Agriculture sector that contributes about 15% to total Gross Value Added in India, in this period of COVID pandemic has been facilitated with certain timely exemptions from COVID-induced lockdowns by the government for uninterrupted harvesting of ‘Rabi’ crops and enhanced sowing of ‘Kharif’ crops. What strengthened the fact, even more, was the forecast of a normal monsoon at102 percent of the long-period average (LPA), which made the sector ready to combat the COVID pandemic impacts on the Indian economy in 2020-21. According to the monthly economic report of the Indian government, a record procurement of wheat has enabled a flow of around Rs. 75,000 crores to the farmers which will boost private consumption in rural areas. Since September 2019, the terms of trade have favored agriculture and thus reinforced rural demand. This has shown an increase in rural core inflation between March and June 2020. The liberalizing reforms were introduced at appropriate times to the agriculture sector empowering the farmers to become effective participants in India’s economic growth.
The Farmers’ Produce Trade and Commerce (Promotion & Facilitation)Ordinance, 2020 allows farmers the freedom to sell and traders to purchase from outside the markets notified under various State agricultural produce market legislations. This freedom to market their products is strengthened by The Farmers (Empowerment and Protection) Agreement on Price Assurance and FarmServices Ordinance, 2020. This Act protects the interests of farmers to engage in remunerative business with agri-business firms, processors, wholesalers, exporters, or large retailers for farm services and sale of future farming produce.
The Essential Commodities Act (ECA), 1955 Amendment Ordinance allows for stocking of agricultural produce by both sellers and buyers, by removing stock limits on cereals, pulses, oilseeds, onions, and potatoes. In doing so, the Act encourages investment in infrastructure and storage for improved inventory management of agricultural produce. These landmark ordinances give the freedom to farmers to decide when, where, to whom, and at what price to sell while making buyers of agricultural produce more willing customers at the farmgate.
In response to the on-going fight with the upsetting COVID-19 effect, Central banks across the globe have been pumping in massive liquidity and governments providing substantial fiscal stimulus. This gigantic liquidity gush made its way in the Indian equity market as India started to unlock. As a result, India attracted net Foreign Direct Investment (FDI) of USD 2.0 billion during April 2020 and USD 2.4 billion until May 2020. It is known that FDI is seen as a long-term investment. On the other hand, Net Foreign PortfolioInvestment inflows which are viewed as a short term move for money-making stood at 3.1 USD billion in June 2020, recording the highest inflow since March 2019. Many credit rating agencies have downgraded India’s sovereign rating but a strong belief of foreign investors on India’s macro-economic fundamentals, government policies and growth prospects have kept it going despite all. Mutual funds investments in the Indian capital market also rebounded in June 2020 to 0.4 lakh crore, recording the highest investment since January 2020. The value of rupee has increased to 75.53INR/USD until June end as compared to 75.64 during May end. The reason behind this is the fresh beginning of FPI flows, large FDI, current account surplus, and weakening US dollar. However, the rupee depreciated against the Euro sharply to 85.25 INR/EUR in June 2020 from 82.48 INR/EUR in May 2020. According to the July report of Ministry of Economic Affairs, in relativity to peer Emerging Market (EM) currencies, the rupee has depreciated less on a year to date basis and has witnessed relatively less volatility.
While India along with the whole world is still into grips with the Covid-19 pandemic, the International Monetary Fund (IMF) has projected that global output would contract by 4.9 percent in 2020-21 in its June 2020 update, assuming a gradual recovery in activity starting by the second half of2020-21. But in another scenario, the Organisation for Economic Cooperation andDevelopment (OECD) projected the second wave of infections to be erupting in the later part of 2020. With this, the global economy could contract by 7.6 percent in 2020. In the January-March quarter of 2020, the GDP growth estimates of most of the countries witnessed broad-based reductions in advanced economies(AEs) ranging from (-) 3.4 percent to (-)14.2 percent. In emerging market economies (EMEs), it was between 2.9 percent and (-) 6.8 percent. Public authorities across the globe responded on a massive scale with USD 11 trillion in fiscal measures committed to by international forum Group of 20 (G20) members and other countries (IMF estimates). Also, there were Central bank liquidity injections to further support growth and financial stability measures to mitigate the adverse consequences of the pandemic.
Purchasing Managers Indices (PMI) is an indicator of economic health for the manufacturing and service sectors. The composite PMI is measured from 1 to 100. A PMI above 50represents expansion and under 50 represents contraction. Rates of contraction in output, new orders and employment have been easing since April 2020reflecting an improvement in global PMI. Global composite PMI improved from36.3 in May 2020 to 47.7 in June 2020 with improvement seen across all advanced countries and expansion in China. According to MoEA report, China’s quarterly growth is still at its lowest level since the 1990s though it has rebounded from a record contraction of 6.8 percent in January-March quarter of 2020 to grow by 3.2 percent in April-June quarter post lifting of lockdown. The United States industrial production rose by 5.4 percent in June, a bigger monthly gain after a 1.4 percent slight increase in May, albeit below the February level of 10.9 percent. A moderate pick up in industrial production with contraction falling from -28.7 % in April to -20.9 % in May was witnessed in Eurozone. Producer prices in the region, however, further moved into negative territory to (-) 5.0 percent in May, suggesting weak demand pressure.
The Covid-19 pandemic also has brought up consequences of trade decline on a global scale. World Trade Organization, as per its June 2020 update, estimates an 18.5% YoY decline in merchandise trade in April-June quarter which was 3% in January-March quarter of 2020 due to full-scale pandemic induced supply chain disruptions, fall in demand, loss of employment and shutdowns. Asper United Nations Conference on Trade and Development (UNCTAD) estimates, several sectors including textiles and apparel, office machinery and automotive sectors, energy and automotive products, chemicals, machinery, and precision instruments have seen a sharp decrease in global trade while trade in agri-food products has been stable. The Trade of medical products related to COVID-19 has jumped to a double of April 2020. The timely responses have helped in uplifting the contraction from a mere low in merchandise trade.
G20 economies implemented 93 new trade and trade-related measures out of which 65 measures were for facilitating trade while 28 for restricting trade flows linked to the COVID-19pandemic. However, 36% of the pandemic-related trade restrictions were invalidated by mid-May. Further, Global financial markets have relatively stabilized since June 2020 due to swift and out of ordinary Central bank macro-financial measures. As per RBI’s Financial Stability Report, July 2020,“Asset prices have recovered, and credit spreads have significantly narrowed from their earlier highs. Bond issuance has picked up substantially. Sovereign borrowers, offering a higher yield than developed market debt and higher credit rating relative to most emerging debt have been accessing the market and their borrowing costs declining in comparison to the previous quarter.”
Heading to Global commodity markets, crude oil markets have witnessed a notable fall in March and April which have been recovered in June 2020 with gradual unlocking of economies and sharp global supply decline by OPEC+countries (Organisation of the Petroleum Exporting Countries). MoEA in its report states that Brent crude futures traded at USD 43.55 per barrel on 31st July 2020 which was 5.8% more than of June and 15.6% even more than that of May 2020. International Energy Agency (IEA), in its June 2020 report, has estimated a record decline in global oil demand of 8.1 MBPD (thousand barrels per day) in2020, also predicting the recovery to 5.7 MPBD in 2021. Fears of a second wave of cases of COVID-19 are keeping the oil price pick-up in check. Also, there is a rise in demand for industrial metals which had fallen during the early part of 2020. The reason is the unlocking of global economies and industries. With this rise in demand, China which is one of the largest consumers of base metals has begun to fatten its ingestion. On a path towards global economic recovery, the economic activities at a global level are simply skating on thin ice below which are fears of a second major wave of Coronavirus infections, along with an over-leveraged non-financial sector, external debt financing risks, simmering trade, geopolitical tensions, and COVID-19 induced unemployment losses.
The past decade has witnessed the largest, fastest, and most broad-based increase in debt in the past half-century, particularly for emerging market(EM) and developing economies as given in the World Bank Report: Global Waves of Debt.
“In an extended period of extremely low-interest rates, leverage of 30major EMs as a proportion to GDP increased from 147 percent (USD 22 trillion)in Q42007 to 220 percent (USD 71 trillion) in Q4 2019 (as estimated by GlobalDebt Monitor, International Institute of Finance). In Q1 2020-21, as per the Institute for International Finance (IIF), global debt hit record high of 331per cent of GDP (USD 258 trillion) and debt levels are continuing to rise. While increasing debt levels raise concerns about debt sustainability, over 92per cent of government debt is investment grade. A surge in EM debt to over 230per cent of GDP is largely driven by non-financial corporate Chinese debt. By end-2020, global bonds and loans of over USD 20 trillion will fall due for repayment of which EMs’ share stands at USD 4.3 trillion. Therefore, in the post-COVID-19world, the challenge will be to convert these financial claims on the real economy into equity, as highlighted by RBI’s Financial Stability Report, July 2020.”
-July 2020 Report, Ministry of Economic Affairs India.