Vijay Kumar Gaba

Last weekend I happened to attend couple of e-meetings. The participants were mostly financial market participants. Few business persons and professional also were present. The agenda was primarily to discuss the current economic scenario and the trends in financial markets. However, within few minutes, the discussion digressed to the current socio-political environment. The views of the participants rekindled the memories of 1993 in my mind.

It was summer of 1993. The country was in total turmoil at that time. The unprecedented balance of payment crisis in 1990-91 had forced the government to initiate significant economic reforms - some under pressure from IMF, some forced by the massive scam in financial markets, and some voluntarily. Many small and medium sized businesses - there were very few large businesses back then - were struggling for survival. Most of them would eventually become redundant over next one decade.

Financial markets were still reeling beneath the debris of the massive scam (popularly known as Harshad Mehta Scam); even though, the liberalization of capital markets had created a certain amount of excitement amongst businesses and market participants. The stocks markets were running far ahead of fundamentals on global buoyancy.

The global geo political situation was tense post the first Iraq war, the first war that was televised live on TV. Czech Republic had ceased to exist. Bill Clinton had just taken over as 42nd President of the United States and committed to widespread fiscal reforms in US. European Economic Community created a single market bringing European Union into existence. The global markets were buoyant though economy was not doing well. Few years later, the internet boom would start that will obliterate the memories of all previous stock market bubbles.

In India, the financial capital Mumbai was rocked by a series of bomb blasts killing hundreds of innocent people. The premier stocks exchange of the country (BSE) was also targeted by the terrorists. These blasts were reportedly carried out by hard line Muslim groups to avenge the demolition of a Mughal period disputed structure in Ayodhya. The decade old insurgency in Punjab had just peaked and was brought under control, while the situation in J&K had started to worsen.

So, while the country was struggling to revive from an economic debacle, it was also struggling with communal and sectarian violence. On political front, the killing of Rajiv Gandhi had weakened the Congress Party. It had started to lose significant ground in many states; in which it would get rendered irrelevant forever. 1991-1996 would be the last Congress Party government at the center, where it had ruled since independence, except for two short breaks during 1977-1980 and 1989-1991.

In these settings, I had a chance to interact with one of the most prominent politicians in the country at that time. The man was very enthusiastic about the Hindu renaissance in the country. He claimed that all the wrongs done to the country and its Hindu majority would be undone now and the aggressors would be put to their place. Being naive in the political and religious matters, I requested him, could I ask three questions. He was gracious enough to allow me the opportunity. I asked him the following three questions. Incidentally 27yrs later, I am still waiting for the answers.

1.         Does Ram belong to only Hindus or Indians?

2.    Does Brahma creates only Hindus; Vishnu nurtures and preserves only Hindus; and Mahadev destroys only Hindus? or they are lords of the universe and creator, preserver and destroyer of "life" per se.

3.    Does Vishnu incarnates to protect the rule of Dharma or rule of Hindus?

These days, my social media timeline is inundated with messages which claim Ram to be an Indian phenomenon. Incidentally, one Union Minister has recently mentioned Buddha also to be India's contribution to the global community.

As society we are moving away from Ram at accelerated pace. We are implying that Ram is capable of being insulted and respected by ordinary people; just like any other ordinary person. Even judiciary promptly admits complaints of insult to Ram. The judges fail to assimilate that their act of admitting such cases is equally hurtful to the sentiments of millions of devotees of Ram, as it seeks to trivialize Ram as ordinary citizen capable of being insulted.

Recently, some organizations have demanded Ayodhya like decision in cases of co-existing temple-mosques in Kashi and Mathura. I have still not heard any politician saying that these demands should be suppressed, lest they become more ardent and potentially violent.

In another development the elected Chief Minister of a State has declared that as "Yogi", he would not like to visit foundation laying ceremony of a mosque. My understanding of the term "Yogi" so far is based on what Lord Krishna narrated to Arjuna in Gita. For example-

sarva-bhūta-stham ātmānaṁ sarva-bhūtāni cātmani
īkṣate yoga-yuktātmā sarvatra sama-darśanaḥ

A true yogi always see’s God in all beings and he also see’s every being in God. A true transcendentalist see’s God everywhere.

ātmaupamyena sarvatra samaṁ paśyati yo ‘rjuna
sukhaṁ vā yadi vā duḥkhaṁ sa yogī paramo mataḥ

The person who is a true yogi never differentiates between any two persons. He see’s them equally both in happiness and distress.

Equanimity is thus the primary characteristics of a Yogi. But from the recent stance of the Chief Minister it appears that the color of robes is replacing equanimity as primary characteristics of a Yogi.

The short point is that we are likely to witness a fresh round of communal disharmony in the coming years. I am neither taking any sides nor would like to sit in judgment over the conduct of the government, judiciary and other organs of the society. I am just saying that like 1990s we are likely to witness political, economic, social and geopolitical turmoil in next couple of years.

My fellow investors though would be more interested in knowing whether we shall also see a dotcom like bubble in the stock markets also. Well, I believe that is already a work in progress. Just take care of your health and security.

The first Monetary Policy Committee (MPC) of RBI met for the last time during 4 to 6 August 2020. To commemorate the end its four year term, the Committee thankfully did not take any populist decision. It prudently kept the policy rates unchanged, as I had wished for (see To cut or not to cut is not the question), and focused on mitigation of stress caused by the economic lockdown due to spread of COVID-19.

In line with the stand taken by the government, the MPC refrained from issuing growth and inflation estimates. However, the governor's statement makes the following things clear:

(a)   Inflation, especially food & energy inflation, is a matter of serious concern at present and development on this front need to be watched carefully; though the governor expressed hope that as the monsoon progressed well and base effect comes into play, the food inflation will ease in 2HFY21 leading the headline inflation below the MPC target range. It is pertinent to note that for past almost one year the headline inflation is running above the MPC target range of 2 to 4%. Despite this violation, MPC has continued on the path of substantial monetary easing even before the COVID-19 breakout.

(b)   GDP Growth for the current year shall remain in contraction mode, despite robust recovery in the rural sector. MPC noted that "Manufacturing firms expect domestic demand to recover gradually from Q2 and to sustain through Q1:2021-22. On the other hand, consumer confidence turned more pessimistic in July relative to the preceding round of the Reserve Bank’s survey. External demand is expected to remain anaemic under the weight of the global recession and contraction in global trade. Taking into consideration the above factors, real GDP growth in the first half of the year is estimated to remain in the contraction zone. For the year 2020-21 as a whole, real GDP growth is also estimated to be negative. An early containment of the COVID-19 pandemic may impart an upside to the outlook. A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks."

(c)    There is scope for further cuts in rates. Most likely these cuts will be implemented in 2HFY21 as the outlook for inflation and growth becomes clear.

(d)   The Statement on Developmental and Regulatory Policies, the Monetary Policy Statement, 2020-21 Resolution of the Monetary Policy Committee and the Statement of the Governor, totally avoided any mention of the word "Fiscal". This makes it very clear that monetary policy function has chosen to overlook the fiscal digressions at present at least.

(e)    RBI is mindful of the stock markets digressing from the economic realities and surge in the prices of gold. However, RBI refrained from making any specific provision to control the excesses in stock and bullion markets. Rather, it has relaxed conditions for loans against gold when gold prices are ruling at highest levels. The central banker obviously does not want to rock any boat at this point in time.

(f)    RBI is actively managing liquidity and short term rates through various tools, and it seems to be enjoying the game. Expect this to continue for next few months at least.

(g)    The realization within RBI is growing that a large number of MSME and individual loans may be terminally sick. Setting of a Committee under chairmanship of K. V. Kamath, a vocal supporter of one-time restructuring of stressed loans indicates that there is virtual acceptance within RBI that these loans would need to be restructured. I guess, the only thing that remains to be decided is the modalities of restructuring and who takes how much hit. The complete omission of the term "Moratorium" from the statement explains the caginess of RBI on this issue.

To sum up, RBI has impregnated the markets with the twins - hope and caution. The morning sickness will keep bothering in coming days; and joy and bliss will keep it hopeful.

The Finance Ministry, in its Monthly Economic Report for July 2020, expressed guarded optimism about the economic recovery. “India is well on the path to a recovery from a trough in April, ably supported by proactive government and central bank policies. However, the increase in Covid-19 cases and subsequent intermittent lockdowns make the recovery prospects fragile and call for constant and dynamic monitoring”, the report said.

Relying on the IMD forecast of above average monsoon, the ministry expects agriculture to cushion the shock of COVID pandemic on the Indian economy in 2020-21. It is pertinent to note that agriculture contributes about 15 per cent of total gross value added. As per the ministry's estimates, a record procurement of wheat for Rabi season 2019-20 has enabled a flow of around Rs. 75,000 crore to the farmers which will boost private consumption in rural areas. Incraesed flow of funds due to higher crop, better MSP, a slew of agriculture sector refomrs, and massive rural sector stimulus, has moved the terms of trade in favour of agriculture and has reinforced rural demand. This has also manifested in an increase in rural core inflation between March and June 2020.

The Finance Ministry believes that "With India unlocking, the worst seems to be over as high-frequency indicators show an improvement from the unprecedented trough the economy had hit in April 2020. These include Index of Industrial Production (IIP), Purchasing Managers Index (PMI), power generation, production of steel and cement, railway freight, traffic at major ports, air cargo and passenger traffic, e-way bill generation capturing inter-state movement of goods, consumption of petroleum products and motor vehicle registration among others. However, risks on account of rising COVID-19 cases and intermittent state lockdowns remain."

As per the brokerage firm Nomura Securities, "While business resumption remains stuck at ~30pp below normal, hard data released so far have improved in July." The brokerage firm believes that "the uptick in July activity data reflects continued post-lockdown normalisation and pent-up demand, with most of it caused by a stronger recovery in rural demand. With daily cases continuing to pick up both nationally and in traditionally safer states (in the south and the east), the freeze in the Nomura India Business Resumption Index (NIBRI) indicates a growing risk that the sequential improvement in activity could taper."

An analysis of corporate results for 1QFY21 declared so far and management commentary post results also indicates that good monsoons and rural buoyancy have aided the margin of most consumer and auto companies have been aided by the buoyancy in rural demand.

Given this reliance on rural demand for overall economic recovery and corporate earnings revival, the tracking of monsoon becomes critical. Any disappointment on that front could rattle the fragile recovery and buoyancy in the stock markets.

So far, the monsoon trends have not been encouraging. As per the data released by IMD, till 04 August 2020, the country has witnessed 2% deficiency in the rainfall. The spatial distribution of monsoon has been rather bad. All 10 states in the North West region have witnessed 0% to 63% deficiency in rainfall. In the Central region, 6 out of 8 states are deficient. In South rains have been good, except in Kerala which faces 18% deficiency so far.