What can we expect post-pandemic?

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The COVID-19 outbreak is a major threat to the health of the people, and more so, it has taken a big hit to India’s economy. To avoid further disruption to people’s livelihood and incomes, the Government and the RBI have announced schemes and packages to revive economic activity. While all these efforts seem appealing to a layman, we must realise that these schemes will cost a large amount of money. In order to fund its revival activities, the government will have to turn to borrowing. This may lead to an increase in the burden of public debt. Economic theory suggests that an increase in public debt may lead to increase in interest rates, and inflation over time. But, practically, what can we expect post-pandemic?

What is happening right now?

2019 saw a growth in the number of start-ups. However, they are now facing a huge set-back in operations as well as in obtaining funds. The stock market showed extreme volatility in this crisis, showing its worst losses in its history, and record gains, all in a period of a few days. Many domestic as well as foreign rating agencies have predicted a negative growth rate for India in FY 2021. This translates to lower income for corporates post-pandemic.

2019 saw a growth in the number of start-ups. However, they are now facing a huge set-back in operations as well as in obtaining funds. Big brands such as Oyo, Ola, PayTM, Quickr among many others have been on a cost-cutting streak since long before the pandemic. Oyo has pay cuts and leaves with limited benefits to all its employees for April-July 2020. Ola, on the other hand, has laid off 1400 employees, due to a major hit on revenues due to the outbreak, while Zomato cut 13% of its workforce and reduced the salaries for the remaining workers.

The stock market showed extreme volatility in this crisis, showing its worst losses in its history, and record gains, all in a period of a few days. Further, the recent India-China military standoff has caused a stock market drop, though it is not expected to cause long-term damage. However, even before this escalation, Indian companies have been facing supply disruptions, particularly in consumer durables.

Many domestic as well as foreign rating agencies have predicted a negative growth rate for India in FY 2021. This translates to lower income for corporates even post-pandemic.

What are developed economies doing?

Public debt has risen in many developed economies as a response to the economic crisis that accompanied to coronavirus outbreak. However, these countries have interest rates at a near-zero level, which makes inflation an unlikely situation. Rather, deflation is a more serious problem that these countries may have to face. Deflation raises the ‘real’ value of debt, which consequently, means that in the post-pandemic world, businesses and consumers will have a hard time keeping themselves financially afloat. 

However, this situation is not applicable in India, where interest rates are much above zero. We will not have to worry about deflation. But high inflation is also an undesirable in the post-pandemic scenario. 

So how can we prevent high interest rates and inflation?

The increase in spending can be funded by printing of money by the central bank. This will keep the interest level rise in check. Along with this, the government must raise taxes to reduce the real income of its people, decreasing their purchasing power. This will allow the government to control the inflationary effects of the spending.

Although, there is a big difference between theories and real life. There are many constraints and limitations that make the application of the theory possible, specially in developing economies, where social welfare must be a top priority for authorities. As a result, we can expect the price levels and interest rates to rise in the future. 

The CEA Subramaniam, in an interview stated that India may not have to approach the IMF of the World Bank to mitigate the impact of the pandemic. The Government can reduce the impact of a huge fiscal deficit by listing government bonds on global indices. However, this may have an impact on interest rates, and may also result in crowding out of domestic investment. 

There is no easy way out of this pandemic. Any alternative will lead to interest rates rising and inflation. Though the RBI has introduced some schemes to induce liquidity, it will not be enough, considering India is already quite close to its fiscal deficit limit of 2.6%.

What does this mean for investors?

The increase in spending can be funded by printing of money by the central bank. This will keep the interest level rise in check. Along with this, the government must raise taxes to reduce the real income of its people, decreasing their purchasing power. This will allow the government to control the inflationary effects of the spending. 

Although, there is a big difference between theories and real life. There are many constraints and limitations that make the application of the theory possible, specially in developing economies, where social welfare must be a top priority for authorities. As a result, we can expect the price levels and interest rates to rise in the future. 

In the long run, a lot depends on how the Government spends the money. If it is spent on infrastructure, or on activities to increase employment, it can boost growth, which can repel the adverse impact of inflation. Corporates will benefit from increased income, which means higher yields for its investors. 

In the short-run, the Central Banks will buy bonds to counter the increase in interest levels, due to which fixed-income investments may take a hit, and the effects of the same may be seen for for a longer time. 

But when inflation is very high, gold is the best investment. Gold has a stable purchasing power, compared to other currencies. Since the real value of gold doesn’t change, it is immune to effects of government policies and public spending. 

We cannot predict what will happen after the pandemic is over. But we can prepare ourselves what whatever may come our way. In the meantime, stay safe, stay calm and stay informed. 

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