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LIQUIDITY LESSONS AMIDST COVID 19 PANDEMIC

/ Economy/ /

P. Subhadarshinee

26 Mar 2023

Summary :

The world is under siege. COVID 18 poses to torment the humanity
The deadly virus spreads if the people breaks the rule of Noli-me-tongere.
The medical science and medicos are under trail of Corona court
The verdict to vanquish the virus is dependent on success of vaccine experiment.

The world is under siege. COVID 18 poses to torment the humanity.
The deadly virus spreads if the people breaks the rule of Noli-me-tongere. The
medical science and medicos are under trail of Corona court. The verdict to
vanquish the virus is dependent on success of vaccine experiment. But this
uncertainty has terrorized the humanity with daily net exponential growth of
infections and death cases. The most vivacious victims are USA and European
countries. India is catching hold of this feverish fearful trembling gradually
but definitely. Only non-medical healing is to break the chain, the practice of
Noli-me-tangere.<o:p></o:p>

To keep the corona cases under control for administering healing
touch, the chain is to be checked and disconnected. The ultimate weapon is
lockdown, spill overing to layoffs and firm exits. <o:p></o:p>

What has happened to the
effect of Lockdown?<o:p></o:p>

The lock down of all the activities sans essential daily needs has
disrupted cashflows devastatingly; the production, distribution and consumption
were stranded out of Govt’s impromptu lockdown imposition to contain the spread
of corona virus.<o:p></o:p>

Impact of Lockdown:<o:p></o:p>

The factors of production particularly were fence sited by lockdown
rule. Economic activities amidst the economic agents are muted. The cash flows
like rewards to the factors of production in terms of wages, rents, interests,
etc trade off are chocked  and dried up
the economic lubricants in terms of liquidity for livelihood and life-saving
succors.(Annex-I).<o:p></o:p>

The ceased activities out of lockdown and social distancing measures
skyrocketed unemployment in a short period of around two months specifically in
unorganized sector.<o:p></o:p>

Unorganized sector labour force dominantly constitutes around 81% of
total labour forcein India. The nature of informal sector labour is that they
earn daily or weekly for their livelihood. The disrupted supply chain also
drastically hampered the distribution leading to temporal price rise. This also
acutely affected the poor and daily wage earners.<o:p></o:p>

The shuttered factories and companies are resulted into low , in
some cases, no supply of products and services leading to supply shock in the
economy. Side by side, the unemployment, the layoff as well as the social
distancing have restricted the disposable income of the consumers leading to
marginal decline in consumption demand. This deficit in demand continuity
accrued to the demand shock in the economy. Resultantly, the Aggregate Demand
shifts left along with decline in Aggregate Supply definitely contraction of
GDP/National Income. But the price effect depends on magnitude of supply
contraction in relation to demand decline. If change in AD> change in AS,
then the price rise will be deflationary. If change in AD < change in AS,
the price rise will be inflationary. But this dynamics is tenor dependant.
Longer the virus period, greater the uncertainty to quantify the magnitude and
higher the policy gamble.<o:p></o:p>

Both shocks have time lag effect. At the initial period of COVID 19
induced economic coma, though supply chains are disrupted, but regional stocks
supplemented the supply position. But with complete national lockdown and
curfew, the factories and shops are shuttered leading to drastic decline of
supply over night. This created the supply chain havoc. But there is effective
demand in the market with gradual decrease. Both declined, at the outset, with
over powering of supply of all. This temporal market scenario inflated the price
level. The longer the virus imbued situation persists, the consumption demand
declines drastically and gradually over powers supply shock. Ultimately this
leads to low employment, low National Income, & low price level dragging
the economy into the recession.<o:p></o:p>

Amidst this gigantic
health emergency and recessionary economy what should be the policy measures
fiscally as well as monetarily?<o:p></o:p>

To save the life from Corona Virus, the Govt locked down all. But
the threat lingers with delay in vaccine invention. Livelihood only can save
the de-chained and confined lives. Livelihood depends on the disposable income
of movement less people. There is no issue with haves. Have-nots are the 90 per
cent informal labour force in the economy. Those poor people along with their
dependant families need regular livelihood/income to feed them to save loss of
lives out of hunger. To quench this need, Govt came out with initial stimulus
measures of around Rs.1.70 lakh crores to provide ration and gas for daily
needs. To the greater extent, the poor are benefited.   This
is inadequate to complement the multitudinal economic miseries of households,
forms, investors exporters. The massive package with sectoral effect analysis
should be effected in a continuous manner for reversing the AD with an eye on
Fiscal Deficit and inflation. Since India has huge unutilized production
capacity, the measured FD induced fiscal measures can generate AD which can be
economically managed for higher capacity utilization and matching AS. Though it
will take time, the policy makers should venture into reversal recovery
strategy with a long term trajectory allowing temporal and transient policy
shocks. The high level team of economists should be engaged for this gargantuan
economic management.<o:p></o:p>

What had happened to
Liquidity Issues? And what were the measures initiated by monetary authority?<o:p></o:p>

In an on-going normal economic scenario, liquidity is the life-blood
of circular market economy. Further the economic prosperity depends on easy
& timely to access the low cost liquidity. Since inflation costs the poor
heavily the monetary authority’s inflation targeting policy acts as catalysts
to growth. Central Bank takes guided measures for stabilization of price to
achieve the targeted growth through several liquidity windows as per Guiding
Principles of Liquidity Management Framework. <o:p></o:p>

Now COVID-19 dilapidated the circular flow of liquidity by forcing
all economic agents to stay still and safe. Since consumption is only constant
phenomena in economy, Households consumes for comfortable life, firms consume
for better productive maintenance and Govt spends for growth and welfare. All
are implicitly chained to consume and in effect circulate the liquidity. COVID
19 forced the dechained of all agents of the economy has blocked the flow of
liquidity. People at all strata have been suffering from higher cost
consumption without getting opportunities to be employed and earned. The cost
of economic life has been spiked. All economic participants need funding of
adequate low cost liquidity to meet their liabilities and various payment needs
for sustenance.<o:p></o:p>

In pre-Covid period, Indian Economy was subdued reflecting reduced
revenue collection at continuous growth imperative expenditures. Post COVID 19,
Govt revenue generation took a huge hit but indispensing huge fiscal stimuli.
This made Govt cash balance with a nosedive with Central Bank which also
affected fractional liquidity in system. With advent of COVID 19 with uncertain
vaccine discovery, economic bleak was palpable. To cut loss and to park at safe
haven for future prospective investment decision, FPIs sold out the investment
even at loss and capital was out flowed from equity and debt market by
depleting forex balance. Consequently durable system liquidity was severely affected
and RBI has intervened in forex market vide USD-INR swap operations to the
extent of $2.00 billion. With constant change of NDA, RBI modulates liquidity
position to achieve the objective of monetary policy. Broadly uncertain
fluctuation in system liquidity arises due to transient or frictional factors
like change in Govt vash balances and due to durable factors like the change in
CiC and impact of Central Bank’s Forex operation.<o:p></o:p>

For a well functioning and vibrant financial system liquidity plays
the crucial role, especially market liquidity to support the funding liquidity.
This market liquidity to a great extent connoted as System Liquidity. Specially
system liquidity quantifies to the amount of net borrowing under LAF over and
above the excess reserves maintained by Bank with RBI. Under Corona virus risk   <o:p></o:p>

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P. Subhadarshinee

Focus:	Macros
Sector Expertise:	Economy

LIQUIDITY LESSONS AMIDST COVID 19 PANDEMIC

Summary :

P. Subhadarshinee

Focus:

Macros

Sector Expertise:

Economy