Many people I regularly speak with have expressed surprise over market’s resilience despite (i) worsening pandemic conditions; (ii) persistent FPIs’ selling; (iii) downgrade of economic growth forecasts for FY22; and (iv) likely earnings downgrades due to renewed mobility restrictions.
To be honest, I am not at all surprised with the market resilience. I believe market resilience is underlined by the following five major factors –
1. Sharp rise in global commodity prices and consequently elevated inflationary expectations fuelling a rally in commodity stocks, especially metals and agro commodities.
2. Extreme pressure on MSME sector, especially those in unorganized sector. This is resulting in accelerated consolidation of business in top companies resulting in sharp rise in their valuations.
3. RBI commitment to lower rates.
4. Consistent rise in non-institutional participation in market. This segment is usually less sensitive to valuation and more concerned with momentum. Given that Covid-19 has resulted in higher private savings; lower working capital requirement for smaller businesses, the liquidity with this segment remains comfortable.
5. Lower systemic leverage. Tighter margining and funding rules implemented by the regulators have resulted in materially lower systemic leverage as compared to previous crisis periods. This has prevented any panic selling in the market so far.
In my view, worsening of economic conditions may keep market supported for more time, before it begins to hit larger corporates; and/or rates begin to rise to control inflation.
The sharp rise in infection and mortality rates in past one month have attracted global attention towards India. I would also like to share some thoughts on the worsening pandemic conditions in India.
In the sacred text of Shri Durga Saptshati, eighth chapter is dedicated to the killing of a demon named Raktabīja by the Mother Supreme. The Raktabīja was a very powerful and strong demon. He had a super power. Whenever his blood dropped on the ground, a clone of his (equally powerful and strong) would emerge from every drop of blood so fallen. Killing him therefore was extremely difficult task. All attacks on him would result in thousands of his clones emerging in no time. The mother Supreme then thought of a trick. She summoned goddess Kali and ordained, “I shall hit Raktabīja now; enlarge your mouth and consume each drop of his blood before it touches the ground.” This way the entire blood of Raktabīja was finished without any clone taking form. The demon eventually succumbed to the injuries inflicted by the Mother Supreme. His elimination paved way for eventual elimination of his masters, the demon king Shumbha and his tyrant brother Nishumbha.
As India’s struggle with intense second wave of Covid-19, inspiration could be drawn from this episode from scriptures. Each infected Covid-19 patient is infecting multiple other healthy persons. If the contagion continue to spread at this rate (or even at a slightly lower rate), it is estimated that close to 20% population may catch infection in next few months. At a mortality rate of 2%, we are staring at a potential of over 5million casualties. Even thought of such an eventuality is frightening.
It is therefore critical that virus (SARS-CoV-2 and its various mutants) must be killed before it is able to replicate itself. Aggressive testing and vaccination are two very potent methods to achieve this goal. Unfortunately, we are facing serious challenges on both these solutions. Testing infrastructure is proving to be grossly inadequate, discouraging even the people with clear symptoms to get themselves tested. Vaccination drive is not progressing at desired pace. In this situation, one can only expect the situation to worsen before it begins to improve.
I have the following two suggestions for the government to kill this incarnation of Raktabīja:
1. The government may immediately declare Covid-19 a “national emergency”. Set up a Covid-19 task force comprising of Chief Secretaries of all states.
2. Set up an emergency fund to raise US$50bn for Covid-19 management. Some large projects may be suspended and resources may be diverted to this fund. A one-time 10% cess may be imposed on income of top 500 companies. Multilateral and Bilateral agencies may be tapped for special loans.
3. The fund may be used to procure adequate stock (at least 2bn) of vaccines from all possible global sources, including setting up local capacities, in next 6months.
4. Train one million volunteers to give injections in next one month. Each volunteer should be able to vaccinate 50persons every day.
5. Vaccinate people door to door in next one months.
Make Rapid Antigen Test (RTA) test kit available for OTC sale at a subsidized price of Rs5/per kit. Encourage people to self-test at least once a week.
Do not get discouraged with non-gold standard of the test. Remember, the results of self-test pregnancy test, digital blood pressure monitoring machines, digital thermometers, self-test blood sugar monitoring etc. are far less than 100% accurate. But all these monitoring means do play a material role in preventing care.