A report by the global forecasting firm, Oxford Economics, predicting that India will be one of the worst-hit economies even after the worst impact of the pandemic is beyond us, has given Government baiters a new stick to beat it with. However, one must remember that several previous predictions of doom and gloom for India, either in terms of its caseload and number of deaths, has been proven to be premature fear-mongering. While the economic relief packages have been admittedly coming slow and staggered, one must not forget that several prominent economists have argued that India has not rushed into any action and is waiting out to see what long-term impacts the Coronavirus will have before taking major action on reviving aspects of the economy. Currently, some structural reforms have been made to spur development. So one should treat all reports of what will happen four years in the future with a major pinch of salt.

It is true that manufacturing and services have been hard hit by the pandemic and while ratings agencies and the Government might quibble about the exact figures, India’s economy will contract by around a tenth this year. Many sectors, such as aviation, travel and tourism, will take a good five-six years to return to prosperity that they had known and we are yet to see the worst of the jobs impact on the economy as various moratoriums come to an end. There are slight glimmers of hope though, including increased car and two-wheeler sales over the past few months. But there is also no doubt that a new tsunami of cases is upon us, whether we recognise it in the data or not, particularly in Delhi where public carelessness might have a fatal impact with specialised hospital beds beginning to run short. This has led to much speculation that Government authorities in India, like their counterparts across Europe, might need to declare a second shutdown. It would be prudent for forecasting firms, none of which saw the pandemic coming, to wait and watch as well and at least wait until the worst of the Coronavirus is past us before sounding the Doomsday alarms.   

The Indian seed industry has made rapid progress over the past 50 years, maturing because of the ceaseless efforts of thousands of men and women, who have created a strong R&D base and given us a competitive advantage in ensuring quality. India is endowed with diverse agro-climatic conditions, high level of technology expertise, trained and skilled manpower, suitable land and abundant sunshine for agriculture. The country, therefore, has immense potential to emerge as the leading provider of seeds to the world. We can export varietals for all kinds of field crops, vegetables, forage crops and flowers.

However, considering the developments in terms of the new and emerging disruptive business operating models and processes aligned with innovative technology interventions, there is a need to invest in concrete initiatives for further strengthening the Indian seed industry as part of “Atmanirbar Krishi.”

The Indian seed industry, as a sub-sector of the agri-inputs industry, has been the most vibrant in terms of innovation and growth over the past four decades, contributing to a significant increase in productivity and profitability of farmers in India. The well-balanced seed quality legislative framework, set up by the Seed Act, the New Seed policy, 1988 and National Seed Policy in 2002, boosted private sector participation in a sector that had its foundations laid by public sector seed systems. However, much needs to be done in terms of further reforms and policy interventions.

The role of new technologies, like molecular-marker based selection approaches to fast-track breeding programmes for development of new/superior plant varieties, needs to be further strengthened as an integral part of the seed industry. Also biotechnological and molecular approaches can improve the quality assurance systems. An emerging area, which utilises biotechnology and nano-technologies and can contribute significantly to productivity and profitability of farmers, is seed treatment with biological inoculants. This can also be promoted on a large scale as part of seed-applied technologies.

The Indian seed industry can become a globally competitive, export-oriented and self-reliant industry, especially for several Asian, African, East European and South American countries, which share similar agro-climatic conditions like India as, with respect to international trade, most countries allow seed imports subject to the following: (a) Import permit based on sanitary and phytosanitary certificates and (b) Variety evaluation in the importing country to ascertain its suitability to the agro climatic conditions.

Currently, there are no significant export incentives available to the seed sector though the export potential is estimated at more than $ 5 billion per year based on various industry estimates. India can offer seeds for export to many countries with suitable sub-tropical and tropical agro-climatic regions in Asia, Africa, Eastern Europe and so on at affordable prices similar to our pharma and agro-chemical sector. The following incentives can help.

Incentive to the extent of 20 per cent of the seed value that is exported must be considered because  in sectors like pharma and garments, similar incentives have been available for a long time to encourage exports in the initial stages. These incentives can be gradually brought down to 10 per cent after five years.  A provision of Rs 100 crore may be adequate for the next five years and Rs 100 crore for the next six to 10 years.

Reimbursement of the cost of variety evaluation in any foreign country is a progressive policy. It may be considered here, too, as the seed companies have to incur heavy expenses for variety evaluation, which is a pre-condition for obtaining export orders. This expense needs to be reimbursed at least to the extent of 75 per cent by the Government. A provision of about Rs 100 crore may be adequate for the next 10 years for meeting plant variety evaluation expenses for export purposes. Seed manufacturers add to economies of the importing countries and help get more foreign reserves into the country. Hence they should be rewarded with up to 30 per cent subsidy.

India has lacked a seed export promotion council for a long time. The Government, under the trade and export promotion council, should institute one with industry representatives and ensure that seed exports amount to 10 per cent of  total agriculture exports.

India has three major seed hubs in the country. But given our vast agro-climate, we can cater to demands from Africa to ASEAN countries. The Government needs to allow Indian and foreign seed companies to breed seeds for export purposes in special agro-zones. These zones may function like SEZs. They need to be equipped with dry docks, good transportation, seed testing facilities and so on to facilitate swift exports. A single window clearance counter can be established for fast tracking permissions.

An “Atmanirbhar Krishi” or self-reliant seed sector needs the SAARC markets and good economic relations between SAARC countries. The Government and industry need to step forward and create a SAARC seed forum, which will help ease-of-doing-business in the sub-continent and also provide avenues for international trading without restrictions. This body should strictly be an economic one for policy and regulatory advocacy among the SAARC countries. The Indian seed sector will grow immensely if we can spearhead this drive.

Finally, climate change is causing a rapid shift in the demands of seeds globally. Very soon, many nations won’t have the financial resources to evade this crisis. But we can be a hub for seed research for the world. Our versatile climate allows us to research and co-evolve new varieties that may be suited for many countries. For even one or two varieties at the right time can change the fate of the nation and bring millions of dollars into India. Hence the Government needs to provide development grants to Indian R&D companies so that they can track future challenges, assess demand and create a seed bank for Africa, Latin America and ASEAN countries. The Government may also partner with African nations to outsource their seed R&D to us. This would boost innovation here while providing lesser developed nations an access to cheaper research and seeds.

(The author is Director,  Policy and Outreach, National Seed Association of India)

It is festival time globally, and not just the religious and fun variety but also the vital festival of democracy or elections. It is for the first time in our lifetimes that festivities, mostly associated with huge crowds jostling to reach the ballot box or bedi (the pedestal on which the idols of deities are kept), are taking place in the shadow of a raging global pandemic. Forced departures from well-known rituals associated with festivals make these times a case study for future generations. Many would have seen a video on social media of an idol being immersed using mechanised trolleys, with least human intervention, in the recently-concluded Durga puja festivities. Now switch to the theatre of democracy in Bihar, where Assembly elections are being held. The common thread between the two festivals is, technology. Bihar, would perhaps be the first State in the country where technological interventions played a key role in the elections.

First, the Election Commission (EC) allowed online filing of nominations for candidates and many political parties chose to reach out to their constituents through virtual rallies and put up huge LED walls for public viewing. Given the absence of many veterans active in Bihar elections for at least three decades, most of the young scions of the colourful, vociferous and politically-influential families were suddenly catapulted to the centrestage of a new narrative. This young brigade of Biharis, technologically more versatile than their parents, sought votes on issues. Something hitherto unheard of in a State, known for its divisive caste and religious biases. It was surprising to see rival candidates promise lakhs of jobs to young voters in a State grappling with the problem of the jobless migrant labourers.

The most welcome aspect of this election has been the reliance on technology in a State which could well be a case study on the digital divide between India and Bharat. Many statisticians will point to a survey which revealed that more than half of Bihar’s women and around 40 per cent men have no access to mass media. This, when extrapolated over digital media, means a significant part of the population can either be completely insulated from the impact of technology or could be the next addressable unconnected millions, who need to be put on the information technology expressway of prosperity.

Now let’s jump across the Pacific to the US, which, too, is about to witness one of the fiercest and cacophonic elections on November 3 amid the Covid threat, deaths and economic destruction. The common binary binding Bihar elections, Durga Puja festivities and US elections is again, technology. After all, the new dominance game and the race to be a global superpower is now increasingly getting defined by your first tap on a smartphone, first digital payment/electronic transaction, first contact-free shopping for world-class brands from the comfort of your home and perhaps the first digital date after months of trying to understand each other’s typos and abbreviated texts.

Therefore, restrictions on digital applications, depending on the country of origin, to applying the same principles to hardware solutions in technical infrastructure, to forming an alliance of like-minded technology fraternity of nations were some of the key highlights in the election campaign of the two presidential candidates of the world’s richest democracy. What it also highlighted was the fact that increasingly, the physical restrictions (read policies) of trade and commerce dominating economic relations between a bunch of nations will now be enthusiastically copy-pasted in the digital arena to prevent loss of sovereign powers and dominance at the global high tables.

Covid has put the spotlight on public policy issues, which, till February, were still in advanced stages of intellectual discourses. It has challenged our ability to adapt and eventually recover from the disease. And the only sector which has truly helped this advancement is technology. It reacted quickly and ensured teachers, parents and children were handed online course materials for seamless academic learning and doctors were given online tools for initial digital health interventions for patients. It gave the Government effective platforms for interaction and empowered it to push critical policy goals. Technology enabled digital live darshans of beautiful but deserted pandals and online delivery of prasad for the religious, too. If the human race has been pushed ahead by three decades in one stroke by the lockdown and technology has taken centrestage, it is also time to think and refresh many global policy challenges and perhaps release an update. Policymakers have to realise that imposing strict restrictions, based purely on case-by-case models, and having a physical worldview of digital policy issues can be self-defeating in the long run. A continued prosperity for nations will only be achieved by allowing and championing a global open market for trade, goods and digital services. It must be kept in mind that the new normal for policy-making at sovereign-level negotiations must be dictated by a set of principles. This must be compulsory in all digital agreements between consumers and technology providers, governments and their counterparts across borders. A multi-lateral approach must be championed. It is time to click on the right button.

(The writer is a policy analyst)

The Indian retail industry is a highly competitive, $800 billion market with a Compound Annual Growth Rate (CAGR) of 12 per cent. Out of that, the share of online retail is $32.7 billion with a CAGR of 31 per cent. Smartphone penetration, brand consciousness, demographics and policy support are the factors transforming and pushing this industry towards omnichannel retailing.

Omnichannel retailing is a fully-integrated approach to commerce, providing shoppers a unified experience across all channels or touchpoints, including online and offline. It offers consistent merchandise and seamless interaction between online and offline channels, thus combining the benefits of both. However, the pandemic and subsequent national and local lockdowns have greatly impacted both supply and demand. The supply side was hit by administrative restrictions and limited resources while  demand, too, remained subdued due to job-losses, salary cuts and restrictive spending. In such a situation, an agile response is needed for swift operations, customer satisfaction and surviving in the post-Corona era.

Evolving consumer behaviour: Though retail has undergone many significant disruptions in the past, perhaps none has shifted consumer behaviour as rapidly as this contagion has. The changes are happening due to factors like challenges in personal situations, preferences towards local products, precautionary measures against the virus and rising digital awareness — a by-product of promotion of contactless transaction.

Even in the unlock stage, consumers are hesitating to visit stores and while exercising social distancing measures, many uninitiated customers are moving towards online retailing. For example, many senior citizens are opting for online grocery shopping as a precautionary measure. Use of services like contactless digital payments, social commerce and virtual consultation are also seeing a rise.

Many of these behavioural changes will continue even after the pandemic is over. McKinsey and Company cited this as “consumer behaviour shift.” For example, people will get used to the comfort of home delivery, ease of digital payments, varieties offered by online markets and so on. Retailers need to draw insights from these changes and rebuild the consumer confidence as the new normal continues.

Financial skills: Revenue is sharply dropping for many categories. Even though store profit has gone down, retailers need to pay rents, salaries and so on. Hence, at this point it is necessary for them to optimise cost and curtail the offerings to profitable items. In the long-term, as demand picks up, it would be prudent to invest in omnichannel fulfillment as means to financial resilience.

Accept the new normal: Social distancing, safety and hygiene procedures will be here for a while. The best way to go forward is to accept the new normal and the complexity it will bring to decision-making.

Consumer connect: Now more than ever, it is must for retailers to connect and communicate. Consumers will definitely like to know what a business is doing to ensure their safety, for delivery as well as in stores. Despite the pandemic, customers will need timely deliveries of their order. So, in case of item shortages or delayed fulfillment, it is necessary to explain the cause and convey the commitment.

Extra activity: First and foremost, retailers need to adapt to safety regulations, sanitisation procedures and regulatory directives at the country, State and municipal level in various phases of the unlocking. They need more dynamic inventory and logistics planning to meet the fluctuations both in demand and supply, plus a connect with employees regarding their health and financial well-being. This will prevent attrition and business continuity.

Infrastructure: The Indian online retail infrastructure is in an intermediate stage. The pandemic just exposed the flaws and inefficiency which were already there. Retailers should review the location of warehouses, delivery centres and their distributors to compute the risk of supply chain disruptions. The partnership with local grocery stores will help retailers to ensure timely contactless last mile delivery even during a crisis. Retailers also need to re-imagine in-store experience, considering customers’ safety and efficient operation with reduced staff while complying with social distancing norms.

Technology skills: Technology allows retailers to have relevant information and visibility throughout the supply chains, resulting in timely communication with all the stakeholders. Businesses will need secured, informative and intuitive shopping apps, which can balance for the lack of store visits. Also, Artificial Intelligence will continue to make a big impact in this sector to predict real-time consumer demand, optimise inventory and manage backorders, thus ensuring operational agility.

Also, Smart Mirrors and Augmented Reality can help build a store-like environment in the virtual world, ensuring safety. This way, retailers and associated stakeholders need to ramp up technological skills and infrastructure as they enter a post-pandemic era. As of today, India is among the top countries with the highest number of Covid cases and there is no end to the contagion in sight. Even the countries, where the outbreak seemed to be in control initially, are experiencing a second wave. This has caused supply and demand disruption and jolted the market ecosystem.

Hence, it is certain that retailers, that are an integral part of the demand-driven economy, need to be financially prudent, fast in their response to the new dynamics and ready to collaborate through the value chain to hthrive during this crisis and subsequent periods. As with many sectors, it is likely that retail will see a regime shift and consolidation. Smaller and financially-struggling businesses might face difficulty in surviving this crisis. At the same time, retailers with a unique value proposition will come out stronger. This outbreak serves as a reminder for retailers to be more proactive in planning and resilient in their response to unprecedented disruptions in future.

(The writers are Senior Research Scholars at the Indian Institute of Science, Bengaluru.)

The bid to take over the remaining assets and brand of Jet Airways by Dubai-based real estate entrepreneur Murari Jalan and American private equity firm Kalrock Capital has been accepted by the lenders. Even though they will have to accept a massive 90 per cent haircut on their outstandings from the airline, the fact that they will get something is a lot better than what they faced with Kingfisher. Former employees of the now grounded airline as well as other unsecured creditors, everyone from those who provided taxi and catering services to passengers with tickets for flights that never took off, are hoping that the new management will clear their dues as well. Unfortunately, while the new management might absorb some old employees and even executives, it does not hold any obligation to clear these unsecured dues. The new owners could clear some dues in order to build goodwill but of the estimated Rs 40,000 crore owed by Jet Airways to various creditors and employees at the time it suspended operations in April 2019, much of it will never be seen again.

This deal is being spoken about as a success of the Insolvency and Bankruptcy Code (IBC) that was introduced by the Government in 2016. Some even suspect that the Government pushed this deal through to highlight that the IBC can be a success as several other high-profile cases are stuck. That said, the proof of the pudding is in the eating and the proof of an airline is in the flying. With few details public, there are no firm dates on when this ‘new’ Jet Airways can fly again. As the aviation market globally is in the doldrums, one also questions whether this is a smart time to launch an airline when customer demand is less than half of what it was this time last year. Yes, it will be easier than it would have been in February to get slots and even lease new planes but the new management should not have misplaced optimism about “customer loyalty.” Restarting a brand, any brand, and particularly a service brand after a period of not operating is not easy and customers are extremely fickle. And with the likelihood of one, maybe even two airlines in India potentially falling victim to the pandemic, thanks to stretched balance sheets,  things might actually get very difficult for the new ownership. That said, we wish them all the best and hope that they can succeed, and hope is a very powerful thing these days.

The science of stock market investing has long been a mystery for normal retail investors and there are numerous debates about which strategy is better. There are two divergent ideologies: Active and passive investment.  The passive strategy, which is mainly followed by the legendary Warren Buffet, is a long-term one that mirrors a particular index where the returns are generated due to the natural upswing of stock markets, ignoring short-term setbacks and even sharp downturns. The simplest way of embarking on a passive approach is to buy an index fund that follows one of the major indices like the S&P 500, Dow Jones and BSE Sensex or Nifty in India. These index funds automatically adjust their portfolios to any new additions or deletions to the original index in the same proportion. Passive investment is for conservative and risk-averse people who are looking for low-risk investment and are not overly concerned with seeing rapid gains. The idea behind this is the classic value investing style, which looks at long-term benefits of holding on to undervalued stocks with huge future earning power.

Active investing, on the other hand, aims to generate above market returns by an in-depth research and analysis and using the knowledge and expertise to manoeuvre into or out of a particular stock, bond or any asset, taking full advantage of short-term price fluctuations. Since it does not necessarily mimic any index, it provides the flexibility of buying stocks which could be hidden gems. Since active investors are not stuck with index stocks, they are able to exit any sector or stocks when the risk becomes too high and can also hedge their bets using various techniques such as short sales or put options. However, all the research overheads and frequent buying and selling make active investment very expensive. It is also a highly risky affair since higher returns can only be expected when the going is good but things can go terribly wrong during market downturns and therefore, due to its volatile nature, the active investment strategy is better suited for people who are aggressive and risk-tolerant. In passive management, one rises and sinks with the ship whereas actively managed funds have the ability to provide greater opportunity for profit, albeit, increasing the risk. According to researchers who propagate the efficient market hypothesis (EMH), stock markets are efficient in nature and, therefore, actively managed funds cannot outperform them over a long period of time.

So does active portfolio management create value? The debate about the merit of active vs passive portfolio management is supported by numerous researches worldwide. In the mid-1960s, Eugene Fama adjusted the EMH and suggested three forms of informational efficiencies; the weak form, semi-strong and strong. This hypothesis suggests that investors cannot beat the markets by actively managing portfolios, as stock markets incorporate all the publicly available and privately-held information into price movements. Therefore, fund managers cannot beat the stock markets and generate higher returns on a long-term basis. This theory is supported by many researches. In 1966, Treynor and Mazuy studied the performance of 57 mutual funds and their sensitivity to market fluctuations and  concluded that maybe, no investor, professional or amateur, can outguess the market. A similar study in 1968 by Jensen found that average mutual funds produced low returns. In a study to understand the importance of selecting a good fund manager, Dunn and Theiser in 1983 found that there is only a 50-50 chance that an active fund manager can produce better returns than the bourses. This was reiterated by the Nobel laureate, Sharpe, in 1991 who showed that active fund managers cannot give better returns than passive investment strategies, mainly due to active management being expensive.

That brings us to the question, can anyone predict the stock market movements and earn abnormal returns? Nobel laureate Samuelson quotes Aristotle in explaining this, “The whole is greater than the sum of its parts.” This means that an investor cannot do better than the bourses. Sharpe explains this on the basis of costs and says since both active and passive management generate equal returns before costs, active management loses as it is costlier, and therefore generates less after-cost returns.

Modern portfolio theory assumes that all market participants are rational in their investment behaviour and invest only in stocks at their fair value. However, in reality, the markets consist of various investors who are driven by different emotions, impulses, experiences, risk tolerance, timelines and legal  constraints. Since efficient market hypothesis presumes that all available information is reflected in the stock process accurately and timely, no investor can earn abnormal returns. They can, of course, earn normal returns, which are the market returns. This assumption is used as an excuse by people who have faced losses during any meltdown, as they take a break in using their prudence, creativity and perception to invest. But there is always a gap between theory and practice. The question now arises: Are stock markets efficient? Do they reflect all available information accurately and timely? There is evidence that market efficiencies may be lower in emerging markets that can give a chance to active fund managers to find arbitrage opportunities. After the 2008 financial crisis, the developed world has focussed on emerging markets, which have risen as engines for global growth, driven by younger populations, higher consumption levels, modernisation of infrastructure and integration with the world economy. According to UNCTAD’s World Investment Report 2019, FDI flows to developing economies rose by two per cent to $706 billion in 2018.  Developing Asia, already the largest recipient region of FDI flows, registered an increase of four per cent to $512 billion, with positive growth occurring in all sub-regions. China attracted $139 billion, an increase of four per cent. Flows to South-East Asia rose by three per cent to $149 billion, a record level. This increase is for the third consecutive year. FDI flows to Africa expanded by 11 per cent to $46 billion. Emerging markets, being informationally inefficient, may provide opportunities for excess returns and portfolio diversifications through market timing and stock selection.

A study by Kremnitzer shows that actively managed mutual funds outperformed passive ones. The researcher, using data from TD Ameritrade Research and the Standard and Poors NetAdvantage database on all existing US mutual funds and exchange traded funds (ETFs), dedicated to emerging markets, found that the before tax returns of actively-managed mutual funds yielded superior returns of approximately 2.87 per cent over passively managed ETFs. So, which investment style should be chosen? An apt strategy could be to combine both active and passive investment styles, depending on the stock market conditions. Active fund management could be especially beneficial when stock markets are volatile. Passive fund management is a better strategy where the stocks and markets are highly correlated and move together.

Ultimately, it comes down to personal priorities, timelines and goals. An experienced fund manager should have the expertise to switch.

(The writer is Associate Professor, Amity University, Noida)

Knowledge is the key to success. This has been proved time and again by the achievements of start-ups. In almost all fields, new businesses have not only challenged market leaders but also undercut them. Unicorns like Paytm, PhonePe, Flipkart, Netmeds, MakeMyTrip, OYO did not create a new market but rearranged the existing one and became leaders. A similar approach is needed in the manufacturing sector if we are keen to take on the world and are dreaming of becoming a $5 trillion economy.

The Micro, Small and Medium Enterprises (MSME) sector is key to the Indian economy as it is one of the biggest job generators. It has also created resilience to withstand global economic shocks and turmoil. With around 63.4 million units throughout India, MSMEs contribute to around 6.11 per cent of the manufacturing Gross Domestic Product (GDP) and 24.63 per cent of the GDP from service activities, as well as 33.4 per cent of the manufacturing output. Their export share is 40 per cent. The MSME sector is the second-largest employer after agriculture, giving jobs to more than 120 million people in rural areas. MSMEs are now contributing close to 15 per cent to the overall GDP of India.

If the Government wants to support MSMEs and equip them to meet global standards — as in the current scenario we are not only working to “Make in India” but also trying to “Make for the World” — we need to upgrade them in all aspects: Infrastructure, technology, manpower and capital. Plus, in addition to financial and logistics support, MSMEs need information technology (IT) support to upgrade themselves. They can be carriers of knowledge and experience and create a repository for others.

To match international standards and compete globally, upgraded IT infrastructure is needed for MSMEs and if the same is provided by the Government free or at reduced costs, then it will take a huge financial and operational burden off small entities.

In the current scenario, skilled manpower will be a challenge for MSMEs and with shared IT support, they can reduce their dependence on internal staff. Another big challenge in front of MSMEs will be limited budgets for upgradation of their existing IT infrastructure and affordability of operating costs. The requirement of research and development in MSMEs is different from that of big industries as they need cost and resource efficient solutions. MSMEs need continuous upgradation to compete globally and benchmarking is required so that they can produce world-class goods. Big industry players, who are cash-rich, always upgrade by deploying huge capital and beat small competitors like MSMEs.

By introducing shared IT infrastructure from the Government’s side, MSMEs can save on capital expenditure and operating costs, giving them better profitability. Owing to the nature of their business and size, most MSMEs don’t use a high level of IT support and lack badly in IT infrastructure. As these are promoter/owner-driven and focus more on their core job, their investment in core job IT and research is always lacking.

For example, a small auto-component manufacturer requires designing software to improvise designs or to reduce cost. New  software could cost the business Rs 5-8 lakh, which is unaffordable for most. By using shared IT services, the manufacturer can improve the design, control quality and deliver a better product under stringent cost control. Such a requirement can be very diverse, starting from basic software, communication or meeting tools to highly-advanced Enterprise Resource Planning (ERP) solutions. It can be designed or categorised based on the requirement level or reach and can be priced accordingly. The biggest strength of MSMEs is their agility and ease of response to change as per the client’s requirement. If the same is supported by IT and other high technology, they  can be a double engine of growth for India.

This can be designed on a PPP model and create employment for service providers too. Post the pandemic, the Government is budgeting huge growth in the MSME sector and planning multiple packages for them. IT is a consistent requirement and always looking for upgradation. Hence if the Government can provide IT infrastructure resources at a nominal fee or free of cost, then it will be a huge saving for MSMEs. On the other hand, due to the bulk purchase of such services, their total outgo will be considerably lower as compared to individual purchase.

If we want to develop the “Made in India” brand as a global signature and beat competition around the world, we have to upgrade all systems of manufacturing and service. This can only be done after improving the IT infrastructure. This one-point cost will save and support millions who are looking to grow and make India a manufacturing and services hub.

(The writer is Associate Professor, Atal Bihari Vajpayee School of Management and Entrepreneurship, JNU)

In the last bi-monthly Monetary Policy Committee’s (MPC) review announced by its Governor Shaktikanta Das on August 6, the Reserve Bank of India (RBI) had kept the policy repo rate unchanged at four per cent. It had also kept the reverse repo rate or the interest rate the banks get on their surplus funds parked with the RBI unchanged at 3.35 per cent. It continued with the “accommodative” stance of the monetary policy as long as necessary to revive growth and mitigate the impact of Covid-19, while ensuring that inflation remains within the target.

In the build-up to the next bi-monthly review (originally scheduled for October 1, which was postponed to October 9,  due to the delay in appointment of three external members of the MPC), there was an expectation that there wouldn’t be any changes this time round. Things have happened on expected lines even as the RBI has maintained status quo on key policy rates.     

There are four major reasons as to why any further action in gliding the policy rate on the downward trajectory — as demanded by a certain section of the industry — was totally unnecessary. 

 First, ever since the incumbent Governor took charge (December 2018), the RBI has handed out a cumulative reduction in repo rate of 2.5 per cent. Of this, during 2019, a total cut of 1.35 per cent was delivered in five instalments, the last one being under the policy review announced on October 4, 2019. This brought down the rate from 6.5 per cent in the beginning of the year to 5.15 per cent on its close. The apex bank also tried to boost the economy by pumping liquidity using policy instruments such as Open Market Operations (OMOs).

The above policy moves were made in the backdrop of the slide in the real Gross Domestic Product (GDP) growth that had commenced in the third quarter of the financial year (FY) 2018-19 and continued all through FY 2019-20, the intent being to not just contain the slide but also to revive it. Yet, the deceleration continued with growth plunging to a little over three per cent during the last quarter of FY 2019-20 and the yearly figure settling at a low of 4.2 per cent. But that did not deter Das from continuing with a cut in the policy rate.

On March 27, he reduced the policy rate by 0.75 per cent. This was followed by a further cut of 0.4 per cent on May 22, thus delivering a total reduction of 1.15 per cent post-pandemic. Das also announced on March 27 and April 17 measures like reduction in the cash reserve ratio (CRR), auction of Targeted Long-Term Repo Operations (TLTRO), hike in accommodation under the Marginal Standing Facility (MSF) and so on, to inject total liquidity close to Rs 5,00,000 crore.        

Despite these measures, growth during the first quarter of the current FY plunged to minus 24 per cent. During the second quarter ending September 30, though the situation was not as bad, the growth was still lower than during the corresponding quarter of 2019 (for the whole of the current year, Das has projected a decline of 9.5 per cent — that, too, is predicated on positive growth during the last quarter). These trends clearly show that neither reduction in policy rate, nor pumping liquidity in the system are working.     

Second, according to Das, of the 1.35 per cent reduction in the policy rate during the pre-Covid phase, only about 0.6 per cent was transmitted by banks by way of corresponding reduction in the lending rate. If transmission is not even 50 per cent then, why keep harping on a cut in the policy rate. Are we to infer that banks are pocketing the differential? The truth is, we are trying to see a strong correlation which either does not exist or is very feeble, if at all there is one. A bank fixes the interest rate it charges from borrowers based on the interest rate it pays on deposits, plus cost of its intermediation. It has also to factor in the cost of non-performing assets (NPAs) or loans which can’t be recovered. Even as the policy rate is posited as an external benchmark for determining lending rate, the latter can’t exactly follow the movement in the former. A perfect correlation would have been possible if only the RBI was its sole source of funding; but that is theoretical, to say the least.  Third, despite the RBI opening several taps and banks flushed with funds for onward lending (this was done during FY 2019-20 and on a much larger scale during the current year), the latter have not stepped up lending. During 2019-20, bank credit grew by 6.1 per cent, less than half of the 13.4 per cent growth registered during 2018-19. The trend has got aggravated during the current year. Overall non-food credit off-take from the banking system declined by Rs 1,40,000 crore to over Rs 90 lakh crore during  April-July, 2020.    

On April 17, while announcing reduction in the reverse repo rate from the existing four per cent to 3.75 per cent, Das had argued it would goad banks to lend to businesses instead of parking excess funds with itself (they were then holding a gargantuan Rs 6,90,000 crore with the RBI). The rate has since been further lowered to 3.35 per cent to ensure that banks don’t keep the money with the apex bank; instead lend. Yet, the excess funds parked by them have crossed Rs 8,00,000 crore. Apart from the disruption caused by the contagion and the resultant compression in demand for credit, sanctions and disbursements have also been impacted by the banks’ increasing risk-aversion and conservative approach to lending. 

Fourth, the initial uninterrupted spell of lockdown for three months and even thereafter, intermittent lockdowns at the State/local level, have exterminated demand on a scale never seen before. Apart from lakhs of businesses downing shutters, millions losing jobs or facing cut in wages and salaries, even those who survived the Covid onslaught and had surpluses, could not spend (due to the sheer compulsion of “social distancing”, forcing prolonged closure of a vast swathe of businesses especially in the service sector, like restaurants, cinema halls, multiplexes, tourist destinations and so on).

The gravity of incapacitation engineered by the pandemic can be gauged from the fact that currently, cash with the public is at a historic high of about Rs 26,00,000 crore or 15 per cent of the GDP (assuming 10 per cent contraction in nominal terms during FY 2020-21) — up from the Rs 17,00,000 crore it was at the time of demonetisation in November, 2016.       

A major factor that has a profound impact on demand has a lot to do with scams galore. These involve siphoning off funds from banks, non-banking finance companies (NBFCs) or even directly from the public (say by builders) and so on. Running into hundreds of thousands of crores, these add to the personal wealth of a select few, which is either stashed abroad or kept within India as “undisclosed income” (black money). Had this money remained with millions to whom it actually belongs, this would have added hugely to the purchasing power, reduced the NPAs of Banks/NBFCs and increased their ability to lend more.              

Unlike the pall of gloom surrounding the August meeting of the MPC, this time the RBI exudes confidence even as the Governor sees the “Indian economy entering into a decisive phase, seeing easing of contraction in various sectors. Deep contractions of Q1 are behind us and silver linings are visible in easing caseloads across India.” He also sees retail inflation to be moderating from the third quarter onward, driven by a bright agriculture outlook and oil prices remaining range-bound. The Governor has also promised measures as necessary “to assure market participants of access to liquidity and easy finance conditions” (Rs 20,000 crore-OMO auction next week and On-tap TLTROs of Rs 1,00,000 crore to be made available till March 2021 — linked to the repo rate — are some of the steps in this direction).

These are add-ons to the existing pool of measures in the same category. Just as those measures failed to deliver, it is unlikely that these incrementals will do any better. It is good that the RBI has kept the key policy rates like repo and reverse repo rates unchanged or else in the current scenario, when the economy is besieged with structural constraints, any further cut thereof would have been rendered infructuous. A holistic approach is needed to address the structural constraints of the economy. This should encompass policy reforms to lift business sentiment and boost investment;  tackle NPAs on a war footing;  goad banks into proactively taking up project lending; and result in stern measures to deal with scams with greater emphasis on prevention. Sans these, any stimulus won’t be of much use in lifting the economy.

(The writer is a New Delhi-based policy analyst)

Ever wondered why stock markets have huge upswings or downswings? Most of the times, they are like a domino effect, a chain reaction, caused by herd behaviour. Herding is an inclination of investors to follow the crowd, thus destabilising  stock prices. It is a very powerful bias, and in the process of mimicking each other, the impact on the stock prices gets intensified, leading to bubbles when the demand is high and crashes when investors detect overpricing.

This is contrary to the classical finance theory, which believes that investment decisions are taken by rational investors. But are investors really rational? A Boston-based research group reported in 2007 that an average stockholder earned 4.3 per cent per annum returns where the returns of American S&P 500 Index averaged at 11.8 per cent per annum. The reason for this variance was the irrationality of investors of buying high and selling low. 

A peek into the past can show that players in the stock market have been irrational since the time the bourses have existed. One of the earliest instances of unreasonable herd behaviour is the Dutch tulip bubble of the 1630s, also known as “Tulip Mania.” When the tulip was introduced as a new variety of flower in the Netherlands, the Dutch people, because of some strange reason, became excited about this new exotic flower and vied to invest in tulip bulbs.

Progressively, the investments grew huge and at the pinnacle of this mania, a single bulb was sold at a price that was more than ten times the annual income of a skilled worker.  But when people realised that  investments in tulip bulbs were way more than their actual worth, they panicked and started selling tulip stocks, leading to a sharp fall in the  stocks, resulting in huge losses.

This and many other subsequent events after this, like the dot.com bubble and the more recent real estate bubble, have led to the belief that investors do not behave rationally and that their decisions are mostly driven by emotions like panic, fear and greed. These instances are in contradiction of the traditional financial theories that are based on efficient market hypothesis, that assume that all the information is reflected in the stock prices efficiently and in a timely manner. So much so that the investors are unable to make any abnormal profits by buying stocks. There are four pillars of traditional finance: Rational investors; efficient markets; traditional portfolio designs; and linear expected returns-risk relationship.

However, stock markets in reality are largely inefficient, which is evident due to various market anomalies, speculative bubbles and over or muted reaction to any new information about stocks. These prevalent conditions in the stock markets suggest that investors are more emotional than rational about their investment decisions, leading to creation of bubbles.

A bubble is created when the stock price is driven higher than its fair value as people invest in these stocks, neglecting the fundamental valuation. Such investments strengthen the overpricing even more and put pressure on the stock prices to generate higher returns for investors, failing which, the selling starts and picks up momentum when investors follow one another, leading to the bursting of the bubble. Behavioural finance, as a discipline, emerged as an attempt to explain the psychology of financial decision-making and how the human angle affects the same. Several researchers believe that principles and morals of people influence their economic, social and financial decision-making. Sentiments like pride, shame, insecurity and egoism also play an important role in investment decisions. By accepting the fact that investors are irrational and have biased decision-making, behavioural finance entends the limitations of traditional finance theories into possible inefficiencies in the financial markets and provides a realistic view.

Research has identified two types of behavioural biases. The first one, a heuristic-driven bias, also known as cognitive bias, acknowledges that investors are investigative in nature and use rules of thumb to process data for decision-making. For example, people predict future performance of stock market movements through historical data.  Emotions like overconfidence, anchoring and adjustment, reinforcement learning, excessive optimism and pessimism form a part of this bias. The second one, frame-dependent bias, is where the investors’ decision-making process is affected by the way they frame their options, like narrow framing, mental accounting and the disposition effect.

It can be concluded that awareness about behavioural biases is indispensable since it is unequivocally associated with human beings and  its implications are far and wide. Ignoring such behaviour of the decision-making process can prove to be quite expensive in the financial markets as it can result in stock market anomalies. Financial investment managers and advisors can identify investment mistakes if they have a good understanding of this behaviour of retail investors and become more effective by understanding their clients’ psychology and needs. It helps them in creating a behaviorally-adjusted portfolio, which best suits their clients’ requirements. Investment bankers can put this knowledge to use by correctly timing the IPOs and understanding the general sentiment in the stock markets. Behavioural finance also helps financial analysts in forecasting  future stock market movements and recommending appropriate stocks for investments. Finally, individual retail investors can use this expertise to make wise, rational and effective financial decisions.

Investors, financial advisors and fund managers are all humans and are subject to biases. Understanding the psychology of financial decision- making can help in reducing the stock market movements and reducing losses on the bourses.

(The writer is Associate Professor, Amity University, Noida)