Finance in the post-COVID-19 World

Panchanan Das

Professor of Economics

Department of Economics

University of Kolkata (financial blog on behalf of GLARiUS – www.glarius.com)

GLARiUS Markets Intelligence (www.glarius.com) provides tools, prognoses and graphs to monitor performances of economies, countries and stock markets worldwide.

The outbreak of coronavirus (COVID-19) brings about extreme uncertainty in our economic and social life by carrying a novel risk.Global financial markets have turned volatile and experienced episodic meltdowns since early March, 2020. The health crisis has been transmitted into a financial and economic crisis incurring terrible collateral damages. This crisis has caused a huge shock in the financial market. As financial markets are driven by algorithms designed by humans, individual investors behave like Keynes’s ‘beauty contest’: investors speculate on what others would speculate. 

The first phase of the crisis started in early January, 2020, after the Wuhan incident in the form of pneumonia outbreak as China reported for the first time to the World Health Organization (WHO). Rational investors started to anticipate, at least partially, about the faith of the global economy as declining trend started in investment in the transportation industry during this early phase. The next phase of the crisis started after publishing the first assessment of the Wuhan incident by the WHO during third week of January 2020. The stock market started to experience the shock internationally because of the outbreak of coronavirus. The current stage started since the end week of February, 2020, when Italy declared lockdown in its most productive region. Selling in the stock markets along with buying in supermarkets jumped up significantly in Europe.  

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The severity of the crisis prompted the Federal Reserve to cut down the emergency rate on March 3, 2020. The central banks in Canada, the UK, Australia, New Zealand and many other countries followed the similar move to ensure adequate liquidity. Equity markets in many countries in the developed as well as developing world suffered the worst during March 9-16, 2020. Bond yields fell sharply, most noticeably in the US where the 10- year benchmark yield fell below 1 per cent. The Dow Jones Industrial Average (DJIA) along with other prominent indices has witnessed multiple lower circuits during this time. The Indian stock indices, both Nifty and SENSEX, have also experienced a downfall of roughly 30 per cent of market capitalisation during this lower circuit. Roughly USD 650 billion has been wiped out in a single trading session during this phase. This crisis has led to a liquidity crunch in the financial system because of cut down of active workers with reduced work hour. 

 The effects of sharp global turbulence in the financial market transmitted into Indian financial system since March 11, 2020, following the declaration of COVID-19 as a pandemic. The Indian equity market experienced buoyancy till mid-January 2020, and recorded a sharp decline thereafter. The BSE Sensex reached above 40000 level during the third quarter of 2019-20 partly because of the fall in oil price in the global market and sizeable recovery in industrial output, but started downfall during end of the last quarter of 2019-20. Substantial sell-offs in equity markets was triggered by growing risk aversion investors. The BSE Sensex fell by 2919 points (8.2 per cent) on March 12, 2020 (shown by the red reference line in Figure). The equity market experienced a sudden fall of turnover more than 10 per cent during early trading hours on March 13, 2020, that results in breakdown of the circuit and suspension of trading for 45 minutes. 

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The worst affected sector is the aviation sector experiencing nearly 20 percent downfall after the travel ban and lockdown of the Indian economy. The declaration COVID-19 virus as pandemictriggered travel bans globally. The other major affected players in Bombay stock exchange include Tata Steel, Adani Ports, Mahindra & Mahindra, HDFC Bank, Axis Bank, Reliance Industries and the State Bank of India. Foreign investors (FIIs) are continuously withdrawing money from the Indian market.

India has been in lockdown for almost 3 weeks now. A large trunk of the workforce does not earn any money or cash. The long-term (economic) effects of the pandemic are difficult to deliberate and speculate on. But the cement and foundations of the economy are being swept away at least on the short term. When the fire shall be extinguished, will there be any vegetation, any plants left? Or will bankruptcy of the economy cause large-scale economic, social unrest.

#Mumbai

BSESENSEXIndex 

avg Δ10 years +7.03% p.yearΔ1 year -16.96%
Sharpe ratio +0.13
geopolitical risk factor 8

GLARiUS Markets Intelligence (www.glarius.com) provides tools, prognoses and graphs to monitor performances of economies, countries and stock markets worldwide.

Glass Ceiling Effect in Indian Labour Market

Panchanan Das
Professor of Economics
University of Kolkata
(financial blog on behalf of GLARiUS Markets Intelligence – www.glarius.com) GLARiUS Platform 

Property Taxation in Indian Cities – Application of Unit Area Assessment

Property tax is one of the major fiscal instruments of local governments in urban areas for raising their own revenues. Two popularly used tax bases of property taxes in India are annual rental value of the property and the capital value of the land. Most of the urban local governments use the notional property rental values as the base for assessing property taxes. In the notional property rental method, the tax base becomes stagnant, and an upward adjustment of tax rates is the only way to increase revenues from the property tax (Bagchi 1997, Rao and Ravindra 2002).

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Local governments at the cities are responsible for designing instruments to finance their activities with the 74^th Constitutional Amendment Act (1992). Many urban local governments have initiated reforms to improve the property tax system. The reforms in property tax focus primarily on improving the tax base and the administrative mechanism on of the tax. The municipal governments in a number of Indian cities have adopted the capital value of property method since 2004. In this method, values per unit of land are estimated, and the tax base is the product of this unit value and land area, plus the value of the property determined by some multiplicative factors.  It is highly unlikely that the potential gains of the new method have been fully realised partly because of the absence of a well-functioning real estate market for accurate information on property values and high transaction costs that adversely affect land prices.

Historical prices of real estate worldwide (45 countries) can be found on www.glarius.com.

The Kolkata Municipal Corporation (KMC) and Newtown Kolkata Development Authority (NKDA) have adopted recently the Unit Area Method of Property Tax. The urban local bodies of Delhi, Bangalore and Pune also have introduced the capital value system in their property tax assessment. This system is simple and transparent, and property owners can assess their tax and submit the returns. In this system, tax for a particular property is based on the annual value of the property obtained by multiplying unit area value assigned to the localities by the covered area of the property and the multiplicative factors for occupancy, age, structure and use. Multiplicative factors account for the wide heterogeneity among properties within a conceptual block. This system is expected to reduce disparity in assessment of similar properties within the same locality and thereby ensures equity to the taxpayers, efficiency in tax collection, neutrality in resource allocation, and accountability of tax officials. Equity in property taxation is horizontal or vertical. Vertical equity refers that a tax should be progressive in income or wealth. Horizontal equity, on the other hand, refers that taxpayers with equal ability to pay ought to have similar tax burdens.

Daily movements in stock markets, 10-year and 25-year averages of the main stock market indices like IBOVESPA, BSE Sensex, RTSi, Dow Jones and 40 more can be followed on www.glarius.com

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References

Bagchi, A. (1997). “Reforming the Property Tax Base: Need for a New Direction.” Economic and Political Weekly, 32(47): 3005-3010

Rao, U.A.V and A. Ravindra, (2002). Reforming the Property Tax, New Delhi: UNDP

Mr. Panchanan Das
Professor, Department of Economics
University of Calcutta

Demonetization in India: Impact on the Economy

On November 8, 2016, the government of India took away the legal tender character of 500 and 1000

Rupee denomination of banknotes. As a result, 86 percent of the currency (nearly 11 percent of GDP) in circulation was reduced suddenly from the economy. The shortage of currency created a shock to the economy which has several implications. Of course, the capacity to spend by the people had affected directly reducing the consumption demand in the domestic economy. The unorganised sector operates substantially outside the formal banking channels and uses cash for its transactions. The unorganised sector affected badly sinking their production. This affects demand in the entire economy since. As this sector still produces 45 percent of the national output, it has significant contractionary effect in the economy.The rate of growth of the economy as a whole would come down.

Related: India's Demonetization Is a Distraction, Not a Solution

Demonetization reduces the cash in the economy. But, cash in the Indian economy represents only less than one fourth of total money supply. While the Reserve Bank of India supplies the cash circulating in the economy, the banking system as a whole creates more money by lending the deposits it gets to others. While the amount of currency in circulation sharply declines, the deposits with the banks increases although slowly. The money multiplier, the ratio of money in the economy to the cash that the central bank releases in the economy, rises as the people uses less and less of cash and more and more of the deposits with the banks. Cash held by the people is a leakage from the banking system and not available to be further circulated.

New Delhi: People queue up at out side of banks ATM to get money in New Delhi on Sunday. PTI photo by Vijay Verma

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It is argued that there are agents in the economy who are hoarding currency as a method for storing savings, especially by people earning unaccounted or illegal incomes. Demonetization has been introduced for reining in the unaccounted incomes or wealth in the economy. It is being argued that the part of wealth held by people as cash would be extinguished as a result of demonetization. There is artificial suppression of demand because of the cash crunch. After remonetisation with the new series of bank notes, consumption demand has started to rise, and if the items are in short supply because of the contraction in economic activity or because of supply chain management, inflation may go up.

Follow economic performance of over 40 countries on www.glarius.com Main stock market indices, inflation, real estate prices, prognoses.

Mr. Panchanan Das
Professor of Economics,
University of Kolkata
Kolkata, West Bengal, India

Financial Integration and Real Sector Growth in BRICS Nations

by Panchanan Das
 
India - The 1980s and 1990s were characterized by substantial institutional change in financial markets that significantly increased global financial integration. These changes resulted in the emergence of new issues that were not present so far. As a result, we have seen a noticeable increase in the size and variety of studies dealing with these issues. This article is restricted to look into some interrelated issues on financial integration among the BRICS nations. BRICS is an association of five major emerging economies: Brazil, Russia, India, China and South Africa. These five countries together contributed roughly 1/5 of the GDP to the world economy with nearly 40% of the world population in 2015. Initially it was BRIC but later South Africa joined the family to be newly termed as BRICS. The immediate aftermath of the 2008 financial crisis didn’t had much effect on their economies as the emerging powers continued to grow.
Related: What is the state of the BRICS economies?

Image: REUTERS/BRICS Photohost/RIA Novosti

The BRICS countries have little in common in political terms and the degree of openness with regards to the level of globalization and liberalization. The unique and unifying factor is the scale of their economies in terms of gross domestic product (GDP) and their sustained growth rates in the past two decades. The shift from intensive technique to extensive technique way of extracting materials lead to a paradigm shift in development. Although there exists a huge number of studies that concentrate on measuring the level of financial integration and focusing on the issues related to it, there are relatively small number of studies that concentrated on these nations. However, the changing power structure of global economy calls for more attention to the emerging giants. The BRICS is a renewed global partnership for development. The BRICS member countries have converged to work on some common goal and priorities. Being the fastest growing and the largest emerging giants, the BRICS nations account more than half of the global population and contribute majorly in the world GDP growth. Daily changes, 10-year and 25-year averages of the main stock market indices like IBOVESPA, BSE Sensex, RTSi can be followed on www.glarius.com
Related: BRICS Face Their Own Challenges While Meeting As A Bloc

Mr. Panchanan Das is an Economics Professor at University of Kolkata Kolkata, West Bengal, India

Divergence Between Stock Market Performance and Real Economy Trends

by Panchanan Das
 
India - Many economists believe that significant decrease in stock prices could be source of future recession, whereas large increase in stock prices may reflect the expectation towards future economic growth. However, there were controversy issues to doubt the stock market’s predictive ability such as the 1987 stock market crashed followed by world recession and the 1997 Asian financial crisis. Daily BSE Sensex movements can be followed live on Glarius Investments Intelligence Platform. www.glarius.com

While the Sensex, as of any other stock or share price index, is conventionally treated as an indicator of economic performance of an economy, it can only be the gross indicator of an economy like India both statistically as well as conceptually. This is because the movement in share prices is guided by the expectations about the future performance of companies listed on the stock exchange. Here we enter in the field of Markets Intelligence. Movements in share prices may indicate economic health, but it could not predict properly the performance of the real sector. Glarius (www.glarius.com) has tools to monitor performances of Indices worldwide. Performance, yields of the last 25 years. Also, we have a tool to predict future movements in Indices. GLARIUS PROGNOSIS TOOL. 

There is a divergence between stock market performance and real economy trends. The stock markets seem reasonably function well even if the real sector not performing so well. This is because the Sensex is a stock market index representing the movement in the share price of major companies listed in the Mumbai Stock Exchange.

Mr. Panchanan Das is an Economics Professor at University of Kolkata Kolkata, West Bengal, India

Does the movements in the BSE Sensex Index Reflect the State of the Indian Economy?

BSE Sensex building     Source: financialexpress.com

The movement in BSE Sensex (Mumbai, India) largely depends on major macroeconomic parameters like GDP growth, inflation, fiscal deficit, foreign exchange stability, industrial output etc. affecting the expectations of future performances of the companies. Let’s say RBI (Royal Bank of India) increases interest rates because of rising inflation. This increases the borrowing cost of companies which is expected to add to their cost of production and bring down their profits. This will bring down share prices of most of the companies in the market.

Related: Sensex rallies 145 points, best weekly jump since May

Mumbai business district  Source: mumbaithemegacity.weebly.com

The Sensex is also affected by the macroeconomic indicators of the global economy. The debt crisis in the Eurozone, for example affected the Sensex after the integration of the domestic financial market to the global market. Recently, the sensitive index decreased 604 points to 26398 on June 24^th because of the Brexit effect. Stock prices and the BSE Sensex index can be regarded as a good mirror of the Indian economy. However, it must not be forgotten that Stock Markets in general are subject to a deal of emotions, opportunism and hustlers looking for an overnight profit. For serious, long-term investments it is important to look at the results and opportunities over a long period of time.

Daily BSE Sensex movements but also long-term results, average return on investments can be followed live on Glarius Investments Intelligence Platform. Glarius has developed models, graphs and tools to monitor performances of stock market indices worldwide. Also, we have developed an econometric model to predict future movements in indices such as BSE Sensex. www.glarius.com

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Mr. Panchanan Das
Associate Professor at the Department of Economics, University of Calcutta
Kolkata, West Bengal, India