Shantanu Nandan Sharma writes in The Economic Times that rural economy will drive overall recovery and that a normall monsoon raises the prospects of bumper Kharif harvest as well as higher consumption demand. Also, tractor sales have are up while auto sector is in a slump.
But a good monsoon is not the only reason why policymakers and India Inc alike are anticipating a rural resurgence. They point out to three things: First, farming continued even during the lockdown that started March 25, while manufacturing languished. Second, more land has been under cultivation this year, according to preliminary assessments by government agencies. Third, many factory workers who returned to their rural hometowns as jobs evaporated in the cities are now involved in farming activity. These factors, and the lack of any other positive sentiment in the near-term, have convinced corporate India, particularly those with a wider rural portfolio, to focus on consumers in Bharat.
[...]The consensus that rural India will lead the nation’s economic revival has been backed by recent sales numbers, too. Tractor sales — seen as an important barometer of the rural economy — were up in May. In June, numbers released by companies so far have shown a massive demand for tractors. Escorts Ltd, for example, said it saw a 23% sales growth in the domestic market. Mahindra & Mahindra reported a 10% rise in sales in June. Even the tax numbers have a rural flavour. A simple analysis of the June numbers of the goods and services tax (GST) shows shrinkage of revenue in Delhi, Haryana and Gujarat — states with a substantial urban population. A comparatively robust growth was registered in the predominantly rural states. For example, in June, Madhya Pradesh and Chhattisgarh saw an impressive GST growth of 24% and 22%, respectively, from a year ago.
Impact on emerging markets of unconventional monetary policy in advanced economies
In an op-ed published in Mint, Amandadeep Mandal and Neelam Rani argue that the long-term assets purchase program (quantiative easing, QE) of advanced economies have lowered bond yield, which can boost India's growth prospects provided that the economy is operating below capacitieis. Central banks in the US, the UK, Australia, Canada, EU, Japan, New Zealand, and Sweden have announced QEs aimed at purchasing assets (either sovereign or corproate bonds or mortgage backed securities or all). These have spillover effects in emerging markets-- higher volatility in capital flows, currency and financial markets. In case of QE exit, emerging markets may see capital outflows, volatility-spikes in financial markets, currency depreciation, and increase in government yields.
In an op-ed published in Mint, Amandadeep Mandal and Neelam Rani argue that the long-term assets purchase program (quantiative easing, QE) of advanced economies have lowered bond yield, which can boost India's growth prospects provided that the economy is operating below capacitieis. Central banks in the US, the UK, Australia, Canada, EU, Japan, New Zealand, and Sweden have announced QEs aimed at purchasing assets (either sovereign or corproate bonds or mortgage backed securities or all). These have spillover effects in emerging markets-- higher volatility in capital flows, currency and financial markets. In case of QE exit, emerging markets may see capital outflows, volatility-spikes in financial markets, currency depreciation, and increase in government yields.
In restricting the pandemic and the related economic downturn, many developed economies faced short-term interest rates nearing zero, or even slipping to negative. Several central banks around the world engaged in unconventional monetary policy interventions in the form of long-term asset purchase programs, commonly referred to as quantitative easing (QE). Since March, eight central banks of the developed economies made QE announcements. Notably, US initially announced a $700 billion purchase on 16 March, followed by an announcement of ‘unlimited’ purchase on 23 March. UK announced a purchase on $200 billion on 19 March.
[...]While the central banks of developed economies aim to mitigate the dysfunctionalities in their targeted markets, the QE interventions will have spillover effects linked with higher volatility in capital flows, currency and financial markets in developing economies, including India. An impulse study of QE-triggered US and UK interest rate shock on Indian 10-year sovereign bonds suggests that the spillover effect is immediate and the associated implied volatility subsides in 10 days. The impact primarily depends on the cyclical position of the Indian economy and the stability of its financial system, in other words the scale of its market imperfections.
The lower bond yields, resulting from QE of developed economies can boost India’s growth opportunities, provided we are operating below capacities. In contrast, they can overheat the economy if we are working above capacity, which we are certainly not. Nevertheless, the spillover of QE interventions in developed economies can potentially destabilise the currency and the financial markets. This is primarily because of the incapacity of the growing economies to absorb the capital and the potential speculations in the markets, leading to excessive credit growth and pricing bubbles. Such market volatility fuels financial turmoil. However, with increased Indian financial market depth and regulations in the recent time, we expect to contain such speculative bubbles in the near future.
[...]Starting from October 2020, we can anticipate a potential exit of QE programs by the developed economies. This can lead to an outflow of capital and volatility-spikes in the financial markets. We are most likely to witness depreciation in currency and fall of equity prices due to portfolio rebalancing. Government yields are also expected to go up.
The degree of the impact of a QE exit on the Indian economy and its financial stability will depend on several factors: i) the scale of India’s exposure to the developed economies, through financial linkage and trade, ii) India’s cyclical economic position, i.e. if we are slowing down, then reversal of capital flows will widen the output gap, iii) size of current account deficits, i.e. higher debt levels will make an economy more vulnerable, iv) the depth of Indian financial markets – greater the depth, greater will be its sensitivity to movements of assets in the developed economies, v) the policy interventions that will be aimed to mitigate the effects of capital outflows and vi) the economic impact of the policies taken to prevent the spread of the covid-19, such as the lockdown measures.Here is an ADBI working paper by Bhattarai, Chatterjee and Park on the same topic but looking at the effect of QE in the US on emerging market economies before 2015. They show that an expansionary US QE shock appreciates the local currency against the US dollar, decreases long-term bond yields, and increases stock prices of emerging market economies. They do not find significant and robust effects on output and consumer prices in the emerging market economies. Capital inflows and exchange rate appreciation might have opposite effects on output.
