India Post Payments Bank launches ‘Fincluvation’

On the occasion of the 75^th anniversary of Indian Independence & ongoing Azadi ka Amrit Mahotasav, India Post Payments Bank (IPPB), a 100% government owned entity under Department of Posts (DoP) announced the launch of Fincluvation– a joint initiative to collaborate with Fintech Startup community to co-create and innovate solutions for financial inclusion.

Why is it in news?

Speaking on the occasion of the launch, Shri Ashwini   Vaishnaw,   Minister   of Railways, Communications and Electronics & IT, said, the country made rapid strides in FINTECH space in Global Tech world leading innovations like UPI, Aadhaar. “Fincluvation is a step in this direction, an Industry first initiative to create a powerful platform to mobilize the start-up community towards building meaningful financial products aimed at financial inclusion. Combination of IPPB’s Banking stack, DoP’s trustworthy doorstep service network and the techno-functional acumen of start-ups can deliver unmatched value to the citizens of the country.”

Highlights

Fincluvation will be a permanent platform of IPPB to co-create inclusive financial solutions with participating start-ups. IPPB and DoP collectively serve close to 430 million customers through neighbourhood post office and at their doorsteps via more than 400,000 trusted and capable Post Office employees and Gramin Dak Sevaks - making it one of the largest and trusted postal networks in the world”, said Shri Devusinh Chauhan, Minister of State for Communications. Fincluvation invites startups to Participate, Ideate, Develop and Market intuitive and tailored products and services that can be taken to the customers. Startups are encouraged to develop solutions aligned with any of the following tracks-

·         Creditization - Develop Innovative & Inclusive credit products aligned with the use cases of target customers and take them to their doorsteps through Postal network.

·         Digitization - Bring convenience through convergence of traditional services with Digital Payment Technologies such as making the traditional Money Order service as Interoperable Banking service.

·         Any Market-led solutions that can help solve any other problem relevant to IPPB and/or DoP in serving the target customers

Intersection of technology with financial services coupled with traditional distribution networks is opening up new set of business opportunities. Conventional model of technology procurement led product creation by banks often lacks value in user experience leaving huge gap between customer expectations and service delivery. Traditional technology firms fail to meet these expectations with a deficit of ownership in product creation. “Our citizens have varied and complex needs that need careful thought, empathetic product design, and rapid prototyping among users. With Fincluvation, we want to crowd-in the best minds to develop technology-led financial solutions for Bharat”, said Shri Vineet Pandey, Secretary, Department of Posts & Chairperson, Postal Services Board.

Fincluvation will allow the start-ups to work with IPPB and DoP experts to develop solutions and conduct pilots using the postal network and IPPB’s technology stack. Successful pilots can then mature into long-term partnerships. “Through Fincluvation, we wanted to create a platform that can provide an opportunity for start-ups to work together with us in understanding the needs of the underserved customers to deliver products with a positive impact and more importantly in a cost effective manner”, said Shri J Venkatramu, MD & CEO, IPPB.

Fincluvation mentors will work closely with the startups to tweak products to the customer needs and align the go-to-market strategies with operating models of IPPB and DoP.

India Post Payments Bank (IPPB) has been established under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India. IPPB was launched by the Prime Minister Shri Narendra Modi on September 1, 2018. The bank has been set up with the vision to build the most accessible, affordable and trusted bank for the common man in India. The fundamental mandate of IPPB is to remove barriers for the unbanked and under-banked and reach the last mile leveraging a network comprising 160,000 post offices (145,000 in rural areas) and 400,000 postal employees. IPPB’s reach and its operating model is built on the key pillars of India Stack - enabling Paperless, Cashless and Presence-less banking in a simple and secure manner at the customers' doorstep, through a CBS-integrated smartphone and biometric device. Leveraging frugal innovation and with a high focus on ease of banking for the masses, IPPB delivers simple and affordable banking solutions through intuitive interfaces available in 13 languages. IPPB is committed to provide a fillip to a less cash economy and contribute to the vision of Digital India. India will prosper when every citizen will have equal opportunity to become financially secure and empowered. Our motto stands true - Every customer is important; every transaction is significant, and every deposit is valuable.

Ganga Quest 2022, An Online Quiz Competition Witnesses Participation Of Over 1 Lakh People
Last Date For The Quiz Is 22nd May, Winners To Be Announced On World Environment Day, 5th June, 2022

Ganga Quest Can Be Played On www.clap4ganga.com

Guided by Prime Minister, Shri Narendra Modi’s vision of transforming Namami Gange Programme into a mass movement, with a special focus on students, National Mission for Clean Ganga (NMCG) along with Tree Craze Foundation, began Ganga Quest, an online quiz in 2019.

Why is it in news?

This year, Ganga Quest 2022 was thrown open for play from 7^th April, 2022 and so far, more than one lakh people, especially children, have participated in the online quiz. The last date for the quiz is 22^nd May, which is observed as the International Day for Biological Diversity.

Highlights

·       The winners will be announced along with a Live Quiz on the occasion of World Environment Day on 5^th June 2022. Ganga Quest can be played on www.clap4ganga.com.

·       The registrations for Ganga Quest 2022 began on occasion of World Water Day on 22^nd March 2022. The four themes on which the Ganga Quest 2022 is being played are: Arth Ganga & Azadi Ka Amrit Mahotsav, Physical Geography & famous places and personalities, Current Affairs & Governance, Flora and Fauna & Pollution/Water Treatment Technologies. While the 1^st prize winners will get a laptop, the 2^nd and 3^rd prize winners will be awarded with a tablet or a kindle.

·       The structure of the quiz has been designed in such a way that all age groups above the age of 10, especially students, are covered. The 3 categories created are: Grade-I: Up to Class VIII, Grade II: Class IX-XII and Grade III: Adults/University/Institutions/Adults/Senior Citizens. There are three rounds in the quiz which include Questions to Build Knowledge, Questions to Assess Knowledge and Short Survey. Continuous Learning & Activity Portal (CLAP) is an initiative by Namami Gange and created and executed by TREE Craze Foundation. This is an interactive portal that is working towards initiating conversations and action around the rivers in India.

·       Ganga Quest was started in 2019, with a focused aim of imparting knowledge and sensitizing children and the youth about River Ganga including its physical geography, historical and cultural significance, biodiversity, the governance structure, prior efforts and current affairs, famous places & personalities, socio-economic importance, livelihood significance, pollution in the river and various steps being taken to preserve River Ganges. 

·       Over the years, Ganga Quest has been a great learning experience and a successful platform to rope-in children in the Namami Gange Programme. Ganga Quest has proved to be effective in generating interest at national level towards rivers, environment and building an informed younger generation sensitive towards rivers and its ecosystems. Ganga Quest 2022 is part of the Azadi Ka Amrit Mahotsav that is being observed across the country to celebrate and commemorate the monumental occasion of 75 anniversary of India’s Independence and the glorious history of its people, culture and achievements.

World Bank President David Malpass welcomes India’s move of selling oil from its stockpiles

Why is it in news?

Speaking on the sidelines of the annual Spring meeting of the IMF and the World Bank held here, Malpass told reporters that allowing more trade and opening of markets were “very important” steps.

Highlights

·       World Bank President David Malpass has welcomed India’s move to begin selling oil from its stockpiles, asserting that the world needs to take important steps to address the current set of crises. Speaking on the sidelines of the annual Spring meeting of the IMF and the World Bank held here, Malpass told reporters that allowing more trade and opening of markets were “very important” steps.

·       “I was intrigued to see and welcomed India’s moves yesterday and today to begin to sell from its stockpiles. I think market opening steps by many of the advanced economies could add a lot to the global supplies and alleviate some of the impact on the poor countries,” he said on Wednesday.”And they themselves need to build up their systems to produce more. One of the drawbacks is that, in recent years, there’s been a shortage of investment, especially in the developing world. We need to find policies going forward that will add investment,” he said.

·       One of the solutions for the world is to recognise that markets are forward looking, he said.“If you announced policies today, it has an immediate impact on where people begin to invest. I think the world can take steps to say that the capital allocation of global resources can be improved. What we have now is a capital allocation that leads to deep inequality,” Malpass said.

·       The inequality is growing worse. That means more countries falling further behind, not making advancements, and not having the investment that is needed. Some of that owes to the macro policies of the advanced economies. They’ve been borrowing very heavily from the global capital markets, which leaves less for other countries. That can be improved, he asserted.

·       As central banks raise interest rates, it’s important for them to use all their tools and not be undercut by the government demand stimulus, Malpass said, adding that the central banks can use tools that add to supply and that allow capital allocation to be improved.”I think that’s going to be vital. They’ve been talking about, not just interest rates, but also shrinking the balance sheet, which I think would have a stimulative effect on the global investment climate, because it would occupy less of the capital at the central banks from the current situation.“Also, they have regulatory policy tools that can be used to allow and encourage more investment in small businesses, in new businesses, that will be the dynamic portion of a new economy,” he said.

·       Stressing that markets are forward looking, he said announcements on currency stability have an impact and announcements on capital allocation have a positive impact, as the world tries to confront various crises. Malpass said it was vital in global growth that there continue to be trade and cross-border trade flows and cross-border investment flows.

·       “Neighbours are some of the best trading partners, and that openness is important. I wanted to give that background, because trade and investment needs to cross borders, and fragmentation would subtract from the productivity of global capital,” he said.

·       The World Bank president said there will be a strong effort to have less dependency on Russia for energy supplies and on China for the supply chain.“There had been an over-dependence on that, and that could be good for China. As specific supply chains are less dependent on China, it allows China to move into other sectors and to look forward to the markets of the future,” he said “I don’t see this as a negative step; it is a necessary step for the world to look at regional trade growth. Near-shoring is important for the United States. Mexico and Canada are key markets, powerful markets, and vice versa. For Mexico, a powerful trading partner is the United States. That can be built on and made into an even bigger trading relationship,” he observed.

All-India Consumer Price Index Numbers for Agricultural and Rural Labourers for March, 2022 Released

The All-India Consumer Price Index Number for Agricultural Labourers (Base: 1986-87=100) for the month of March, 2022 increased by 3 points each to stand at 1098 (One thousand ninety eight) and 1109 (One thousand one hundred and nine) points respectively.

Why is it in news?

The major contribution towards the rise in general index of Agricultural Labourers and Rural Labourers came from clothing, bedding & footwear group to the extent of 1.09 & 1.44 points respectively mainly due to increase in prices of saree cotton (mill), dhoti cotton (mill), shirting cloth cotton (mill), plastic chappal/shoes, leather chappal/shoes, etc.

Highlights

·       The rise/fall in index varied from State to State. In case of Agricultural Labourers, it recorded an increase of 1 to 10 points in 16 States and a decrease of 2 to 10 points in 4 States. Tamilnadu with 1282 points topped the index table whereas Himachal Pradesh with 876 points stood at the bottom.

·       In case of Rural Labourers, it recorded an increase of 2 to 10 points in 16 States and a decrease of 3 to 10 points in 4 States. Tamilnadu with 1270 points topped the index table whereas Himachal Pradesh with 926 points stood at the bottom.

·       Amongst states, the maximum increase in the Consumer Price Index Number for Agricultural Labourers was experienced by Maharashtra State and for Rural Labourers by Madhya Pradesh, Maharashtra & Rajasthan States (10 points each) mainly due to rise in the prices of wheat-atta, bajra, meat-goat, milk, groundnut oil, chilies green/dry, saree cotton (mill), dhoti cotton (mill), shirting cloth cotton (mill), plastic chappal/shoes, brass vessel, earthen-ware, etc. On the contrary, the maximum decrease in the Consumer Price Index Numbers for Agricultural Labourers was experienced by Tamilnadu State and for Rural Labourers by Karnataka State (10 points each) mainly due to fall in the prices of rice, jowar, ragi, pulses, pan-leaf, fish fresh, onion, vegetables & fruits, etc.

·       Point to point rate of inflation based on the CPI-AL and CPI-RL stood at 6.09% & 6.33% in March, 2022 compared to 5.59% & 5.94% respectively in February, 2022 and 2.78% and 2.96% respectively during the corresponding month of the previous year. Similarly, Food inflation stood at 4.91% & 4.88% in March, 2022 compared to 4.48% & 4.45% respectively in February, 2022 and 1.66% & 1.86% respectively during the corresponding month of the previous year.

Russia-Ukraine War: What Impact Can It Have on India's Economy?

Why is it in news?

Doing business in the fog of war‚ distant as it may be‚ is fraught with unknown risks.

Highlights

·       An essay on the ‘State of the Economy’ in the Reserve Bank of India’s (RBI) February 2022 bulletin begins by saying this: “Domestic macroeconomic conditions are striking a path that is diverging from global developments.” Perhaps, but the possible outcomes of the geopolitical crisis that began when Russia invaded Ukraine on February 24 could challenge that assessment. That’s not all. On March 8, US President Joe Biden raised the ante in this war by announcing a ban on the import of Russian energy products. 

·       While the US itself is not very dependent on Russian oil—in 2021, it imported an average 672,000 barrels a day, or 8 per cent of its needs, according to the Energy Information Agency (EIA); Canada provides 51 per cent of US oil imports—the impact would be elsewhere. Crude oil prices could skyrocket—to as high as $150 a barrel, some analysts fear—and that would wreak havoc on the Indian economy. 

·       Many observers worry that the impact on India’s economy could be severe; others are sanguine that India’s economy is insulated from the effects of a war that is very far away. The stock market has already reacted, with major indices falling by almost 10 per cent since February 1, although they recovered around the days of the state election results. Several market veterans shrug off the slide saying a ‘technical correction’ was due anyway, and events in Europe supplied the trigger.

·       Most companies and business people are confident—or at least hopeful—that the crisis will be re solved quickly, since the world cannot afford a long drawn-out conflict or persistent political tension in Europe. That said, US-China trade tensions have persisted for long, and the global economy has adjusted. China’s alignment with Russia, and new tensions over Taiwan could, however, ratchet up the pressure. 

·       Three scenarios are possible: a difficult, but manageable short-term one, in which the dispute is resolved and tension de-escalated within two months, a second, more adverse situation in which the effects of persistent sanctions will be felt if the conflict continues for six to nine months, and the third, worst-case scenario of a dragged-out war over 12-18 months.

·       Three types of effects on the Indian economy are likely: direct, affecting trade between India and both Russia and Ukraine; indirect, through global commodity and energy market shifts; and macroeconomic, as policy implementation and business choices may have to be deferred or adjusted to manage any fallout from the crisis. The results of and responses to this 3x3 matrix will vary, and degrees of uncertainty—at least at this stage—are high. The big question is how the Indian economy will weather this crisis. Will it demonstrate resilience, or will some sec tors get into serious difficulties? 

BITTER, BUT STRONG, MEDICINE 

Pharmaceutical companies—Sun Pharmaceuticals and Dr. Reddy’s Laboratories (DRL) come to mind— have production facilities in Russia and offices in Ukraine. Requests for an interaction sent to the first elicited no response, despite many attempts. DRL’s spokesperson sent a standard two-line response that has been curated for the media: “We have had a presence in the region for over three decades. Ensuring the well-being of our staff is our first and foremost priority, along with measures to meet patient needs and business continuity. We have been monitoring developments closely and preparing accordingly, and continue to do so.” Sudarshan Jain, Secretary General of the Indian Pharmaceutical Alliance (IPA) and himself a former head of pharma company Abbott India, identified three immediate industry priorities, the first being to keep an adequate supply of medicines—three to four months’ stock—in Ukraine and Russia. “Our other priorities are to ensure the safety of employees in the region, and to ensure the safe return of our Indian staff and their families back home,” he says. “We are working closely with the Ministry of External Affairs and the Ministry of Commerce on meeting these and other challenges.”

But there is one essential commodity’s behaviour that is concerning to the pharma industry: the volatility in active pharmaceutical ingredient (API) prices. The industry depends on imports for 90 per cent of its API needs, and increased volatility because of the Ukraine crisis is going to make matters worse. “Company margins— and balance sheets—are already stressed as a consequence of this volatility,” Jain points out. “Things could get harder for the industry, financially. Our response to the Covid-19 pandemic and changing operations and structures while still ensuring the f low of medicines isn’t interrupted has also come with some costs.” They would do it all over again if needed, he adds. Consultation with the government is ongoing to ad dress the API challenge, along with a whole host of other things.

THE PAYMENTS PROBLEM 

The imposition of economic sanctions on Russia has been swift. To start with, five major Russian banks have been barred by Europe and the US from the SWIFT global messaging system that lets banks communicate with each other across borders about payments and transfers between them, a sort of financial SMS confirmation system. The Society for Worldwide Interbank Financial Telecommunications, or SWIFT, has more than 11,000 participating member banks and financial institutions from 200 countries, and makes global trade and finance possible. 

The sanctions have got the pharma industry worried, not because of the volume of trade—the Pharmaceuticals Export Promotion Council (Pharmexcil) reported that in 2020-21, pharma exports to Russia and Ukraine amounted to $591 million and $181 million, respectively, or less than 3 per cent of total pharma exports—but because companies are worried about receiving payments. “Receiving payments for exports to Russia will now be a big problem,” says Ajay Sahai, Director General and CEO of the Federation of Indian Export Organisations (FIEO). “There is about $400 million in unrealised receipts for exports that have already been shipped.” Most of that is from Russia. The problem, Sahai says, is that the financial consequences can be steep for exporters. Banks have applied stringent terms in recent months because the rouble has been a volatile currency, and now it has pretty much collapsed.

Pre-shipment credit is typically accompanied by insurance cover from the Export Credit Guarantee Corporation (ECGC), and post-shipment credit has high penalties if payments are not received on time. “Unless the government asks banks to relax the penalties and payback periods until the situation is resolved, the costs for exporters can be crippling,” says Sahai. Russian companies have offered to pay through third countries—Turkey, for instance—but the ECGC and banks insist that payment through third countries should be part of the agreement when the contract is initiated, that is, before shipment is made. Unfortunately, that provision probably is absent in most contracts. 

On March 3, at a meeting in Kolkata, RBI Governor Shaktikanta Das suggested that banks should find alternative ways of handling payments with Russia, but no ideas were forthcoming from bankers. In the past, a rupee-rouble exchange was put in place—this was after the collapse of the Soviet Union, to make payments for defence and other purchases—which may now be reconsidered. For imports, things may be a little easier. The bulk of Russia’s exports to India are oil, gas and coal, all of which, along with agricultural products (like sunflower oil from Ukraine), pharmaceuticals and medical devices, are exempt from sanctions. India’s trade volumes with the two countries are not very significant (see The Export-Import Impact). The indirect effects, however, are a whole different story.

THE COMMODITIES CONUNDRUM 

Over March 7 and 8, the price of nickel on the London Metal Exchange (LME) shot up from roughly $29,800 to over $100,000 a tonne, forcing the LME to suspend trading, and launch an investigation into the causes. Russia accounts for 9 per cent of global supply, but influences prices hugely. The immediate effect of the invasion of Ukraine was the jump in crude oil prices, which traded upwards of $110 a barrel at one point, though it softened to less than $105 thereafter. (On March 15, Russian crude was selling at a $26 discount to Brent.) However, the significant jump in spot prices worries economists, whose estimates on the tipping point for crude prices—the point at which the Indian economy will begin to feel the full impact—vary between $80 to $100 a barrel. 

Price hikes are not restricted to oil and gas or energy; over the past 18 months, all commodity prices have risen steadily. They seem to have plateaued, but this latest crisis has added its own upward impetus. Rising prices of three metals are of major concern: steel, aluminium and nickel. In addition, coal is a significant factor in the production of the first two. On March 4, aluminium hit a record $3,850 a tonne, an increase of 13 per cent in just a week, on the LME, and nickel reached an 11-year high.

The hike in steel prices could be beneficial for India, according to Amit Dixit, Director, Institutional Equities at Edelweiss Financial Services Ltd, a Mumbai-based financial services firm. “About 11 per cent of seaborne global steel exports are from Ukraine and Russia,” he points out. “Most of it is intended for Southeast Asia, and the crisis will disrupt their supply. This can be an opportunity for Indian steel makers to enter that market.” 
Aluminium poses a different problem. Because of its high energy intensity—in India, 40 per cent of the cost of production is attributable to coal (as a source of energy)—which is a problem for achieving net zero carbon as agreed to in the climate change accords. There has been a push towards recycling. The International Energy Agency reports that 34 per cent of the metal used in 2020 was recycled. “But there is also a shortage of 2 million tonnes in a market where demand is 69 million tonnes annually,” Dixit points out. Ergo, prices will go up. Russia is a significant producer of aluminium, accounting for roughly 4-6 per cent of global production, and is among the world’s most cost efficient producers. Sanctions compound the supply shortage. India is unlikely to face supply constraints, though. Hindalco, Vedanta and Nalco can more than meet domestic demand. But the metal’s prices are set at the LME, not in India, and so are likely to remain high.

Two other metals are worthy of mention: palladium and platinum. Russia accounts for 35 per cent of the global production of the first, and 10 per cent of the second. Both are key inputs into catalytic converters, and thus the automobile supply chain. In 2019, palladium became the most expensive of the four precious metals (gold, silver, platinum and palladium), and a reliable substitute isn’t easily available. When the US imposed sanctions on Russia in April 2018—the US has a long history of imposing sanctions on Russia for a variety of reasons— the volatility in prices was similar, and the impact on the automobile industry was very adverse. That can hit close to home for consumers. 

A TWIST IN THE TAILPIPE

In December 2021, asked by the media on the outlook for 2022, auto mobile industry leaders and senior executives shared opinions that ranged from hopeful to ‘cautiously optimistic’. The pandemic itself pushed up demand for personal passenger vehicles, although the global semiconductor chip shortage and higher fuel prices increased the cost of ownership considerably. Others said they expected demand to strengthen after India navigated the Omicron variant onset; production shortages due to a global semiconductor chip shortage were also handled relatively smoothly.

But industry honchos seem unwilling to hazard a statement now. Attempts to connect with and questions sent to senior company executives for this article were met with silence. Basudeb Banerjee, an Automobile Industries Analyst at ICICI Securities, says there’s no cause for worry. “The choice for consumers is really between the cost of personal mobility weighed against the cost of family time, which seems to have become more valuable now,” he says. “Most people will still be willing to absorb the higher costs.” Plus, the government has also chipped in with policy incentives for production; there’s about Rs 26,000 crore under the production-linked incentive (PLI) scheme for the auto and auto component industries, another Rs 18,000 crore for investment in advanced chemistry cells (for EVs), and Rs 76,000 crore for semiconductor manufacturing over the next six years. The latest surge in commodity prices will delay the industry’s anticipated recovery. Several analysts had priced in a bottoming out of gross margins by the second quarter of FY22. 

The sustained increase in commodity prices, and now the Ukraine crisis, have shifted that point to Q3FY23. More pain before some gains, apparently. The logic for that assessment is relatively straightforward. Raw material costs as a share of sales value amount to roughly 75 per cent (see The Platinum, Palladium Risk). The sum of energy conversion costs, logistics, sales and marketing—labour costs will remain stable—will dent or damage gross margins by about roughly 3-4 per cent.

With additional costs stemming from the crisis—not forgetting inflation—the gross margin turnaround could well be pushed into the start of 2024, if the Ukraine crisis persists. And if markets are anything to go by—both equity markets and futures—people are persuaded that things could take longer before ‘normalcy’ is restored. Uncertainty breeds volatility. 

UNMAKING THE MARKET 

The most obviously visible signs of distress are in global equity markets, and their hopes of a fast resolution seem likely to be belied. On March 4, US Secretary of State Antony Blinken told the media in Brussels that an early end to the crisis appears unlikely, after his meeting with NATO Secretary General Jens Stoltenberg. Sanctions on Russia, its businesses and economy are likely to get harsher. Indian stock markets have been ‘correcting’ very quickly. On March 7, the S&P BSE Sensitive Index (BSE Sensex) had declined to 53,035, by almost 15 per cent from its 52-week record high of 62,245. 

Another 5,700-point decline will take it to the lowest point in a year, or 42,205. That likelihood doesn’t seem far-fetched, although it recovered marginally to 55,464 on March 10. Rashesh Shah, Chairman and CEO of the Edelweiss Group, isn’t convinced that the Ukraine crisis is the primary cause for the fall in the Indian equity market. “We were already in a global risk-off environment,” he says. “India is reasonably insulated from what is essentially a geopolitical crisis.” He acknowledges the potential inflationary effects that commodity prices will have on the economy. “But look at corporate balance sheets,” he argues. “This year’s Budget and tax collections in the past few months have been high enough for the RBI to reduce the government’s borrowing programme; the government’s balance sheet is strong too.” 

Others are less sanguine. “The market was expensive, and some valuations were definitely very high,” says Sanjeev Prasad, Managing Director and Co-head at Kotak Institutional Equities. “Interest rates are high, and so is inflation. I have never seen people in the equities market as worried about inflation as they are now.” He’s right about excessive valuations. The stock price of TCS, for example, was 19-22 times forward earnings through most of the last decade; it is now 30 times. HUL (Hindustan Unilever Ltd) was at more than 45 times earnings in early March, and Avenue Supermarts Ltd—otherwise known as DMart— has a price-earnings (P/E) ratio of 110 times! The National Stock Exchange’s (NSE) Nifty 50 is trading at 19.5 times. Prasad worries that inflation in FY23 could average well above RBI forecasts; an extended conflict could keep oil prices higher than $110 a barrel; September oil futures on March 8 were over $126. Together with other high commodity prices, the RBI may have to revise its inflation estimate upwards, to 6 per cent, probably even higher. With 10-year bonds at a shade over 6.8 per cent, and forward earnings yield (the reciprocal of the P/E ratio) at 5.13 per cent, the yield gap between equity and bonds is 162 basis points. “When earnings yield is that much lower than bond yield, equities are clearly overpriced,” Prasad points out. “And if the RBI hikes interest rates to contain inflation, that gap could get bigger, or there will be a bigger market correction.”

INFLATION: ILLUSION OR SPIRAL? 

There is a spectrum of views on inflation and the economy’s ability to tolerate it. There are a multitude of ways that economists and other analysts slice and dice it: food versus non-food, core versus consumer, cost-push versus demand pull (which is analogous to supply side versus demand side) and so on. Inflation is also intensely political. Energy prices will go up sharply as crude oil and coal prices spiked as a result of the current crisis involving Ukraine and Russia. A meeting of OPEC+—a group that has 23 members that account for 45 per cent of global crude production and of which Russia is co-chair—lasted just 13 minutes on March 2. Not surprisingly, they held the line on production; after all, they are happy to take the benefits of the price increase. “Sanctions may not be imposed beyond the end of March or April; at least that’s the hope,” says Madan Sabnavis, until recently chief economist at CARE Ratings, and currently Chief Economist at Bank of Baroda. “India’s GDP growth for this year—FY22—is unlikely to be impacted, though some volatility in bond and currency markets cannot be ruled out.” 

The problem is, inflation may have been suppressed for a while recently. Elections in Uttar Pradesh, Punjab, Goa, Manipur and Uttarakhand necessitated keeping fuel prices untouched even as global crude prices were rising even before the Ukraine crisis; many are also expecting a hike in minimum support prices (MSP) for farmers. Both these are expected to go up. Look out for second order effects as transport prices and freight rates also go up. Still, public finance—at least right away—will not be a problem. The government’s cash balances with the RBI seem more than adequate and cancelling the auction of some government debt has lowered expectations of problems, and suggest that tax collections will be robust. “But the increase in oil prices will reduce excise and neutralise expected revenue gains,” says Indranil Pan, Chief Economist at YES Bank. “The global economy—and thus India—will feel significant pain if oil prices stay this high for an extended period. Demand will cool and supply-side bottlenecks will persist if the crisis persists beyond three months.”

Conducting a nimble monetary policy will be challenging. Many expect the US to withhold interest rate increases; global analysts suggest there may be fewer rate increases, although US Federal Reserve Chairman Jerome Powell is not taking his foot off the brake entirely. There will be policy rate hikes, and with consequences for India’s economy. Ordinary people were already expecting high inflation even before the crisis. The January 2022 Household Inflation Expectations Survey expected inflation to be higher at 9.7 per cent a month ahead, and at 10.6 per cent in the coming three months, and 10.7 per cent for the coming year. Compare that to the RBI’s target of 4.5 per cent for the year. 

Opinions and views on the impact of the crisis—and the consequences of sanctions against Russia—fall into two camps: one believes, maybe even hopes, that the crisis gets over quickly, a second is worried that it may last longer than anticipated and cause some permanent economic damage. No one wants to prepare for the worst possible outcome. The problem is, despite hope and selective amnesia, India cannot ‘decouple’, as many people thought India could before the global financial crisis of 2008. Then, as now, that impression is wildly inaccurate. In an interconnected global economy, it doesn’t have to be a sneeze that can give the world a cold, or the shivers.