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Cash crisis in India

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[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] W [/yt_dropcap]orld attention was fully focused on US presidential poll as Republican Donald Trump was leading on November 08 as Indian premier Narendra Modi announced in the night on Indian TV channels about the state ban of currency notes, making life miserable for the people without enough money in hand.

While making the announcement to discontinue Rs 500 and 1,000 banknotes , the government had also announced closure of bank branches and ATMs next day. It also announced the launch of newer notes of Rs 500 and Rs 2,000 from November 10.

India has plenty of money but not got locked in banks, houses, offices, and elsewhere, including hidden underneath to avoid taxes to the government and people of India are unable to use them as government of India has banned currency notes of denomination of Rupees 500 and 1000, causing the first ever serious cash crisis in India.

Modi has indeed declared another surgical attack, now on the helpless Indians.

Demonetization measure is too harsh for the common masses who have very limited resources.

The result is people are not buying things, business establishments have no business, as banks allow only 2000 thousand rupees a day for the peole to withdraw or exchange. New rules are being announced complicating the life of common people while the rich and corporates have their own “channels” of money transfer and expenditures.

The BJP government of Narendra Modi abruptly announced a ban of big notes of denominations 500 and 1000 that played huge role in trade and even ordinary business. In fact, high value currencies have ceased to be legal tender from 8 November midnight when PM Modi announced the new financial measures. There has huge rush since 09 November at the bank branches as customers throng to deposit their Rs 500 and Rs 1000 notes or exchange them with Rs 100/50 notes.

The Modi government explains the measures as being necessary to end black and bad money floating along with the genuine notes, causing inflation, whereas experts say corruption is the cause of inflation and poor quality of life of common people. Whether or not PM Modi would be able to contain the dirty cash and make the value of Indian money strong, people are suffering a lot, while the regime has not been able to control the corporate funding of elections, thereby bring Indian democracy closer to American.

Demonetization effect

The recent demonetization of currency notes reveals the sad state of our public discourse on government policy. The combination of braying anchors on TV channels and opinions on social media show how to mangle a discourse.

Demonetization of high denomination currency has created big problems to common people and law and order situation is being created with police being deployed outside banks to control the queue. The issue has reached the parliament. The Winter Session of Parliament opened on Nov 16 with a united Opposition mounting an assault on the government over demonetization, saying it had led to “economic anarchy” in the country. The opposition parties also demanded a probe by a Joint Parliamentary Committee (JPC) on the alleged selective leak of information before the official announcement. Joining ranks over the raging issue, parties like Congress, JD(U), RJD, SP, BSP, Trinamool Congress, Left and AIADMK slammed the government, particularly targeting PM Modi, for making Rs 500 and Rs 1,000 denomination notes invalid and said the “ill-timed” and “ill-conceived” step had severely hit the common people, the farmers and the poor.

While Lok Sabha was adjourned for the day, the seven-hour-long debate in Rajya Sabha, however, remained inconclusive. The debate in Rajya Sabha continued till 6 pm as there were repeated demands by the opposition members that the Prime Minister should be present in the House to listen to the members. Leader of Opposition in Rajya Sabha Ghulam Nabi Azad said PM Modi, who did not come to the Rajya Sabha, should at least be present tomorrow and possibly intervene.

During a discussion on demonetization, which was taken up after suspension of all business in response to notices given by a host of opposition members, a scathing attack was made on the government which strongly defended the step as one taken in national interest and to end corruption and black money, which it linked to terror activities in the country.

Opposition attack on Modi in parliament

In an all-day debate in parliament today, opposition leaders like Anand Sharma of the Congress said they are not opposed to the reform, but to what they described as the lack of preparation to manage the cash crunch. The government has emphasized that if the notice for the initiative had been longer, the move would not have been effective.

Congress is the major opposition in parliament. Deputy Leader of Opposition in the Rajya Sabha Anand Sharma sought a probe into “selective leakage” of the demonetization move, which he termed a “Nadirshahi farman” (autocratic order). Initiating a debate after listed business was suspended to take up a discussion on the 8 November decision to withdraw old higher denomination currency, Sharma used wit and humor to attack Modi for being insensitive to problems caused to the common man. He asked Modi to state where he got Rs 23,000-24,000 crore, estimated by the International Money Watch Group, for his Lok Sabha elections. He also asked if cheque or credit card payments were made to organize his rally at Ghazipur in Uttar Pradesh a few days ago. Alleging that the information on demonetization was selectively leaked, he said, “Your BJP units have deposited crores (just before the 8 November decision).” Sharma sought to know from the Prime Minister as to “who wants to kill him”, referring to the Prime Minister’s speech in Goa where he had said that with demonetization resulting in “Looting of their 70 year corrupt earnings, they will destroy me, they can kill me”. “There should have been an ordinance for demonetization. But no ordinance was brought. This is a Nadirshahi farman (autocratic order),” Sharma said.

The decision to demonetize high currency notes was leaked to a select few. Secrecy was not maintained on this issue. It was published in a Gujarati newspaper long back and even other newspapers wrote about it,” said Sharma. “There should be a probe into the selective leakage of information,” he said, asking: “What did the government do to prepare for effective implementation of the policy.” He also sought to know from the government which law gave it the right to impose limits on withdrawing money from peoples’ own accounts. “An atmosphere has been created by the government where questioning them has become a parameter to decide one’s nationalism,” said Sharma. He sought to know from the Prime Minister as to from where the “15 thousand crore rupees spent on your mega election campaign come from”. “Did you pay for your recent Ghazipur rally through credit card,” Sharma said mocking the government for asking people to use plastic money for day-to-day expenses. After withdrawing Rs 500 and Rs 1,000 currency notes, restrictions were placed even on foreign tourists who could not get their currency changed.

The Modi government rejected as baseless the opposition charge that there was “leakage” of the 8 November decision that benefited BJP, and said everyone was taken by surprise which is why there are “initial” problems.

The government argues that the honest tax payer is being rewarded as he does not have to worry about his cash deposits. For once the honest tax payer is in a privileged position which is rare and shocking for him.

Finance Minister Arun Jaitley had informed Parliament in August that fake currency was 0.02 percent of the total currency in circulation. If 0.02 percent by government admission is counterfeit currency, how can that be made the base to remove 86 percent of currency in circulation. An undeclared emergency has put common people in grave inconvenience, he said while crime money, ill-gotten wealth and that accrued through corruption or tax evasion is black money. One wonders if money in the market, or in households or with farmers, workers and employees was also blackmoney.

Key opposition leaders

BSP chief and former UP chief minister Mayawati demanded the presence of the Prime Minister in the House to hear out the Opposition parties and address their concerns. Mayawati questioned the government’s preparedness for the demonetization of high-value bank notes, accusing it of spending the last ten months on settling the black money of its people. “The government has said that they spent ten months preparing for this decision. Ten months was a long time to prepare. If they were serious about it, they would have prepared well for all the problems that people are facing today.” “If the government had spent ten months preparing for it, then why do they need another 50 days? There is something fishy.”

While the masses are in pain, PM Modi keeps taking after creating a national crisis and Mayawati said he must be sleeping after taking pills, adding that the poor and the middle classes were the worst sufferers. “It is an immature decision taken in haste and the whole country feels that is an ‘economic emergency’,” she said adding that it was like a “Bharatbandi situation.”

The hardship is real especially among lower income categories that do not have bank account and need cash for emergencies. Their trouble is painful and affects the society emotionally. There is no justification logical or emotional for this pain. An emotional pain cannot be justified by logic, neither should an economic decision rest on emotional arguments. The reason an emotional justification is pulled in is because of the nationalist fervor or color being given to an economic decision.

The nationalistic line or patriotic one is wrong all it shows is the intellectual drought that TV channels suffer from these days. Their desire to kowtow the government line crosses limits of ridiculousness and borders on stupidity. Though the line is supported by those in the government and is detrimental as it will affect economic decisions in the future. People are not stupid to be swept by such fervor. TD will not reduce or remove corruption. The artifice is high and is the favorite line of criticism for opposition politicians. Especially, as the government is introducing a higher denomination Rs 2000 note and reintroducing Rs 500 and Rs 1000.

To understand, TD by itself does not remove black money or will get rid of it. One, it will help to bring more people in the banking system as they stop relying on cash, particularly traders and jewellers. Second, currency as stock is not going vanish anytime, it cannot go away, Rs 500 and Rs 1,000 are also going to come back. This step is a shock therapy to the system. To put the fear in the minds of people who do not pay taxes or use cash to hide unaccounted income. Clever politicians have tried to explain that black money is no longer kept in cash but in gold and real estate.

Like all criticism it is easy. There is no single step or action that can get India rid of black money irrespective of what politicians say. The reason it is black is because the system is not able to capture it. No country has been able to successfully capture it, which is why tax havens exist. TD affects a small percentage of it, but should this step not be taken because it affects a small percentage. Should we wait endlessly until we find that brahmashastra that will destroy black money. If incremental steps help they should be taken.

This shock required surprise, surprise required secrecy that means not many people knew. Therefore the system is still not ready. Hence the hardship! Though the secret argument cannot be used for justifying the hardship as once announced banks need to get their act together. Especially as the nail that has lost the kingdom is the tray in ATM machine that is not able to take a Rs 2000 note.

Yechury Mamata, Mayawati

CPM leader Sitaram Yechury said that of the 130 crore population in the country, only 2.6 crore have credit cards. He took a dig at Modi and narrated the infamous quote of Queen Marie Antoinette during the French revolution who had said that people can eat cakes when they don’t have bread. “We have Modi Antoinette who says ‘If you don’t have paper, use plastic'”. Alleging that a BJP unit in Kolkata deposited Rs 1 crore in Indian’s Bank Account on 8 November, he said “prove me if I am wrong.” He added that Prime Minister was advertising for Paytm while talking about cashless economy.

The CPM leader said 1/5th of the economy is black economy and people who kept black money invested it in real estate, gold etc. That is why the imports surged and stated that it was this PM only who had stated that 95 percent of the black money is stashed offshore and is in safe havens. “PM is cleaning a pond to kill crocodiles but big crocodiles have survived and only small fishes are dying.” He also demanded that corporate funding of all political parties should stop and there should be a system of state funding for elections to which Kurien said “why don’t you move a private members bill in this regard.”

Seeking immediate withdrawal of demonetization exercise, West Bengal Chief Minister Mamata Banerjee met President Pranab Mukherjee along with leaders of National Conference, AAP and NDA ally Shiv Sena and submitted a memorandum voicing serious concern over the crisis arising out of ban on Rs 1000 and Rs 500 currency notes. She said the situation arising out of demonetization has triggered a sort of constitutional crisis.

Expressing concern over the problems being faced by the people after the demonetization move, she said “We have requested the President to speak to the government and decide on this and bring back normalcy in the country. President was once the Finance Minister and knows country’s situation better than anyone else, he will take appropriate action.” Leaders of the other opposition parties including Congress, Left parties, SP and BSP did not took part in the protest march. Describing as “dictatorial and draconian step” the government’s demonetization move, the memorandum has sought its immediate suspension. “Stop harassment of the common people by lifting of all sorts of restrictions recently thrust upon them,” the five-page memorandum said, and added “ensure that supply of essential commodities in adequate quantities be restored in the markets forthwith.”

Before beginning the march from Parliament, Mamata said “The march is to save common people from disaster.” The ban has affected the normal functioning of the household as there is no money available. However, the Shiv Sena differed on the issue and insisted the government to extend the deadline of accepting the old currency notes.

Mamata also said “Those with black money have been supported, but taxpayers are suffering”, and added that the situation arising out of demonetization has triggered a sort of constitutional crisis and financial emergency. Seeking the intervention of the President in the “interest of common people to alleviate the untold suffering, helplessness and financial insecurity that they are facing now”, the memorandum said “withdraw this draconian demonetization measure immediately.” Pitching for a broader campaign against demonetization, involving various political parties, Mamata yesterday met Delhi Chief Minister Arvind Kejriwal. Both the leaders discussed the crisis for about 40 minutes but Kejriwal reportedly expressed his reservation to come along with Shiv Sena on a same platform.

Mamata had approached other parties, including Congress and Left, to join the march against the demonetization of Rs 500 and Rs 1000 currency notes, saying “common people are suffering because of it.” However, Congress and Left though opposing the demonetization move preferred not to join the rainbow platform created by Mamata against the government. Undeterred by the absence of major political parties she marched ahead.

Positives approach

On a day when the opposition launched an offensive against the government over the abrupt withdrawal of Rs. 500 and Rs. 1,000 notes, there was a rare exception. Nitish Kumar, Chief Minister of Bihar, expressed his “total support” for the ban, introduced last week by Prime Minister Narendra Modi. “Fake notes will disappear,” said Kumar in his home state, sharing rare agreement with PM Modi, who has said the reform will attack the roots of black or untaxed money, counterfeited currency and corruption.

The parliament decried the ban on notes as a move that is punishing the poorest and weakest, who suddenly find themselves cashless.

Eight days after the old notes were cancelled, with just a few hours’ notice, banks are swarming with huge crowds desperate to get to the counter or an ATM to collect some new currency. A new version of the Rs. 500 note is still a rarity; the 2000 rupee note is being rejected by many vendors who say they cannot provide change for the high-denomination bill.

Nearly 48 billion dollars have been deposited in banks so far, as people turn in the old notes. And though the lines at banks in cities are long, it is in villages that a crisis is threatened with lakhs who are excluded from the banking system.

For now, people can exchange Rs. 4,500 of old notes for new ones – after this swap, indelible ink is used on the customer to ensure it remains a one-time exchange; upto Rs. 24,000 can be withdrawn per week from a bank account; Rs. 4,500 can be withdrawn from an ATM per card per day. The government has repeatedly said it is working night and day to reconfigure ATM machines, which need bigger trays to stock the new currency. The Reserve Bank of India has also confirmed that it has made special arrangements to help villages by dispatching micro-ATMs

The Positives approach of Bihar CM Nitish should be misunderstood for support for the BJP government at all.

Observation

If the cash crisis, if not controlled effectively, could lead to a serious economic and financial catastrophe making India a weak nation among third world nations. If the government is unable to tackle the black and other flirty money, that could have serious impact on the future of Indian politics.

Moving towards cashless economy was fine but even the most developed economies of US or Europe has not achieved that objective yet. If they had, the US central bank would have stopped printing dollars, European Central Bank won’t be printing Euros and UK central banks would have stopped printing pound sterling.

The move is without preparedness and people will punish BJP in 2019 during general elections. People of five states going for elections including Manipur, Uttar Pradesh and Punjab will punish BJP.

The common people, especially the poor and the housewives were put to great hardship through this move and if elections are held today they will teach this government a lesson, he said, adding that majority of women who saved money through household savings were upset with the move. It shows the shallowness of the TV anchors as intelligentsia. It also shows social media has the ability to influence the trajectory of public debate. It does not portend well for a democracy when the crowd is used as the arbiter for policy. The broad segment of the public discourse can be easily drawn as it is shorn of all nuances and can be easily clubbed into segments.

The hardship is real, but griping about it is not an argument for or against TD. An opinion based on hardship is just that a gripe.

The nationalistic and the ideological jingoists are not too different. As both do not see facts they only see political angles to every policy. They are criticising this step because it will not rid India of black money.

Criticism is always the lowest form of intelligence as it is an argument without a solution. Anybody can make it does not take any effort. Just because there an opinion exists does not make it right.

Today, social media gives every man the means to broadcast their opinion. But if you have a solution with that opinion it may be just a mite more useful. Otherwise, it is just another voice shouting loudly.

Demonetization move, causing hardship for the common people, is an economic decision that has far reaching ramifications. The hardship caused to people is not the reason temporary demonetization should not be done. Please note it is a temporary demonetization (TD). If the measure is hardship government should not take any step that causes it even it is long term interest of the people.

Undoubtedly PM Modi and BJP are now focusing on the assembly poll in UP and next Parliament poll. UP poll results will have impact on the future elections in the country. After the loss of Delhi and Bihar, BJP would be hard-pressed to be seen as the loser of UP also. But BJP has no hopes whatsoever of winning state UP which is now being ruled by the Samajwadi Party (SP) and opinions reveal a plus point for the BSP of Mayawati in UP.

Economy

Finding Fulcrum to Move the World Economics

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Domenico Fetti / Wikimedia Commons

Where hidden is the fulcrum to bring about new global-age thinking and escape current mysterious economic models that primarily support super elitism, super-richness, super tax-free heavens and super crypto nirvanas; global populace only drifts today as disconnected wanderers at the bottom carrying flags of ‘hate-media’ only creating tribal herds slowly pushed towards populism. Suppose, if we accept the current indices already labeled as success as the best of show of hands, the game is already lost where winners already left the table. Finding a new fulcrum to move the world economies on a better trajectory where human productivity measured for grassroots prosperity is a critically important but a deeply silent global challenge. Here are some bold suggestions

ONE- Global Measurement: World connectivity is invisible, grossly misunderstood, miscalculated and underestimated of its hidden powers; spreading silently like an invisible net, a “new math” becomes the possible fulcrum for the new business world economy; behold the ocean of emerging global talents from new economies, mobilizing new levels of productivity, performance and forcing global shifts of economic powers. Observe the future of borderless skills, boundary less commerce and trans-global public opinion, triangulation of such will simply crush old thinking.

Archimedes yelled, “…give me a lever long enough and a fulcrum on which to place it, and I shall move the world…”

After all, half of the world during the last decade, missed the entrepreneurial mindset, understoodonly as underdog players of the economy, the founders, job-creators and risk-taker entrepreneurs of small medium businesses of the world, pushed aside while kneeling to big business staged as institutionalized ritual. Although big businesses are always very big, nevertheless, small businesses and now globally accepted, as many times larger. Study deeply, why suddenly now the small medium business economy, during the last budgetary cycles across the world, has now become the lone solution to save dwindling economies. Big business as usual will take care of itself, but national economies already on brink left alone now need small business bases and hard-core raw entrepreneurialism as post-pandemic recovery agendas.

TWO – Ground Realities:  National leadership is now economic leadership, understanding, creating and managing, super-hyper-digital-platform-economies a new political art and mobilization of small midsize business a new science: The prerequisites to understand the “new math” is the study of “population-rich-nations and knowledge rich nations” on Google and figure out how and why can a national economy apply such new math. 

Today a USD $1000 investment in technology buys digital solutions, which were million dollars, a decade ago.Today,a $1000 investment buys on global-age upskilling on export expansion that were million dollars a decade ago.  Today, a $1000 investment on virtual-events buys what took a year and cost a million dollars a decade ago. Today, any micro-small-medium-enterprise capable of remote working models can save 80% of office and bureaucratic costs and suddenly operate like a mini-multi-national with little or no additional costs.

Apply this math to population rich nations and their current creation of some 500 million new entrepreneurial businesses across Asia will bring chills across the world to the thousands of government departments, chambers of commerce and trade associations as they compare their own progress. Now relate this to the economic positioning of ‘knowledge rich nations’ and explore how they not only crushed their own SME bases, destroyed the middle class but also their expensive business education system only produced armies of resumes promoting job-seekers but not the mighty job-creators. Study why entrepreneurialism is neither academic-born nor academic centric, it is after all most successful legendary founders that created earth shattering organizations were only dropouts.  Now shaking all these ingredients well in the economic test tube wait and let all this ferment to see what really happens.

Now picking up any nation, selecting any region and any high potential vertical market; searching any meaningful economic development agenda and status of special skills required to serve such challenges, paint new challenges. Interconnect the dots on skills, limits on national/global exposure and required expertise on vertical sectors, digitization and global-age market reach. Measuring the time and cost to bring them at par, measuring the opportunity loss over decades for any neglect. Combining all to squeeze out a positive transformative dialogue and assemble all vested parties under one umbrella.

Not to be confused with academic courses on fixing Paper-Mache economies and broken paper work trails, chambers primarily focused on conflict resolutions, compliance regulations, and trade groups on policy matters.  Mobilization of small medium business economy is a tactical battlefield of advancements of an enterprise, as meritocracy is the nightmarish challenges for over 100 plus nations where majority high potential sectors are at standstill on such affairs. Surprisingly, such advancements are mostly not new funding hungry but mobilization starved. Economic leadership teams of today, unless skilled on intertwining super-hyper-digital-platform-economic agendas with local midsize businesses and creating innovative excellence to stand up to global competitiveness becomes only a burden to growth.

The magnifying glass of mind will find the fulcrum: High potential vertical sectors and special regions are primarily wide-open lands full of resources and full of talented peoples; mobilization of such combinations offering extraordinary power play, now catapulted due to technologies. However, to enter such arenas calls for regimented exploring of the limits of digitization, as Digital-Divides are Mental Divides, only deeper understanding and skills on how to boost entrepreneurialism and attract hidden talents of local citizenry will add power. Of course, knowing in advance, what has already failed so many times before will only avoid using a rubber hose as a lever, again.  

The new world economic order: There is no such thing as big and small as it is only strong and weak, there is no such thing as rich and poor it is only smart and stupid. There is no such thing as past and future is only what is in front now and what is there to act but if and or when. How do you translate this in a post pandemic recovery mode? Observe how strong, smart moving now are advancing and leaving weak, stupid dreaming of if and when in the dust behind.

The conclusion: At the risk of never getting a Nobel Prize on Economics, here is this stark claim; any economy not driven solely based on measuring “real value creation” but primarily based on “real value manipulation” is nothing but a public fraud. This mathematically proven, possibly a new Fulcrum to move the world economy, in need of truth

The rest is easy  

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Economy

Evergrande Crisis and the Global Economy

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China’s crackdown on the tech giants was not much of a surprise. Sure, the communist regime allowed the colossus entities like Alibaba Group to innovate and prosper for years. Yet, the government control over the markets was never concealed. In fact, China’s active intervention in the forex market to deliberately devalue Yuan was frequently contested around the world. Ironically, now the world awaits government intervention as a global liquidity crisis seems impending. The Evergrande Group, China’s largest property developer, is on the brink of collapse. Mounding debt, unfinished properties, and subsequent public pressure eventually pushed the group to openly admit its financial turmoil last week. Subsequently, Evergrande’s shares plunged as much as 19% to more than 11-year lows. While many anticipate a thorough financial restructuring in the forthcoming months, the global debt markets face a broader financial contagion – as long as China deliberates on its plan of action.

The financial trouble of the conglomerate became apparent when President Xi Jinping stressed upon controlled corporate debt levels in his ongoing drive to reign China’s corporate behemoths. It is estimated that the Evergrande Group currently owes $305 billion in outstanding debt; payments on its offshore bonds due this week. With new channels of debt ceased throughout the Mainland, repayment seems doubtful despite reassurances from the company officials. The broader cause of worry, however, is the impact of a default; which seems highly likely under current circumstances.

The residential property market and the real estate market control roughly 20% and 30% of China’s nominal GDP respectively. A default could destabilize the already slowing Chinese economy. Yet that’s half the truth. In reality, the failure of a ‘too big to fail’ company could bleed into other sectors as well. And while China could let the company fail to set a precedent, the spillover could devastate the financial stability hard-earned after a strenuous battle against the pandemic. Recent data shows that with the outbreak of the delta variant, the demand pressure in China has significantly cooled down while the energy prices are through the roof. Coupled with the regulatory crackdown rapidly pervading uncertainty, a debt crisis could further push the economy into a recession: a detrimental end to China’s aspirations to attract global investors.

The real question, therefore, is not about China’s willingness to bail out the company. Too much is at stake. The primal question is regarding the modus operandi which could be adopted by China to upend instability.

Naturally, the influence of China’s woes parallels its effect on the global economy. A possible liquidity crisis and the opaque measures of the government combined are already affecting the global markets: particularly the United States. The Dow Jones Industrial Average (DJIA) posted a dismal end to Monday’s trading session: declining by more than 600 points. The 10-year Treasury yields slipped down 6.4 basis points to 1.297% as investors sought safety amid uncertainty. The concern is regarding China’s route to solve the issue and the timeline it would adopt. While the markets across Europe and Asia are optimistic about a partial settlement of debt payments, a take over from state-owned enterprises could further drive uncertainty; majorly regarding the pay schedule of western bondholders amid political hostility.

Economists believe that, while a financial crisis doesn’t seem like a plausible threat, a delayed response or a clumsy reaction could permeate volatility in the capital markets globally. Furthermore, a default or a takeover would almost certainly pull down China’s economy. While the US has already turned stringent over Chinese IPOs recently, a debt default could puncture the economic viability of a wide array of Chinese companies around the world. And thus, while the global banking system is not at an immediate threat of a Lehman catastrophe, Evergrande’s bankruptcy would, nonetheless, erode both the domestic and the global housing market. Moreover, it would further dent Chinese imports (and seriously damage regional exchequers), and would ultimately put a damper on global economic recovery from the pandemic.

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Economy Contradicts Democracy: Russian Markets Boom Amid Political Sabotage

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The political game plan laid by the Russian premier Vladimir Putin has proven effective for the past two decades. Apart from the systemic opposition, the core critics of the Kremlin are absent from the ballot. And while a competitive pretense is skilfully maintained, frontrunners like Alexei Navalny have either been incarcerated, exiled, or pushed against the metaphorical wall. All in all, United Russia is ahead in the parliamentary polls and almost certain to gain a veto-proof majority in State Duma – the Russian parliament. Surprisingly, however, the Russian economy seems unperturbed by the active political manipulation of the Kremlin. On the contrary, the Russian markets have already established their dominance in the developing world as Putin is all set to hold his reign indefinitely.

The Russian economy is forecasted to grow by 3.9% in 2021. The pandemic seems like a pained tale of history as the markets have strongly rebounded from the slump of 2020. The rising commodity prices – despite worrisome – have edged the productivity of the Russian raw material giants. The gains in ruble have gradually inched higher since January, while the current account surplus has grown by 3.9%. Clearly, the manufacturing mechanism of Moscow has turned more robust. Primarily because the industrial sector has felt little to no jitters of both domestic and international defiance. The aftermath of the arrest of Alexei Navalny wrapped up dramatically while the international community couldn’t muster any resistance beyond a handful of sanctions. The Putin regime managed to harness criticism and allegations while deftly sketching a blueprint to extend its dominance.

The ideal ‘No Uncertainty’ situation has worked wonders for the Russian Bourse and the bond market. The benchmark MOEX index (Moscow Exchange) has rallied by 23% in 2021 – the strongest performance in the emerging markets. Moreover, the fixed income premiums have dropped to record lows; Russian treasury bonds offering the best price-to-earning ratio in the emerging markets. The main reason behind such a bustling market response could be narrowed down to one factor: growing investor confidence.

According to Bloomberg’s data, the Russian Foreign Exchange reserves are at their record high of $621 billion. And while the government bonds’ returns hover at a mere 1.48%, the foreign ownership of treasury bonds has inflated above 20% for the second time this year. The investors are confident that a significant political shuffle is not on cards as Putin maintains a tight hold over Kremlin. Furthermore, investors do not perceive the United States as an active deterrent to Russia – at least in the near term. The notion was further exacerbated when the Biden administration unilaterally dropped sanctions from the Nord Stream 2 pipeline project. And while Europe and the US remain sympathetic with the Kremlin critics, large economies like Germany have clarified their economic position by striking lucrative deals amid political pressure. It is apparent that while Europe is conflicted after Brexit, even the US faces much more pressing issues in the guise of China and Afghanistan. Thus, no active international defiance has all but bolstered the Kremlin in its drive to gain foreign investments.

Another factor at work is the overly hawkish Russian Central Bank (RCB). To tame inflation – currency raging at an annual rate of 6.7% – the RCB hiked its policy rate to 6.75% from the all-time low of 4.25%. The RCB has raised its policy rate by a cumulative 250 basis points in four consecutive hikes since January which has all but attracted the investors to jump on the bandwagon. However, inflation is proving to be sturdy in the face of intermittent rate hikes. And while Russian productivity is enjoying a smooth run, failure of monetary policy tools could just as easily backfire.

While political dissent or international sanctions remain futile, inflation is the prime enemy which could detract the Russian economy. For years Russia has faced a sharp decline in living standards, and despite commendable fiscal management of the Kremlin, such a steep rise in prices is an omen of a financial crisis. Moreover, the unemployment rates have dropped to record low levels. However, the labor shortage is emerging as another facet that could plausibly ignite the wage-price spiral. Further exacerbating the threat of inflation are the $9.6 billion pre-election giveaways orchestrated by President Putin to garner more support for his United Russia party. Such a tremendous demand pressure could presumably neutralize the aggressive tightening of the monetary policy by the RCB. Thus, while President Putin sure is on a definitive path of immortality on the throne of the Kremlin, surging inflation could mark a return of uncertainty, chip away investors’ confidence: eventually putting a brake on the economic streak.

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WEF Launches Toolbox of Solutions to Accelerate Decarbonization in Cities

With the percentage of people living in cities projected to rise to 68% by 2050, resulting in high energy consumption,...

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