. According to equity master shares of most hotels, leisure, and airline firms have tumbled 60% to date. Falling fuel prices too didn’t provide any relief caused by the lack of demand.
The losses were not limited to commercial airlines but also any company connected with the industry. Leading airline manufacturers Airbus, Boeing, Bombardier, and Embraer have been forced to suspend production and deffer orders. Some even laying off employees.
The IATA ( International Air Transport Association) on 24th March estimated a $252 billion revenue loss globally. By mid-April, ACI observed a 95% fall in traffic in the Asia Pacific and the Middle East. Indian airlines are estimated to incur a loss of 600 million USD. This information does not include Air India, one of the major Indian carriers.
The only demand that exists in the airline industry is those for aircraft storage. Runways and taxiways in normally busy airports were closed to make room for storage.
2. Automobile Industry
The last thing an industry experiencing a prolonged slowdown for more than 20 months now needed would be a period of inactivity. According to FTAuto, the Indian Auto sector earns gross revenue of 2000 crores per day. As the lockdown is prolonged the losses in the automobile industry keep getting added up.
What makes the auto industry further susceptible to being impacted by the virus is the dependence on various players for different parts. Even one missing part from Tier-1 or Tier-2 is enough to stop entire carmakers or whole industries. Considering that the Indian auto industry relies on China for 27% of the imports in 2020 has been a further worst year as the regions are dealing with the virus at different time periods. Unfortunately for India, Maharashtra aka the Indian Automobile industry has over 8600 cases.
— Recovery lessons from China
As China was at the epicenter of the virus, noticing how their industry reacted would help us potentially understand the industry may face. China has faced disruptions in its automobile industry even after localizing 95% of the production. Based on these figures prolonged disruptions can be expected in the Indian automobile industry.
If we take a look at the new car registrations the first half of February saw a drop of 92%. This was followed by a 47% drop in March. Despite this, the market bounced back rapidly. This, however, can be the psychological impact of the virus. People after the lockdown would prefer to avoid public transport, taxi, and other ride-hailing services.
3. Construction and Retail Industry
— Construction Industry
This industry suffers from the direct implications of the virus. The majority of the job losses due to the pandemic are in the construction sector. Presently most of the relief measures introduced by the government are directed towards workers in the real estate sector.
This is due to the high number of daily wage workers in the industry. The sector was already affected in the month of February and March. The effects are to last due to its reliance on China for Raw Materials. Even luxury construction segments are to face raw material scarcity. This is because Italy the world’s leading supplier for stone and furniture has been the worst hit. These inputs will be seen in the form of higher costs and delayed project completion throughout the industry.
— Real Estate Industry
The real estate sector in India will suffer immensely but indirectly due to the lockdown. This is because with people losing jobs and sources of income. Investment in the real estate sector is further doubted. As a result, housing sales are expected to fall by 25-35%. Due to the lockdown and fewer buyers will show interest in the retail spaces.
Coming months will also pose a potential threat to cash reserves if tenants are adversely affected by the lockdown. Also, the rising prices of raw materials may add to falling profit margins. The real estate industry currently may seem attractive to buyers whose jobs are unaffected by the pandemic. The price correction will allow buyers to acquire properties at cheaper rates. Also, the reduction in rates by the RBI will result in loans available at cheaper rates.
4. Textile Industry
The textile industry in India employs over 105 million and earns around $40 billion in foreign exchange. This industry similar to the construction industry is labor-intensive. And hence, it adds to the troubles due to the lockdown.
The nature of the industry will require concentrated relief efforts by the government. The city of Tirupur serves as the perfect embodiment of the textile industry. With over 10,000 factories it generates Rs 25,000 crores wealth through exports and the same domestically. A three-month loss due to the pandemic ould amount to Rs.12000 crore. Of the 129 Lakh people who depend on the city’s textile industry, 25% would have to face job losses.
The textile industry in India depends on China for both imports and exports. India exports 20 – 25 million Kg’s a month to China. These exports have been affected due to a lack of demand from China. Imports from China include $460 million worth synthetic yarn and $360 million worth synthetic fibers.
In addition, India depends on China for buttons, zippers, hangers, and needles which make up $140 million. The textile industry faces challenges not only from China but also from Europe. This is because of the countries affected by the pandemic like Italy and Spain have asked not to export to them.
The revival of the textile industry would only be possible with directed relief measures from the Indian government. This followed by a hopeful end to the pandemic in the next quarter. This will allow India to procure Apparel industries looking for an alternative to the Chinese textile industry.
5. Freight and Logistics
The freight and logistic industry face troubles due to the lockdown in three delivery phases
The fist includes loading. This is due to the lack of manpower.
The second involves the transportation phase. With many states closing their borders and truckers are being forced to abandon the consignment.
The final stage involves unloading issues also due to a lack of power.
Lack of drivers, loaders, and unloaders have plagued the supply chain.
The future after the lockdown is uncertain as the demand will decide if the freight and logistics industry thrives. The fear of economic uncertainty may force consumers to tighten their spending. However, to support all the other industries that will awaken after the lockdown will require an increase in capacity to meet the demands.
The three phases also highlight the problems that may still persist if the government only allows the transport of essential goods without focussing on loading and reloading concerns.
6. Metals and Mining
The steel production and allied activities such as mining have been covered under the Essential Commodities Act. This does not provide much relief as the producers and miners face the challenge of producing with all the demand wiped out.
The essential commodities act, however, does not cover nonferrous metals such as Aluminium, copper, zinc, and lead. These add to the troubles as unlike other industries metal production cannot be switched off and started again when required. The cost of starting again would involve losses incurred due to the disruption of the continuous process involving smelters and potlines.
The steel supply-side disruptions were already caused by China, Japan, and Malaysia who were impacted by the coronavirus much earlier due to the pandemic. They account for over half of India’s metal and metal production. The Nifty Metal index as of March 21st has already fallen 43% in comparison to 29% of the Sensex.
7. Oil and Gas Industry
The oil prices have faced a decline in value since Mid February.
The cheaper crude oil, however, will help in reducing the Current Account Deficit. This will also provide multiple other benefits for the government. The fuel subsidies provided can also be expected to decline. In addition, the government can also raise duties to boost revenue. The revenue mopped up can be used to revive other sectors.
The lockdown has reduced power consumption by 46000 MW since March 20th. This is one of the primary challenges faced by only the Power sector i.e. no scope for inventory. Units once generated during the lockdown are represented as lost demand. The lockdown has reduced power consumption due to industries being shut.
In addition, the government has asked power generators to continue the supply of power even if the payments are not received for the next 3 months. The only silver lining is the opportunity for gas-based power generation to take advantage of the low prices. But the reduced demand has kept them from leveraging this opportunity.
The Power sector has been a loss-making enterprise even before the pandemic. The total outstanding dues of the power sector stood at Rs 88,311 crores as of January 2020.
9. Consumer and Retail Industry
In retail Food and Grocery accounts for about $550 billion. The textile and apparel account for $65 billion. Consumer electronic durable is worth $50 billion. Each of these sectors is affected by the purchasing power in the hands of the consumers. The great lockdown has put stress on the purchasing power in the hands of the people. This is due to the job losses and availability of other sources of income.
In addition, people brace themselves by reducing spending on nonessential items in textile and apparel and the consumer electronic durables. The further impact will be based on the duration of the virus. The textile and apparel and consumer electronics may lose out on their seasonal demand. For eg. AC sales during the summer season.
Once the lockdown is lifted the size of the retail business will also play a role to determine how much stress it will face. Traditional and independent retailers generally have fewer employees. Bigger retail businesses will face the heat due to their large employee requirements to be met and additional burden due to rent.
10. Chemical Industry
The Chemical industry is worth 163 billion covering more than 80000 chemical products. The impact on the chemical industry is primarily due to its dependence on China for the procurement of raw materials.
As the table shows, not only India but globally every country has been severely dependent on China.
Any impact on the chemical industry will be further felt in the agricultural industry too. This is due to the dependence of fertilizer companies on China for imports of Raw Material.
The industries we observed above wouldn’t generally resort to laying off employees. This is because these industries it is more expensive for the new employees to be trained again in comparison to keeping them employed. The lay off’s show that the pandemic and the great lockdown has forced industries into a corner. The revival of these industries will require an individual industry-wise focus to boost the economy.
As we await another more considerable relief package it is worthwhile to notice how Germany aims at relieving its economy. Germany has announced a 500 billion dollar package. In this, the companies can avail loans at 0% interest and repay them once their companies are in a position to. The relief packages cannot be matched but a package making up a higher percentage of the GDP would provide the required boost.
It does not require a closer look at the above sector-wise impacts to notice overreliance on the Chinese markets. Such reliance would leave any economy crippled when the other is in crisis. This, however, does not mean that economies must close up after the pandemic. Finding other reliable markets to fall back on and not placing all the eggs in a single basket would suffice.
The current situation will have Indian industries competing with Chinese goods which will be cheaper due to the incentives provided by the Chinese government on exports. Competing with a country is complex especially when it also is the supplier of raw materials.
Understanding IPO Grey Market: If you’re actively involved in the market, you might have come across the terms White market, Black market, and surprisingly Grey market. A white market is one that is considered a legal, official, and authorized market for goods. A black market is a complete opposite which is illegal.
A grey market, on the other hand, stands for a market that exists with the knowledge of the owner of the goods but takes place outside the official channels of exchange. Today we have a closer look at the IPO grey market.
An IPO is a means for the company to raise capital for its growth and expansion needs. For the investor, it may be an opportunity to make a quick move into owning the shares of a fastly growing company. The purchase of these shares generally takes place through authorized mediums which is the stock market regulated by the SEBI.
What is an IPO Grey Market?
A successful IPO generally has all its shares subscribed or oversubscribed. In cases of oversubscription, the shares are allotted on a pro-rata, or in cases where the subscription is too high a lottery system is adopted. Here the chance of an allotment is too low. In these situations, investors turn to the grey market for prospective sellers who have also applied for allotment.
When the IPO gets sold through unofficial or unregulated markets it is known as a Grey IPO market.
The Grey Market generally involves a seller, buyer, and dealer.
The Seller is the person who actually takes part in the application for shares with the motive of selling them in the grey market.
The Dealer acts as a mediator between the buyer and the seller.
The Buyer is the person who purchases the allotted or unallotted shares in the IPO from the grey market
It is necessary to note that there is no regulatory body governing the Grey Market. All the agreement transactions that take place are on the basis of mutual trust placed on each other.
When an investor attends the IPO through the white market, he/she applies and bids on the day the IPO opens. The process of allocation of shares generally takes around ten working days. It takes two weeks for the shares to get listed and start trading after the closure of the IPO.
When an investor involves himself in the grey IPO market, the trading can start before the IPO begins and even after the allocation is done.
How does a grey market function?
In a grey market, the trading is done through a dealer or a mediator.
— Depending on the demand and conditions in the market the Grey Market Premium is set. The Grey Market Premium is the amount in excess of the offering price ( offering price is the price at which the company sells shares to investors in an IPO).
— The buyers who are willing to purchase it at this price make a deal with the mediators. The mediator, in turn, contacts the seller. The bids by the buyers can take place before the application even happens or even after their -allocation.
— The shares then get allocated to the seller. As soon as the shares are listed, on the direction of the buyer, the mediator may instruct the seller to transfer the shares to the buyer’s Demat account. Or he may request that the shares be sold in the stock market on the settlement price and transfer the sales proceeds to the buyer.
In the case where one of the party defaults there is no action that an individual can take as there is no regulatory body to monitor the transactions and all the transfers take place online.
Kostak and Kostak Price
In the grey market, it is possible for a person to have his ‘Application for the IPO’ be sold. The buyer will pay a price called the Kostak price in return for the seller promising his IPO application to the buyer.
It does not matter if the application gets allocated or not. Irrespective the buyer will have to pay the Kostak price to the seller.
Benefits of taking part in the Grey market
The main benefit the buyers acquire is the increase in their chances of allocation of shares in cases of subscription. It generally takes up to 2 weeks from the closure till the shares get listed. The buyers in the Grey market bet on the fact that the prices will be higher on a listing day in comparison to the unofficial price (inclusive of the grey market premium) from the Grey market.
The Buyer can then sell this at a higher settlement price once the stocks are listed and make a profit. On the other hand, the buyer also faces the risk of a potential fall in the price which may result in a loss.
Example: ABC company sets the offering price at Rs. 150per-share.
Based on the demand for the shares of ABC the Grey market premium is set at Rs. 30.
In this case, the total official price comes up to Rs 180.
If the settlement price on the listing day is set at Rs.200 then the buyer is set to make a Rs. 20 profit.
On the other hand, if the settlement price on the opening day is set at Rs. 160 then the buyer makes a loss of Rs. 20.
Taking into consideration Kostak.
In the same example as above for ABC company say the Kostak price is set at Rs.100 and a single lot size is of 100 shares. The application by the seller has been for one lot.
In the above case say the price is set at Rs. 200.
Here the seller will sell the lot and transfer the gain to the buyer’s account. The profit here is 20(200-180) x 100 =2000.
From this amount Rs. 100 is deducted for the Kostak amount owed and the net gain is transferred to the buyer in exchange for the risk he took over.
Similarly in the above example if the settlement price is at Rs.160 the buyer will face the loss of the price falling below the unofficial price and Rs 100 added from the Kostak price.
In the case of the seller not receiving an allotment for his application, the buyer will still have to pay him Rs. 100.
The buyer will also face a loss if the seller application does not get allocated. Hence in order to reduce the risk of non-allocation he creates an agreement with many sellers. Say if the IPO is oversubscribed by three times he then creates an agreement with multiple sellers he reduces the chances of loss because of Kostak price due to non-allocation.
The Grey market also serves the function of giving other investors an idea of the demand the shares of a company might have and the investor may adjust his application accordingly. The demand may also indicate a price at which the shares may trade once listed.
The Grey market may also be used by the company or the underwriter to push up the demand for the shares. Hence before using the Grey market as a reference, it should be noted that they are subject to manipulation. In addition, the stock market is a risky enough place. The grey market only adds to the risk due to the lack of a regulatory body and because the risk of trust cannot be quantified.
A detailed study to better understand Why the Crude Oil prices dived into Negative?: A month ago, on March 8th, 2020, ‘30% slash in the crude oil prices’ seemed to be the biggest headlines crude oil could ever get. However, on April 20th, the crude oil prices broke into the news for its extraordinarily inconceivable negative price dump. A negative price, theoretically, would essentially mean that you are to be paid for the purchase of the commodity. Today we try and decode how the crude oil prices ventured into the negative territory and what it would mean to us.
Does the ‘-ve’ represent all oils?
In short, the answer to the above question would be ‘No’. This is because there are multiple varieties of crude oils classified on the geography of their procurement, their quality, and other factors. This ensures their prices remain different just like other commodities.
Popular crude oil types are West Texas Intermediate( WTI), Brent Crude, Dubai Crude, OPEC, etc. An insight into the different types of oils would help us better understand why only a particular oil went negative.
— The Brent Crude
The Brent Crude oil is sourced from the waters of the North Sea between the UK and Norway. It consists of 0.37% sulfur. It is known to be of perfect suitability for the production of petrol. The fact that it is sourced from the sea makes its transportation cheaper from ships.
Financial Traders take delight in the Brexit crude oil as it is highly volatile. This gives it a larger scope to place their bets.
— The West Texas Intermediate ( WTI )
As the name suggests this oil is sourced from the US. The oil fields are drilled for their high-quality shale oil. The WTI crude oil consists of 0.24% sulfur. WTI is used in the production of diesel. However, being sourced from oil fields and the high cost of setting up pipelines make the ‘transportation and storage’ expensive.
The Dubai crude aka Fateh is a medium sour crude oil extracted from the United Arab Emirates. The OPEC includes oil from OPEC members like (Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and also Murban crude from UAE). The Urals crude is sourced from Russia. Several other crude oils also exist like the Tapis, Bonny Light, etc.
Just like any other commodities, these crude oils are priced differently based on the quality, cost of procurement, etc. Of the crude oils named above, the WTI had been priced at $-37.63 on April 20th.
What affected Oil Prices?
The factors that played a role in the massive fall of the oil prices were
— Demand and Supply Factors
The demand and supply play the most important role while determining the price of a commodity. Political tensions and war have had an impact on demand. This is because countries prefer to stock up due to future uncertainties driving up the prices. This was also noticed during the 9/11 attacks and the invasion of Iraq.
— The Russia v/s OPEC standoff
In today’s scenario, however, controlling the supply chain could have played a big role. Major players like Russia and the OPEC (spearheaded by the Saudi) had a fallout. This was over an agreement to reduce production during the pandemic in order to match the reduced demand. Russia expressed dissent over this as it seemed to favor the US WTI once prices are adjusted.
Result: In retaliation, Saudi Arabia increased its production flooding the markets in order to hurt Russian producers from falling prices. Anton Siluanov Russian finance minister responded by saying that they could handle the situation even when the prices dropped to $30 a barrel. He added that the government would be able to operate without difficulty for four years.
These conditions may have been tolerated by WTI in a normal situation. But considering the pandemic where two-third of the world’s economies are facing lockdown led to a backfire. This led to a build-up of oil reserves with no one available to make purchases.
This was because the airline industry one of the biggest consumers of crude oil has most of their planes grounded. Vehicular consumption at its minimum with people quarantining themselves and working from home. With industries requiring crude oils for production shut, this led to a huge build-up of reserves.
Crude oil is priced based on the futures contracts set as benchmarks. Futures contracts are agreements to sell a commodity at a set agreed price and set date in the future. This is done due to the volatility of crude oil prices. Dealing in futures helps the producers and buyers possibly protect themselves from uncertainty. Producers and buyers enter into an agreement with a set price beforehand.
If in a situation the price set for crude oil increases at the set date the buyer is benefitted by the cheaper predetermined price. If in a situation the price decreases at the set date the seller makes a profit. This is because he can still benefit from the higher price as per the future contract.
In the crude oil future contract, however, there is another party of traders who serve as middlemen between the producers and buyers. The traders enter into agreements with the producers. They do this with no intention of acquiring the oil. They do this with the aim of earning a profit after entering into another contract with the buyers.
To combat this US President Donald Trump said the US would buy 75 million barrels to replenish the national strategic stockpile. This would also provide temporary relief to the oil businesses.
How did these factors lead to the eventual fall?
A discussed earlier the WTI already incurs additional expense due to the pipeline. In addition to this, the market was heavily supplied by the OPEC crude with no takers. To combat the price fall Saudi Arabia and Russia reached an agreement. They agreed to cut output by 9.7 million barrels per day for the next two months. This, however, was not enough to stop the prices from falling.
The reserves saved in Cushing, Oklahoma kept building up. The Eventual overflow led to a situation where producers began paying buyers to take the oil. But in such a case why did the producers not destroy the crude oil as it would protect them from further losses. This is because the U.S. antitrust law prohibits oil companies from coordinating their production.
In addition to this, the Future contracts of May saw no buyers. Both these issues further alleviated the problem. It eventually led to the oil prices moving into the negative territory.
What does this mean for the economy?
This meant that the buyers were in a position to be paid in return for the purchase of WTI oil. However, as mentioned earlier crude oil is traded based on future contracts. It would not enable a country to take advantage of these in a short period of time. Also, with the demand for crude oil dropped due to the lockdown the respective country reserves will not be able to hoard large quantities.
The Indian government may use any benefits arising to set off the losses due to the lockdown. However, It is not a completely rosy picture for the Indian Economy. This is because 7 million Indians currently reside in economies that depend on crude oil exports. Adverse fall in their crude oil due to the WTI will lead to adverse effects in their economy. Joblessness will further affect Indian states that depend heavily on the remittances that are transferred from these countries.
There also arises the question of the Indian Government benefitting directly from the WTI. In 2018, of the $106.7 billion worth of crude oil only $2.8 billion can be attributed to WTI.
The benefits of the fall in crude oil prices being relayed to commercial customers are doubted. This is because the government has not transferred the benefits of falling prices over to commercial consumers from the last two months. This also may be seen as a silver lining as in a situation of probable rises. The government may again hold their ground and not relay the losses in the form of high prices.
Low oil prices historically have been known to tip the scales of power from the producing countries to the importing countries. Low oil prices were also one of the reasons for the fall of the Soviet Union ( Yess… Chernobyl too!). Talking about the rebalancing of power, low oil prices are also known to encourage gender equality.
Studies with the Middle East as their prime focus have explained that oil production apart from various other reasons also impacts gender equality. Oil production being their biggest industry further discourages the women. With the number of women in the workforce reduced in turn leads to a reduced number of women with political interference. Further enhancing the patriarchal society. Talk about a silver lining.
The renewable resource industry is also in danger if crude oil products result in providing longer benefits.
When we look at these effects in the short term from the Indian perspective it really helps being tipped upwards especially when we are in the midst of ‘The Great Lockdown’.
Indian Economy Overview 2020: The rough ride of India during coronavirus times in 2020 is now being termed as ‘The Great Indian Lockdown’ after Gita Gopinath’s (Cheif Economist at the IMF) address. The IMF has forecasted the Global GDP to contract by 3%, a downgrade of 6.3% from earlier estimates. This shrink is estimated after considering the pandemic to peak in the second quarter and recede by the second half of the year. This is an optimistic assumption considering that we do not have a vaccine in sight.
Discussing the economic downturn may be considered trivial in the minds of a few in comparison to the testing pandemic. But considering the fact that we are from a country where 22% of the population is below the poverty line, the toll of an economy in depression could further lead to deaths from starvation. This dilemma poses a significant threat to the country especially if the pandemic is not bought into control in time.
In order to find where the Indian Economy is headed in 2020, we’ll look into the GDP today. The GDP is the market value of all the finished goods and services produced within a country for a particular period. In the midst of the GDP of the whole world shrinking, we take a look at the effects on the Indian GDP to assess where eventually we are headed in the near future.
What does each day of the lockdown mean for the GDP?
Tejal Kanitkar (National Institute of Advanced Studies) and T. Jayaraman (M. S. Swaminathan Research Foundation) have attempted to quantify the impact of the lockdown in their study. Their model assumes the estimated annual output to be distributed uniformly across the year.
They then assess the impact based on the number of working days lost. It estimates the direct and indirect impacts of lockdown on sectors using Input-Output multipliers which are assumed to be constant. The research takes into account four different scenarios based on the number of days lost as depicted by the table shown below.
According to the table, the Indian economy is to suffer a loss of around 13% of the GDP if we are to consider the 1st phase of the complete lockdown and the portion of the complete lockdown in the second phase ( 21 days + 6 days). Here, we did not consider the complete extension period as relaxation were expected state-wise after April 20th.
If, however, we are to consider a situation where the lockdown isn’t lifted till May 3rd (40 days) the losses loom at around 20% of the GDP.
In a worst-case scenario where the COVID-19 cases explode. The government will be forced to extend the lockdown till the end of May. The economy will then be estimated to lose 73 lakh crore i.e a 33% impact on the GDP.
Positive Forecasts of the Indian economy in 2020/21
The only bittersweet news is when the forecasts of the Indian economy are compared with that of other countries. India and China are one of the few major economies that may still expand during the pandemic. The IMF has predicted the Indian economy to grow at 1.9%.
Fitch solutions and Goldmann Sachs have also cut their forecasts of the Indian GDP growth rate for the financial year 2020 -2021 to 1.8% and 1.6% respectively. The IMF has however predicted that the following year the Indian economy will be able to expand at 7.4%. This growth rate will be achievable only if the Indian economy is successfully able to control the outbreak. Additionally, a successful stimulation of the economy along with falling oil prices would enable the Economy to meet the targets.
One of the most important factors that stimulate the economy is wages. In the current scenario of the lockdown, the daily wage workers are already left without a source of income. As businesses keep sinking into losses each day the situation is further alleviated. The Centre for Monitoring the Indian Economy (CMIE) has reported that the unemployment rate has shot up to 24%. As people lose income earning capacity they begin to consume less. And if the consumption is reduced the immediate middlemen also suffer losses and eventually even the production is reduced.
— Agricultural Crisis
The Rabi crop harvest has already taken a hit due to the lockdown as it is labor-intensive. The disruptions of the supply chains have further inflicted misery on the plight of the farmers. Despite this, the RBI has claimed that the agricultural output was at an all-time high. But we have to further discuss the importance of just harvesting and quantity produced.
According to Christophe Jaffrelot ( French Political Scientist), productivity is not the sole determining factor but the price at which it is sold is also important. Farmers in these cases no longer have a minimum support price due to urban bias. Cheaper imports are bought into the market to keep the prices low for the urban population. This, in turn, affects the local farmers and is called an urban bias
— Loans to ailing Businesses
The Indian government has put forward various monetary measures to put more money in the hands of the people to stimulate the economy. These include the rate cuts by the RBI. These rate cuts give people access to loans at cheaper rates. However, the reduction in rates is to work only if the banks pass on the benefits of the reduced rates to businesses. Considering the ailing banking sector is already plagued by high NPA’s (Non-Performing Assets) in the form of bad loans. The banks may be concerned over worsening this issue by giving out loans to businesses affected by the lockdown.
‘The Great Lockdown’ crisis that we face today is significantly worse than the 2008 recession. This is particularly because in the recession majority of the workforce still had the ability to work or at least look for jobs. The IMF has considered multiple scenarios including ones where the pandemic remains strong even after the second quarter and carries into 2021. In this case, we would be looking at an estimated global contraction of 6% followed by no growth in 2021.
On being asked as to “why only India and China are expected to maintain positive growth?”. Gita Gopinath replied that this is due to the fact that India and China are already starting from a low place. She also advised that the priority at the moment should be in dealing with the health crisis. Prof Phillipe Martin put the only way out of the current situation as “ To kill the virus we have to kill the economy, at least in the short term”.
“You need to revise discriminatory FDI restrictions, it is against the WTO principles of Non-discrimination and against free and fair trade” – Statement by China Embassy
The above statement came after the Indian government sanctioned new restrictions on FDI investment in India. According to these new sanctions, all the investments made by the neighboring countries in India will be under tighter scrutiny. These new rules have been specifically made keeping FDI flows from China in mind. India is trying to safeguard its interest by imposing these entry rules, as it is worried about the opportunistic takeover of Indian firms by Chinese firms in these financially vulnerable times.
As per these new sanctions, any companies (from countries that share its borders with India) will have to approach the Indian Government for permission, if they want to invest in India. Before these new sanctions, they could invest via the direct route in India. One needs to understand the fact that these new sanctions do not cap any limit on investment, it just reroutes the way to do it.
The existing FDI policies were earlier limited only to Pakistan and Bangladesh. Now, these new rules bring China, Nepal, Bhutan, and Myanmar within its gamut.
But why this sudden imposition of sanctions by India? This can be simply attributed to the fact that because of the COVID -19 pandemic, all the major stock indexes have taken a big hit and it’s made the valuation of all the companies very economical, vulnerable and attractive. So, to prevent the interest of these companies been taken over by opportunistic firms from neighboring border sharing countries, these new sanctions have been imposed.
According to a press note released by the Department for promotion of Industry and Internal trade on 17th April 2020,
“A Non-resident entity can invest in India except for sectors or activities which are prohibited. However, an entity of country which shares its borders with India or where the beneficial owner is a citizen of country which shares its borders with India, can invest only via Government route.”
In addition to this, a company incorporated in Pakistan can invest only via Government permission, only in sectors other in defense, atomic energy and other sectors prohibited in foreign investment policy.
An article published in the Times of India states that “this move is very similar to barrier imposed by other countries like Germany, Spain, Italy, and Australia to block predatory capital for hostile takeover by China”
Now, what is the difference between the Automatic route and the Government route?
In simple terms, through the automatic route, the investor has to just inform RBI about the investment made while in case of government route, the investor has to take permission from a particular ministry or department.
According to an estimate by India-China economic council, an estimated Greenfield investment of 4 billion USD (Rs. 30,000 crores) has been made in Indian startups. Such has been the growth of investment in the Indian market by Chinese investors. So, is it the right time for India to tighten its FDI policy stance? Only time will tell. But for the moment, India has safeguarded its long term considerations by blocking hostile buyouts and takeovers.
Moreover, as per the data published by the Department for Promotion of Industry and Internal Trade,
“Between 2000 and 2019, FDI received from China was estimated around $2.3 billion dollars (nearly 14500 crore rupees) and all the other border sharing nations invested a combined FDI of 71 crore rupees”
This clearly explains the fear factor of the Indian Government.
The last nail in the coffin to introduce this policy by India would have been the purchase of 1.75 crore shares of HDFC Bank by China’s peoples Bank which increase its share in HDFC Bank to 1% from 0.2% earlier. This move is to safeguard the interest of Indian firms because of their current financial vulnerability.
Other major investments in India come via third part routes like Singapore. For example, $ 500 million (Rs. 3500 crores) investment from Singapore subsidiary firm Xiaomi (China Origin) should also have to be added to official statistics as this investment indirectly comes from country sharing a border with India.
The reports published by the ministry of finance do show a huge investment to the tune of $4 billion. This investment comes via online wallet like Paytm (backed by Alibaba), BigBasket, and cab service provider like Ola (sizable investment from China). Mobile phone manufacturers like Vivo, Oppo, and other Chinese phone manufacturers. In the Pharma sector, the acquisition of Gland pharma by Fosun Pharma for $1.1 billion, etc. are some of the direct and indirect investment by China in India.
These new policies won’t be applicable to the existing investment but any future investment will have to follow the new policy rules. Therefore, the latest rules imposed by India might look like a decision taken in haste, but these sanctions were always on cards. The breakout of the COVID-19 epidemic made this decision quicker and faster. So, to answer China’s claim that India is breaking the WTO rules of free trade, one can simply say that there is no restriction on investment that can be made but it has to be just done via Government route.
Anyways, a few questions still remain unanswered:
“It remains to be seen as to what would be the implications of these FDI sanctions over long time?”
“Looking at the gravitas of these sanctions, how does the future of trade and investment shape up for these two Asian giants?”
“Considering the importance of China and its expertise in technology and infrastructure, will the restrictions be relaxed in the future?”
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!
The weakening rupee against dollar meaning & significance: It may come across as a surprise to most of us if we were told that on 15 August 1947, 1 Rupee = 1 Dollar. Today, however, the Rupee stands at 76.16 in conversion from a dollar. In this article, we try and take a look at how this happened and get a clearer understanding of what these figures mean.
Although the Indian rupee can be traced back to ancient India, it derived its official role only in the modern era ever since it was managed by the Reserve Bank of India (RBI). After noticing current rates it does not take long to understand that the rupee has become significantly weaker in comparison to the dollar over the years. But why did this happen?
The requirement for the rupee to be first devalued came in 1951. This was because India opted for loans from foreign entities for their 5-year plans. The Indian economy, however, benefitted from this as it gave rise to foreign investments into India. This also gave a push to its exports as Indian goods were now cheaper in the global markets.
The wars faced in 1962 and 1965 further increased the devaluation needs to meet the requirements of the war. By 1985, the rupee stood at 12.57 in comparison to the dollar. Due to the enormous trade deficit of 1991, high rates of inflation saw the Rupee fall further to 22.74. The wars that followed, unstable governments, poor decisions, democratization, and ever-increasing deficit have brought the rupee to where it stands today.
How does the valuation system work?
India currently follows the floating exchange rate. To understand how we arrived at this we would have to first understand the role played by the US and the Bretton Woods agreement.
The two world wars had destroyed the European Economies. Most of the countries had resorted to borrowing loans from the US in exchange for gold during the war. This led to the US having the largest gold reserves after the war. This prompted the 44 countries to decide on the dollar as their reserve currency at Bretton Woods. They were in search of something stable as European currencies were on the brink of collapse after the war.
With the dollar backed by gold, it seemed like a good idea. The US had also promised the 44 countries that they would limit printing. In addition to this, they would also allow any country to exchange dollars for the gold reserve if the country in question decided.
However, as time passed it was noticed that the US was printing money as necessary to fund the Vietnam War. By 1971 the dollar in circulation was considerably lower than the gold reserves held in the US. This was protested by the French government and requested the conversion of their dollar reserve. This led to the then-President Richard Nixon canceling the Bretton Woods agreement and removing the US from the gold standard.
The earlier steps taken by US president led to the US dollar losing all is value. Nixon, however, cleverly reached an agreement with Saudi Arabia and other OPEC countries to accept only the dollar in exchange for crude oil. In return, the US would provide them with security. The countries accepted the proposal as they were already in a poor state after the Arab War.
This led to the dollar becoming much more powerful than ever before. It made it a necessity for all countries to have dollars to be exchanged for crude oil. This gave rise to the petrodollar and drove us into the era of floating rates. This is a system where the exchange rate is set by the forex (foreign exchange) demand and supply for the currency. Unlike a fixed system where the government can determine the rate.
Important terms that you should know
Before we go further into understanding if the current exchange rates are good or bad, we should first understand a few terms like Forex Reserve and Current Account Deficit.
— Forex Reserve
This is the amount of foreign currency held by the central bank of a country (RBI). The RBI then has the power to control the value of the currency based on the reserve. The reserve can be sold in exchange for its local currency. This would increase the demand for the local currency resulting in appreciation of its value. The foreign reserve of a country also acts as a guarantor.
— Current Account Deficit (CAD)
The Current Account is used to measure a country’s imports in comparison to its exports. When the value of a country’s imports exceeds the value of its exports it results in a CAD.
— Currency Appreciation and Devaluation
Say the current value of the 1$ = 70 Rupees.
If in future 1$ = 75 Rupees, we say that Rupee has devalued, i.e. it has fallen in comparison to the dollar. On the other hand, if in future 1$ = 65 Rupees, we say that the Rupee has appreciated, i.e. it has obtained a stronger position.
Determining the value of the Indian Currency
The CAD position and the amount of Foreign reserve leads to the value of the Rupee to be appreciated or devalued. Foreign investors play an important role as they increase the reserve surplus of a country. They invest only if they see value in a currency or market. The interest rates offered by the RBI also influence investors. They prefer to enter markets with high-interest rates. The increased demand for our currency leads to appreciation. If the Interest rates are low on the other hand it would lead to devaluation of the currency.
If the currency appreciates or becomes stronger it leads to imports becoming cheaper. The appreciation will, however, hurt the exports as our goods will be less preferred due to them being more expensive for foreigners. But this would also, unfortunately, increase the trade deficit.
When a currency appreciates and if the authority chooses to let it appreciate it chooses foreign investments over its exports. The NDA government has chosen foreign investments leaving the exports to fend for itself. This is because foreign investments will push the country’s growth rate at a much faster level than revenue through exports. Further, deficits can be directly covered through these investments and if the investments are directed towards government bonds then they can be directly focussed on infrastructural development and other welfare programs. But this scenario can be assumed only if the currency appreciates.
Indian Rupee at 76.16. What to expect?
2020 has proved to be a disastrous year so far for the economies all around the world. The rupee stands 76.16 in comparison to the dollar. With COVID-19 cases worsening and the economy in complete lockdown threatening to slip into a depression.
The government has announced a number of measures to combat the COVID-19 one of them being the RBI cutting the rates. The rate cuts were aimed at supporting ailing local businesses by making loans cheaper for them. This, however, was foreseen by the foreign investors as their exit started coming as early as the first week of March. This will lead to a shortage of investments in government infrastructural projects and welfare schemes.
The lower interest rates will lead to more money in the hands of individuals which in turn would lead to increased consumption. Increased demand would result in higher levels of inflation leading to the Rupee being devalued further. The government will have to focus on increasing the exports as Indian goods will be cheaper abroad due to the devalued rupee. This, however, would be an uphill challenge as all the other economies are also facing lockdown bracing for depression.
Sectorwise Effects of Weakening Rupee Against Dollar
The effects of the falling Rupee on different sectors will differ. It will depend on whether the sector is import oriented or export. An import oriented sector will face disastrous consequences as they will have to pay more for the same quantities. If the sector depends on export like the Indian textile sector it may be beneficial if the markets respond favorably.
One of the silver linings has been the fall of crude oil prices due to the Russian vs OPEC feud. This could help in maintaining the Rupee value. This could also have provided some relief to the ailing Aviation, Oil and Gas, and Power sectors but the government has not passed on the benefits of the reduced prices as the prices remain at the same level as those before the fall.
Does an appreciation of currency have to be good news?
( The Plaza Accord – 1985)
The best example to consider the effects of the appreciation of a currency would be the Japanese Yen. In the 1980s, the Plaza Accord was signed in an agreement to devalue to the dollar. This saw the Yen rise from the previous 270 per dollar to 80 per dollar within a decade. This may have proved beneficial to Japanese importers and tourists and had a disastrous impact on its export industry. This led to over two decades of economic stagnation and price deflation.
Today 1 Bangladesh Rupee = 1.28 Yen, but this does not mean in any sense that Bangladesh is performing better than the Japanese. Countries are known to intentionally devalue the currency in order to boost exports and tourism. This would also prove beneficial to the Indian tourism sector. This is because tourists target cheaper countries, but with the COVID-19 scare to persist even after it is controlled it seems like a long shot.
Appreciation of the currency, on the other hand, would also not immediately prove beneficial to the IT sector as most of the jobs are outsourced from the US and Europe due to the cheaper solution. If such a situation were to arise where 1$ = 1 Rupee, it would lead to large scale job losses. This is because companies would rather keep jobs in the US. This would lead to inflation further deteriorating the economy, eventually leading the currency to be adjusted to its original value.
If the Indian economy is to take the rupee appreciation seriously it has to be done by improving infrastructure, raising the living standards, alleviating poverty. The most important would be to increase quality production not only in our products but also in our human resource where both are competitive and better than standards available elsewhere in the world. This would increase demand and eventually lead to appreciation of the Rupee.
Biggest Stock Market Crashes in India: Stock Market crashes symbolize times of wealth destruction and pain to investors. They also symbolize times of opportunity and resilience to few. A stock market crash is when a market index faces a rapid and unanticipated severe drop in a day or a few days of trading. Today we look at some of the worst single-day falls that affected the Sensex over the history of Bombay Stock Exchange(BSE).
10 Biggest Stock Market Crashes in India
The table below shows the biggest single-day falls faced by the Sensex.
What Caused the Biggest Stock Market Crashes in India?
The first COVID-19 case in India was traced on January 30th, 2020. The following weeks involved what seemed like just a COVID-19 panic. This was based on the effects the companies globally would face with the worlds leading manufacturer China busy battling the virus.
February saw a silver lining for the Indian economy as an oil feud between Russia and OPEC resulted in a global crash in oil prices to $30 per barrel. This was over a dispute over the steps to be taken to face the demand slump. However, the benefits of the price slash were not relayed to the end consumers. The prices still are still set to those before the crash. The benefit of the reduced price still remains with the government.
March 6th saw Yes Bank at the brink of failure adding to the woes of COVID-19. This was due to the bad loans resulting in high NPAs with the bank eventually requiring government intervention. This further gave a clearer picture of the ailing banking sector. The markets saw a 1,000 point loss on March 4th and March 6th. Lockdowns imposed around Europe and ‘Emergency’ declared in the US saw Foreign institutional investors fleeing the Indian markets to invest in stable developed countries. As the COVID-19 cases kept worsening in India the markets entered a bearish slump.
On 23rd March the markets fell by a record of 13.15%. This was the largest fall in Indian market history. The lockdown which followed did not bring any relief to the stock markets. As of April, the markets had reached depths wiping out earnings from the last three years.
The 2008 financial crisis was known as the biggest disaster after The Great Depression. The financial crisis was caused by the bubble created by the housing market in the US. It trashed not only the ‘American Dream’ but also rippled on throughout the world killing many Indian Dreams too. The Ripple effect saw the market fall a number of times in 2008. The year 2008-09 had seen the Indian markets fall by over 50% from its high.
Harshad Mehta was known as “The Sunny Deol of the Indian Stock Market”, “ The Big Bull”, and eventually was the eponym to his scam. Harshad Mehta was a broker known for his lush luxurious lifestyle. He took advantage of the regulations which barred banks from investing in the stock markets in the 1980s and 1990s.
(The Big Bull, loosely based on Harshad Mehta’ life and financial crimes is under production and will star Abhishek Bachchan )
Harshad Mehta took capital from banks and invested them into the stock markets promising banks a high return. Mehta would invest in selected securities and the huge investments made on behalf of the banks would hike up the demand for those shares. He would then sell the proceeds passing a portion of the profit to banks. The stock markets crashed the day he sold off his holdings in the market due to the over-inflated stocks.
Indian stock market crashes to date were caused due to a variety of reasons like change of ruling parties, actions taken by the government (demonetization), ripple effect of international market crashes and now even pandemics. These crashes may seem like a picture of the riskiness and volatility of the Indian markets, however, they can also be viewed as a testament to the tougher times they have recovered from. Today the Indian Markets face bigger challenges and only time can tell how they cope with the forever changing environment of 2020.
Should Stock Markets Close Over Coronavirus Pandemic?: A walk down memory lane, India just lost their second wicket as Sachin walks back after 6.1 overs. This moment from the 2011 World Cup final has been etched in our memories. With the two important pillars gone lets hypothetically imagine someone decides to call it quits and shuts the TV off. What new levels to your anxiety would you discover? Similar is the anxiety-driven plight of an investor on hearing the news of market closure in tough times.
( The Sensex Index showing a 34.22% fall from Jan 17th to Apr 03)
The stock markets, however, face stakes a million times higher. Ever since the Sensex summited at 41945.37 points on 17th January, it has fallen a total of 34.22%. The Sensex broke the max single-day fall a number of times, losing over 13% in a day ( on March 23rd) and ended at 27590.95 points as of 3rd April. After the government took additional measures by imposing a lockdown to fight Coronavirus, the ANMI ( Asociation of National Exchange Members) requested the SEBI to close the stock market.
This request was made due to the difficulty faced by employees of member partners to commute to work amidst the lockdown. The request also included that the markets should be shut till the depository and broking services are declared essential by the government. We can also see #bandkarobazaar trending on twitter but this was supported mainly to avoid further fall of the market.
Today we look at the historical market closures, reasons supporting a market shutdown and also why such an action may be detrimental.
Historical Stock Market Closures
Dating back to the 19th century the stock markets have been shut a few times around the world over dreadful occasions. The most infamous of these market closures being the 9/11 crash in the US, where the market was closed for a week.
HongKong had halted its trading in wake of The Black Monday crash in 1987 and Greece closed its markets for five weeks in 2015 during the economic crisis. Moreover, the stock exchanges have been forced to shut down a number of times during natural calamities too.
Nonetheless, there also have been periods of extreme difficulty such as The Great Depression of 1929, World war 2, and even the 2008 crisis of our time where the market remained open.
Should Stock Markets Close Over Coronavirus Pandemic?
Argument for closure of the market
One of the major reasons for the call towards the closure of markets has been to reduce the volatility of markets and panic selling. A closure of the markets will give investors a few days to catch their breath and reevaluate their positions instead of blindly following the market sentiments due to the COVID-19 pandemic.
— Why closure is required in the Current Scenario?
In the wake of the COVID-19 pandemic, social distancing has become a necessity. This would prove challenging for stock market employees and the employees of dependant services to risk their lives by venturing out to work. This may further escalate to the market being crippled if they are infected.
Argument against the closure of the stock market.
— Investor confidence at risk
One of the major reasons against the closure of markets is that a market closure will further erode all investor confidence in a particular country. This will be caused due to the lack of transparency and data available to investors during the closure. In a time of crisis where investors are already panicking, a closure will only intensify their anxiety. This will increase the possibility of them selling out of the markets.
— Lack of liquidity
The effect the closure will have on the liquidity needs of individuals will also be severe. This is due to the fact that a number of individuals depend on trading for their daily income. Apart from this, investors depend on the stock market for liquidity. In a country like India, which is already troubled by the 21-day lockdown, the closure of stock markets will further intensify the liquidity issues. This is because a number of individuals have already lost their regular income by means of unemployment or pay-cuts. The stock market shutdown would further hurt them as converting their investments could have helped them through these difficult times.
Other Stock Market Closures around the world
The Philippines Exchange shut on March 17th following the lockdown imposed by President Duterte. The Sri Lankan markets also followed suit. The Philippine stock exchange, however, suffered severe losses once it opened up two days after the closure. The opening day slashed 13.34%.
We also take a look at the Chinese stock market which was one of the worst-performing stock markets in the world before the crisis. During the crisis, however, the SSE Composite Index fell only 10%. This was despite them being the epicenter of the pandemic, whereas markets around the world shed a quarter of their earnings.
The COVID-19 hit China at a different time in comparison to the rest of the world. The markets closed on January 23rd (also due to the Chinese new year when china was still battling COVID-19) at 2976 points and opened on February 3rd falling to 2746 points. During this period china had anticipated the effects and infused $173 billion into the markets but still suffered the loss.
However, the Chinese markets cannot be set as an example as only 4% of their market amounts to foreign capital. The rest remaining in the hands of the Chinese government, directly or Indirectly. Also, China is not known to release adverse data into the public eye. They have been accused of manipulating the actual figures of COVID-19 cases. They were also accused of suppressing the outbreak which then lead to a wider spread.
In this article, we tried to answer should stock markets close over coronavirus pandemic. In short, it could be assumed that investors around the world may forgive closures due to the COVID-19 outbreak. This, however, does not offer enough validation in support of the closure. Thanks to technology and additional support in the form of ‘Work From Home’ continuity can be ensured.
In addition, the stock exchange can take notes from the BCP plans of RBI. The individuals critical to the RBI continuity were moved to a secure location. Here, everyone involved including the support staff (hotel etc.) were quarantined. They will even be working with hazmat suits, maintaining social distancing with a backup team too. Hopefully, the show keeps going and market closures do not add to the woes of 2020.
21 Day Lockdown (COVID-19): Due to the outbreak of coronavirus, last week, the world witnessed the largest democratic lockdown of 21 days as announced by PM Narendra Modi on March 24th, 2020. As we enjoy the privileges at our homes for social distancing and take measures to avoid Coronavirus, a greater portion of Indian population struggles to take measures to ensure their survival. Today we take a look at the cost of such a lockdown and the possible future we are looking at.
There have been many views regarding the lockdown including the one put forward by Dr. Deepak Natrajan. He took estimates based on comparison with the cases in China and the respective death rate and after periodically adjusting for one year. Later, he arrived at the conclusion that the maximum of 25000-30000 estimated deaths in India due to COVID-19. This was done to bring up the comparison of the cost of the Lockdown.
Whether this 21-day lockdown would result in smashing the economy where a hundred thousand may lose their jobs is still a point of discussion. However, most economists are estimating this pandemic resulting in many more being affected by starvation in a country already facing poverty and malnutrition.
Dr. Deepak Natrajan went on to explain how the estimated deaths due to COVID-19 are a blip in comparison to the deaths caused in a year. The deaths in India currently stands at ten lacs per year. This also sheds a light on the dilemma faced by the government over imposition a lockdown. However, it didn’t mean that he encouraged the government to do nothing but instead opt for a different route which involved aggressive testing.
Immediate effects due to the 21-day lockdown
This was the first problem noticed after the lockdown was announced as people immediately resorted to the hoarding of commodities. It was done to cover the next 21 days as it was unclear from the PM address over availability of essentials and the lockdown was mistaken as a curfew.
As always, hoarding causes problems of availability. The reduced commodity results in businesses trying to benefit from the added demand by hiking up the prices which further alleviates the problem. This further reduces the purchasing power of large sections of the economy for commodity at higher prices.
– Exodus of Daily Wage Workers
The 21-day lockdown eliminated all job opportunities available to the daily wage workers and other workers in the unorganized sector. Their situation got worse with no savings to fall back on and added hostility from the landlords who viewed them as a COVID-19 threat. This inability to pay rent also lead to the exodus where workers started their journey home hundreds of kilometers away on foot.
( Migrant Workers trying to find a way out in Delhi)
Although they were further portrayed by the media as an addition to the existing problem, this was the only way out for these bread earners to escape the problems caused by the 21-day lockdown. They started this march to avail government relief in the form of deposits in Jan Dhan saving accounts and foodgrains available to their families in their hometowns. Moreover, any attention given by the state government arrived only after the exodus had already begun.
Announced Relief Packages
A relief package of 22 billion was announced by the finance minister 36 hours after the lockdown. It involved 50 Lac insurance coverage to the healthcare workers, a move in the right direction. However, there were a few schemes part of the relief that raised a few eyebrows.
– Increased wages – MGNREGA
The Finance minister announced increased MGNREGA wage by Rs.20 to Rs. 202 per day effective from April 1st. The wage increase is said to provide additional benefits to the workers. The logic to announce this as part of the relief is hard to understand as during a 21-day lockdown the work provided through MGNREGA is non-existent. The benefit of can only be availed after April 14th provided it is not too late. Moreover, the Finance Minister added that the workers will have a benefit of Rs 2000. However, this will only be available considering that that MGNREGA worker is employed for 100 days in a year.
The added benefit also seems to be unsuitable as the weighted average for the 2019-2020 record is already Rs.221 in the MGNREGA scheme. The unweighted average in major states is Rs.226 per day. The additional benefit on a closer look does not offer any relief to daily wage workers during a lockdown and also depends on the availability of work after the lockdown. The period after this 21-day lockdown is stated by many economists as a period of recession. This is arrived at after taking into consideration of the rise in unemployment as one of its factors.
– Food and Cash in hands of people.
The Finance Minister announced that Rs 2,000 will be deposited into the Jan Dhan Yojana Accounts of Farmers. Further, Rs. 1,000 will also be deposited into the Jan Dhan Accounts of pensioners, widows and the disabled. The Government is also to provide 5 kg of rice and 1 kg of pulses in addition to the existing amount received for the next three months.
In 2017 the Pradhan Mantri Jan Dhan Yojana saw the women ownership of bank accounts rise from 43% to 77%. This indicated that most of the accounts in the PMJDY were those of the spouses of the workers in the cities. To benefit from the relief provided, the individuals will have to travel back home which adds to the exodus.
(Pronab Sen-Chairman of the Standing Committee on Economic Statistics.)
Apart from this, the government also announced a hike on the withdrawal limit of EPFO to transfer cash into the hands of unemployed individuals. The Finance Minister also announced that the center will pay the PF requirements of both the employee and the employer for 90% of the employees (for the firms with less than 100 employees of salaries less than Rs.15000).
– Moratorium on Loans
The RBI allowed lending institutions to offer a moratorium to borrowers on repayment of all loans for 3 months. The banks that have approved this includes Punjab National Bank, Union Bank of India, Bank of Baroda, Canara Bank, IDBI, State Bank of India (SBI), Indian Bank & Central Bank of India.
This move will reduce the burden on the individuals and also provide them the purchasing power for necessities.
– Reduction of Rates
The RBI cut the repo rate and the reserve repo rate by 75 bps and 90 bps. The repo rate now stands at 4.4% and 4% respectively. This will result in a fall in interest on deposits and make loans cheaper. This is aimed to increase the spending and hopefully stimulate the economy. However, this was also done to ensure the enterprises that are affected by the pandemic can get back on their feet and avail cheaper loans.
If we take a step back from this very welcome rate cut and consider the state of the baking sector and their struggles with NPA’s, Non-Performing Assets (as in Yes Bank), it is hard to foresee banks lending to businesses that have been financially weakened due to the pandemic. Any loans given out would be a leap of faith and RBI must ensure that the benefit from rate cuts is transferred from the banks.
Lockdowns around the globe
Countries like Italy, Spain, and France have implemented a national quarantine. The total count of cases in Italy and Spain are currently over 100,000 and France over 50,000. The United States, having the most number of cases (over 210,000) has still not imposed a nationwide lockdown taking a different pill than that taken by India. The US has primarily focussed only on hotspots and 24 states have asked their residents to shelter at home.
China, which only a few months ago was one of the hotspots for Corona, imposed a lockdown but only in the hotspots i.e. Wuhan and Hubai (60 million people) which could also be one of the reasons why the stock market in China was not as badly hit as that of other regions. (Also read: Coronavirus Impact on Global Indexes (2020) – US, Europe & More)
However, these countries have followed aggressive testing measures. India, on the other hand, has one of the worst testing rates in the world with only around 43,000 tests conducted so far. This was despite having the capacity to conduct 12,000 tests per day. So far there have been 2000 confirmed cases in India. Countries like Korea have used rampant testing measures like ‘Drive-Thru Coronavirus testing centers’ to flatten the curve to total cases. This has enabled them to catch up with the spread and quarantine effectively.
The relief package announced by the US is at 2 trillion dollars to fight the coronavirus. A comparison of the $22 billion relief package in India would be unfair. When the relief packages are compared to the respective GDP’s, it showed that $2 Trillion is roughly 10% of the US GDP. Other countries like Canada, Singapore have roughly invested around 5% of their GDP’s. However, India has rolled out a package of just 0.8% of its GDP to fight coronavirus outbreak.
This comes after former Finance Minister P. Chidambaram mentioning in his ten-point plan of action that a minimum relief package of Rs 5-6 Lac Crore was required. Despite that, he didn’t see an economic recovery on the horizon and also termed the COVID-19 lockdown as the biggest crisis the country has faced. Even after the migration crisis post-independence, every famine since independence, the tsunami of 2004, the 2008 financial crash are all put together. This further puts doubt on the capabilities of the relief package.
Is the Indian economy headed towards a recession?
The IMF has already stated that the situation worldwide is worse than the crisis of 2009. They also mentioned that we have already entered a recession and a possibility that the global GDP will shrink by $2.3 trillion. So far 80 countries have already asked for the emergency fund from the IMF. Kristalina Ivanova Georgieva said there is a possibility that $2.5 trillion will be topped for the financial needs of emerging markets.
Subash Chandra Garg, the former Finance Secretary, and former Economic Affairs Secretary has stated that the Indian growth will likely be negative next year unless the government takes measures to prevent it. He also commented that the two-thirds of the economy has been severely hit and the GDP after the lockdown will be reduced by 5-6%. Economist Arun Kumar has also gone ahead to say that the current situation is worse than those faced during a war.
The GDP does not represent all the sections of the society accurately as those with high incomes though few pull the average towards rearer ends. Hence in a situation with a possible negative GDP in the coming quarter will mean that those in the lower-income sections are devastated.
— Extended Lockdown?
Despite having the worlds largest lockdown, researchers from the Cambridge university released a paper that suggests adding length to the lockdown to properly contain the virus. The paper suggested a three phase lockdown (21 days – 5 days rest – 28 days – 5 days rest – 18 days) or a continuous 49-day lockdown for the Indian region. Based on the observations of the current lockdown, the economy is operating at -50% of the GDP as per Arun Kumar. In addition to the effect on daily wage and unorganized sector workers, India cannot afford another extended lockdown without much more serious consequences.
There is a need to ramp up the testing done in India to catch up with the curve and hopefully flatten it. This is a necessity because the current scenario has exposed the cracks in the Indian infrastructure and its ability to cope with a crisis. India has one doctor per 10,000 people in comparison to 41 in Italy and 71 in South Korea.
— Inadequate relief measures
The current policies aimed at the poor in the form of increased income offer is just a mirage of actual help. A lot more has to be done to ease the suffering due to the lockdown t0 the poor. Any success in the relief package or hopefully a stronger revised relief package will require involvement and coordination with the state governments. The current exodus of workers could have been prevented if state governments were kept in the loop. The lockdown too would have been better implemented. Hoarding and police brutality are attributed to the lack of communication and direction from the government.
Subash Garg mentioned how over the last 70 years of our history there are no measures taken specifically to save and push businesses. The government has to roll out new policies to ensure this, especially in the current situation. Else these businesses will find it hard to start again. The severe times of 1990-91 bought forward reforms. Similarly to stimulate the economy, revised relief packages and new reforms are in need. It is already certain that the Corona Recession of 2020 (hopefully not depression) will replace all comparisons in the future that were earlier made with the 2009 crisis.
Indian Stock Market Crash in 2020: After making a peak of 42,273.87 points in Feb 2020, Sensex crashed over -38% by 23 March 2020 to 25,638.90 points. We are currently witnessing one of the fastest crashes in stock market history, even worse than the 2008 market crash as quoted by many leading market analysts. In this article, we are going to discuss the reason behind this stock market crash in 2020.
Here you’ll find everything that you want to learn regarding the Indian stock market crash in 2020. We’ll look into leading causes, facts, effects and what do economists have to say about the crisis. However, before we start the article, let’s first understand what exactly is a stock market crash so that everyone is on the same page. Let’s get started.
What is a stock market crash?
A stock market crash is when a market index faces a rapid and unanticipated severe drop in a day or a few days of trading. A double-digit percentage drop over a few days in the market index generally constitutes a stock market crash. A stock market crash may be caused due to economic bubbles, wars, large corporation hacks, changes in federal laws & regulations and natural disasters. They are generally followed by panic selling and can lead to bear markets, recessions and even depressions.
There have been a few measures to stop a crash. One being large entities purchasing massive quantities of stocks in order to curb panic selling. Trading halts have also been introduced but both these measures have not been proved to be actually effective in pausing a crash.
(The stock market crash of 1924 was one of the most unfortunate crashes where the Dow Jones Index lost 23% in two days and eventually led to ‘The Great Depression’.)
Do Stock Market crashes lead to Recession?
A stock market crash reduces the investors’ confidence in the economy and as the falling shares slowly wipe out investor wealth. Investors resort to selling off their holding at minimal costs. Due to lack of confidence investors also refuse to partake in the purchase of shares.
With the diminished wealth of investors and the valuations of companies dropping, it makes harder for companies to raise capital and secure debt. Companies in bad financial shape lead to layoffs resulting in a fall in demand in the economy. As the decline continues the economy contracts resulting in a recession. A stock market crash does not necessarily result in recession but a recession always results in a stock market crash.
The period between 17th January 2020 to 27th March 2020 saw the SENSEX lose 12,129.75 points. Multiple events were involved which led to a negative impact on the market.
The presentation of the Union Budget on 1st February 2020 coupled with the coronavirus panic led to the SENSEX falling by 2%. Later, WHO classified Coronavirus as a potential pandemic on February 28th, 2020 which led to both the Nifty and the Sensex ending with the worst weekly fall since 2009.
This was further followed by the shares of Yes Bank falling on March 6th due to bad loans and one of the worst NPA in the country. One of the founders of Yes Bank was also arrested on corruption charges. The fall after Yes Bank coupled with the effects of Coronavirus in Europe and the US resulted in the markets touching 35,636 points. (Read More: The Unravelling of Yes Bank – Fiasco Explained)
On 12th March the Sensex fell by 8.18% as a result of WHO declaring corona a pandemic. As the pandemic further spread and the number of cases in India worsened the stock Market plunged 13.5% on March 23rd. Besides, a countrywide lockdown of 21 days was announced by Prime Minister Narendra Modi starting from midnight March 24th. The lockdown was a necessity to curb the spread but it was the last thing the Indian economy required in its efforts to make a recovery.
A recession is typically described as 2 consecutive quarters of negative growth. However, a few more factors are also in play.
The NBER ( National Bureau of Economic Research) defines a recession as “ a significant decline in economic activity spread across the country lasting more than a few months visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
With several predictions by notable economists indicating India having a negative GDP, the lockdown has further intensified all the other factors possibly directing the economy towards a recession due to lack of income to major portions of the sector, with tourism industry already facing unemployment, the other industries will definitely face the heat. The lockdown also guarantees a drop in production and a drop in wholesale retail and sales.
What has the Government done so far?
All efforts by the government began after the lockdown was announced. The Finance Minister Nirmala Sitharaman announced a financial relief package of Rs 170,000 crores. The package included hugely appreciated Rs 50 Lac insurance cover to every individual in the health sector. The finance minister also announced 5kg of wheat and 1kg of pulses in addition to the existing scheme to over 80 crore individuals.
This too was appreciated as the 21-day lockdown would rid the daily wage workers of any source of income. The withdrawal limit of the EPFO was hiked. This was done to transfer cash into the hands of individuals. This would also provide support to unemployed workers.
In addition, the Finance Minister also announced that the center will pay the Provident Fund requirements on behalf of both the employer and also the employee for 90% of the employees. This will further reduce the burden on small businesses as it is targeted towards firms with less than 100 employees and those that have salaries less than Rs 15,000.
(RBI Governor Shaktikanta Das in talks with the Finance Minister Nirmala Sitharaman)
The RBI announced a moratorium on EMI for the next 3 months and also cut the Repo rate by 0.75% to 4.4%. The Moratorium on EMI’s will reduce the burden on individuals.
The repo rate, on the other hand, will make it cheaper for individuals to avail loans, however, deposits will receive reduced interest. This is aimed at increasing cash in the hand of an individual resulting in an increased demand which in turn may lead to stimulating the economy.
What do economists have to say about the crisis?
— Raghuram Rajan
(Raghuram Rajan- Former RBI Governor)
Former governor of the RBI, Raghuram Rajan, known for predicting the 2008 financial crisis and recession in 2005, said in an interview that the most important requirement right now is to prioritize targets such as fulfilling supplies and physical resource requirements of the healthcare sector followed by reaching out to the poor and only then should the question of reduction of taxes and temporary income support should come into the picture.
On questioned about the impact coronavirus may have on the global economy he answered that due to the unprecedented situation we should first look into the Chinese economy and observe the relaxation placed in China and the response COVID-19 has to it and accordingly take an action depending on if the virus spread begins again after the relaxation.
This would mean that the lockdown would be required to be implemented for longer periods. He also said in the interview that it may be a little too early to predict if the COVID-19 pandemic will lead us towards depression. In addition, he further added that with a recession almost certainly on the cards we still can focus on avoiding a depression based on measures taken
— P. Chidambaram
( P. Chidambaram – Former Finance Minister)
The former finance minister advocated the lockdown but mentioned that a lockdown alone was not sufficient. He mentioned that a relief package of 5-6 Lac Rupees is the absolute minimum which is required. He also provided a 10 point action plan which included the direction of cash and food towards the urban poor, assurance that the employer will be reimbursed for any wages paid during the lockdown and also proposed cuts on the GST.
On being questioned about future economic recovery he answered saying that there is no economic recovery on the horizon. Although the growth for the last quarter stood at 4.7% due to corona as per global economic loss prediction of 2% percent the same may be applied to the Indian markets.
He also added that the situation the country is put in now is worse than the migration crisis post-independence, famines to date, the tsunami of 2004 and even bigger than the 2008 financial crash and in fact even bigger than all of them put together.
— Jayati Ghosh
(Jayati Ghosh – Indian Economist)
Jayati Ghost one of India’s foremost economists and also a Professor at JNU, Jayati Ghosh, took a much more critical stance to highlight the magnitude of the problem the lockdown will create.
According to Jayati Ghosh in a country like India, a lockdown of more than a week will have severe disruptions. The damage done by the lockdown is already greater than the damage caused by demonetization due to which the economy has still not recovered. A massive shock such as this will have a negative multiplier effect and will continue to permeate.
She added that lockdown which has already disrupted the demand within the economy, with the supply chain broken down will force farmers to get rid of their stock as they will not be able to sell their produce and any bulk buying or hoarding engaged in the consumer end will only lead to shortages in the economy.
On being asked on what effect this will have on the GDP she made it clear that she has reservations already of the GDP figures being fudged and are actually lower than that reported by the government due to which we may see negative GDP in the coming quarters.
Prime Minister Narendra Modi announced that if the nation does not impose the lockdown, the country and our families will be set back by 21 years.
After taking a closer look which makes it clear that a lot more has to be done before it further devastates the country if poorly implemented and makes one wonder that if so, by how many years is the economy going to fall behind due to the lockdown. The government has to have a plan in place instead of abrupt decisions followed by a plan that may fall in line with such decisions. This is required to keep the economy from falling into a depression at all costs.
While looking into the Indian stock market crash in 2020, we should also not forget that it took the Dow Jones Index almost 25 years to recover from the crash that had led to The Great Depression. The financial package announced which currently makes up 0.8% of the GDP does not even reach the bare minimum set by former Finance Minister P. Chidambaram at 5 lac to 6 lac crore, let alone be compared to Western countries where they are set at 5- 15% of the GDP. The government still has to roll out policies swiftly to make the necessary yet draconian lockdown a success.