Coverage by Bhat Dittakavi of Variance.AI on “How the Conic (COVID’19 Economic) is likely to spread” by Vivek Kaul on 19th April 2020 as part of Manthan Series

Special credits to Manthan India for making this webinar happen.

Vivek Kaul, a popular author of economics and finance, has an uncanny ability to make complex economic topics look simple. I was hoping he can paint an optimistic picture as he spoke. He didn’t. Vivek called a spade a spade. His words are non-comforting but highly logical and facts-driven. Brace for an impact.

Vivek Kaul

After the second world war, economics has become mathematics. It gives the impression that economics is science but it isn’t. I will give my own version of the truth in this talk.

British economist John Keynes in his book “The general theory of employment, interest, and money” suggested that “spending at the individual level is a function of income whereas the income at the society level is a function of spending“. One man’s spending is another man’s income. At an individual level, spending is a function of income. Where does your company get paid from? Your company spends the money to earn money from which you get paid your salary. At an aggregate level, spending determines income.

Restaurants are going to earn near-zero sales revenues. The same is the case with many small businesses such as tailoring, dry cleaning, ready-made cloth sellers, barbers, cigarette vendors, and the list goes on. There is no spending at the aggregate level and hence there is no income.

The fallacy of composition: What’s good for an individual may not be good for society as a whole. If you decide to save money, it is good for you. It makes sense. If many individuals start saving more, it is not always good news for the economy. As people spend less, income for others goes down. Given that all of us are at home, we will be spending money on non-discretionary items. We call it non-discretionary expenditure. Incomes of many businesses have taken a beating. When spending takes a beating at the bigger level, income goes down and it means individuals get less income and hence they spend less.

Take the example of cinema halls. Sweden hasn’t gone for lockdown and their cinemas are on. None of the producers of the big films is in a hurry to release their movies. They want to wait it out. One producer said, “big films will come back around six months down the line.” Employees get laid off. The informal sector puts employees on no pay. Salary cuts happened across India. Postponement of joining date has become common. Income gets impacted, spending gets impacted, income gets impacted and the cycle goes on.

The Unemployment

More than getting fired, fear of getting fired will have much more impact. Economists still argue about what led to the start of the great depression. It started in 1929 when the stock markets in NYSE started falling. Many investors lost their shirts. To recover those losses, they started selling things in the commodity market that led to the fall of those markets. A lot of jobs got lost. The unemployment rate went up to 25%. This has a disproportionate impact on the consumer spend cut done. The biggest motor company at the time, Ford, got sales collapsed by 86%.

Because a 25% workforce is unemployed, everyone knows someone else unemployed and the fear made them cut the spend. Those who already owned a car decided to keep it longer. Those who didn’t own the car never bought a new car and started using public transport. It hurt the auto industry. A similar sort of dynamic is going to happen now.

As of April 12th, unemployment in India stood at 24%. As of March 22nd, it was 8.4%. In that sense, we match the great depression in unemployment. There is something called the “Labor force participation rate” that has come down to 46%. It means people stopped looking for jobs and hence the total number of people in the workforce has come down. Within that lesser workforce, more people are unemployed. technically, it means there are more than 24% of people unemployed.

India has fairly migrant labor. They go back to their villages to help their villages in harvesting. There are lots of SOS Whatsapp messages going around seeking people to buy games directly from the farmers. The supply chain got collapsed. There is no way for what is being produced to reach the consumer. Economists give very precise growth forecasts. We are not in a situation to pinpoint accurately. Back of the envelope calculations are they.

A country that has been lockdown since late March to the first week of April means businesses are shut for 5 weeks. Post lockdown businesses won’t recover quickly. 8-10% of the 2021 economy will be in trouble. The thing I can say with lots of confidence is that India will enter a recession this year. Economy contracts for two consecutive quarters. It will contract. I think there will be a spillover effect from July to September. Things will improve the following assuming the lockdown gets lifted. Festival season then makes people spend.

The psychology of a recession is in place and it hurts us quite a lot. 

The chain effect

Let us look at economic indicators for March to let you know the economic interconnections. Domestic car sales fell off 53%. Two-wheeler sales by 40%. Commercial vehicles by 88%. It means, it impacts sales of companies that make tires, steel, rubber and so on. It goes down the value chain. It means steel companies have to stop making steel as they run out of space. We can’t make a steel plant on with a switch. It takes some time. Then power consumption comes down. It fell down by 9% in March. In large parts of the state, power distribution companies won’t pay enough to the power generation companies. It means their loans with the banks are in trouble. It means any economy doesn’t operate in isolation. The government has given power distribution companies a moratorium. This means sub-sovereign default!

People got surprised to pay interest on the loan for the period of moratorium. We can’t stop interest else how do the banks pay interest on your bank fixed deposits.

When it comes to new home sales that are anyhow not happening, whatever little sales or construction make things worse. It impacts the builder, the lender and so on. It means informal jobs in the construction industry get affected. Many are daily wagers. Troubles might escalate there.


The tendency to ask solutions comes from our examination structure. Every question has a right answer in exams, not in economics. RBI Governor talked about encouraging banks to lend. He didn’t mention that the non-food credit growth lending is the third-lowest in the past 60 years.

Banks in India give lots of credit to food corporations. We need to remove these. Bank lending was already in a mess before COVID came in. How do I know things have gotten worse? Banks deposit their excess money with RBI. RBI pays them a certain interest called reverse REPO rate. On Feb 28th, banks deposited 38,000 crores. On April 12, it went to 7 lakh crores. What did RBI do about it? He cut the reverse repo rate from 4% to 3.75%. His message to the banks was to go out and lend the money out. Parking the money with the RBI won’t be as beneficial. Banks are not going to lend. There are multiple reasons. The bad loan rate continues to be very high. As of September 2019, the bad loan rate in India is 9.3%. The bad loan rate for public sector banks is at 11%. By expanding the banking credit after the 2008 financial crisis, we ended up giving loans to many corporates that shouldn’t get. These decisions are still haunting us. The banks that sort of bankrolled the economy after 2008 are not in a position to bankroll the economy now.

Bankers do not know how bad this will turn out. Hence banks are conservative as they are responsible for the depositors. The return of capital is more important than return on capital. Many businesses are not in the position to borrow and hence banks lent less as of late last year. The pressure on retail banking will go up. Once the lockdown ends, we will be bombarded with telemarketing calls from banks. This is not a problem of liquidity but the willingness of the banks.

RBI can create the liquidity but it can’t let the bank horse drink that water.

What’s the way out?

The private sector is not ready to spend and banks are not lending out. Keane suggested the government must become the spender. They should go to the extent of digging holes and paying the laborers. It means the workers use that money to spend. The government decided to pay Rs. 500 a month through the women Jan Dhan project. It is Rs.32,000 crores spend. Money should go to both men and women. The government released income tax refunds and other promised funds. The government shall clear its outstanding bills quickly. Food entitlements is a good move. The Food Corporation of India has massive stocks of rice and wheat. FCI can give away some of this stock and help the country at large. A simple change in GST also will help. GST needs to be paid after an invoice is raised irrespective of the fact whether the receivables have been recovered. We can change this rule so it frees up a lot of working capital.

Corporates have been unhappy as they are not used to speaking their minds openly in front of the government. Capitalists want the government to bail them out! ASSOCHAM wants $200 billion bailouts for real estate. It is 15 lakh crores. The central government earns 24 crores in tax revenues. Net tax revenue it earns is 16 lakh crores. Hiranandani demanded almost 100% of its taxes in providing an economic stimulus. Even VC funded startups want the government to pay 50% of their salary bills. Socialism is alive and kicking. Airlines want to be bailed out. All of this just started. What really concerns me is that companies like Uber are asking us to donate our money to their driving partners! They have enough cash reserves.

“Saving capitalism from the capitalists” book says the government shouldn’t give in to the demands of the corporate world. The government needs to figure out innovative ways of helping viable SMEs.

How and where does the government money from to fulfill the schemes? The government shall release bonds that typically get issued during wartime. The government is stretched already on the financial front. The fiscal deficit of the central government is at 3.8% GDP. What will happen this year is that tax collections will collapse. Governments will be lucky to get away with 10% shortfall.

Prof. Ananth Narayan says borrowing money makes the government’s fiscal deficit goes up to 16% of the GDP. The government doesn’t have much legroom for money. Excess procurement of rice and wheat shall take a backseat and use that money to fund the negative effect of COVID.

About printing the money

The suggestion is coming from the western economy. This is a rudimentary part of modern monetary theory. The problem with printing money is it causes inflation as more money chases the same amount of goods. Demand was already low before COVID. Chances of low inflation due to printing money is low. Currently, the Indian rating is on the border. If we are one notch below, FDI’s leave India and rupee falls down. It makes macroeconomic activity shaky.

It is worth remembering that the American dollar got exorbitant privilege than Indian rupee. In 2011, S&P decided to downgrade America’s AAA rating. The money should have left America but the reverse happened. That’s the exorbitant privilege of the US dollar that gets reinforced during any crisis.

People in businesses will suffer. This is a big crisis and the government has no room to help them. Anyone who says good days are coming in six months means they are bluffing.

There is no treatment for my thirst both ways. One side we have an ocean and the other side is a mirage.

Personal Finance

Build an emergency fund at least that is three months of your annual expense. Saving money is about making better decisions in life. Money in the bank helps you negotiate your next job once you get fired. First, pay off credit card debt before putting the money in SIPd. Otherwise, the dues get compounded very quickly. Prioritize loans. Repay the loans that have a higher rate of interest. Your money in savings bank only makes 3% and you use that money to pay off the credit card debts. Even though FD rates fell down, keep some amount of money in your bank for a rainy day.

Asset allocation is the key. Don’t get your money stuck in real estate where liquidity is difficult. Discretionary expenditure has to take a back seat. Don’t invest in better mobile phones. Build a checklist of things you have bought in the last 12 months. You will be surprised you bought the items or services you didn’t need to buy. Don’t have half a dozen debit and credit cards. More cards mean more temptation to spend the money. The pain of spending the card money is far less than the pain of spending the real money. Better to carry some cash as it has its own use. Be careful with the fact that you don’t need to have the credit card from the same bank where you carry your debit card.

Make sure there are nominees on all of your accounts. Make a list of your assets and let your family members know. Bank credit growth has slowed down. In the months to come, the sales pitch of banks get better and try and resist the temptation. Be good to your elders and siblings. They may have to bail you out.  As I said, there is no solution to everything.

Vikram: Complex issues may not have a simple solution but simple explanations. I could relate to your talk. How does distress selling by the farmers impact the spending cycle?

Vivek: Farmers have to dump the excess. There is no way to track the losses. GDP calculates the value of production and not the value of the sale.

Vikram: How do you see India versus the rest of the world economies.

Vivek: The last time I checked FED’s balance sheet, it was around $6 trillion. FED is printing money and buying bonds. They have an unlimited bond program to help people to consume more. This has been happening for the last 12 years. This gave the wall street easy money for investments. The funny thing is that in the last 40 days not a lot of that money has come to India. It has gone into a developed stock market. If the FED is on an unlimited money program, some of it will eventually come to India. In the short term, the stock market shall look good.

Vikram: How does printing money help?

Vivek: Noone really prints money. It is created digitally. It means that federal reserve has a computer somewhere it inputs something so the money supply goes up. The Federal Reserve buys bonds from all kinds of markets. It uses the freshly created money for this. Money supply goes up in the market, interest rates come down and hope is businesses will expand with the money available. Macroeconomics has a very limited set of solutions that boil down to the fact that interest rate comes down so people borrow and spend more. Corporates borrowed money and they bought back their shares. When the number of shares in the market went done, earnings per share went up. A lot of USA companies have borrowed money to raise the price per share. They are in trouble as they have heavily leveraged and they have to fire people to balance.

Vikram: Why not cut defense expenses and other government expenses?

Vivek: Our defense expenditure as a proportion of GDP already has come down. Most of it goes into salaries. New New Delhi can wait.

Vikram: GoI has to cash in on the public’s mood. Make in India versus stopping Chinese goods?

Vivek: Protectionism (MINT) is a bad idea. Nationalism started to happen. People say “don’t buy from China but buy from India”. This is fine. The problem is “why do people buy from China?” Because people buy for “Value from Money”. Can we produce the same quality product at the Chinese price? No. If we start producing, the prices of things go up. When prices go up, priorities change. Indian industry remains the same in the end. The idea should be that we must be productive in India before we push “Make in India’ land laws and government laws are archaic.

Chandana: My retirement is dented at 30%. I am retiring in 6 years. What should I do?

Vivek: Asset allocation is important. As you approach retirement, investment in equity should go down. What you can do now is “make fresh investments in bank deposits”. Hope stock market recovers so you minimize the losses. I believe in gold. You can’t bet your life on gold as it is a volatile asset class. In the current scenario gold is on the excellent play as rupee loses its value against the dollar. Gold is sold in dollar terms internationally. Gold should be a part of the portfolio. At best 10% of your portfolio in gold.

Chandana: Daily wage farmers are suffering. The most suffering ones are in the lower middle class too. 

Vivek: Aim of the different governments across the country is to put more money in the hands of people. How do we target a specific set of people? There is no structure. The solution shall emerge at the societal level.

Chandana: Can we adjust additional hours against future holidays? 

Vivek: Every landlord is in a different situation. We can’t even recommend the landlords not to collect the rents. Let the society figure it out.

Chandana: Taxing the super-rich to help the poor?

Vivek: This is not possible. Atrocious tax rates could drive the economy under the ground. Make the tax system simple and encourage people to pay taxes. taxing the super-rich is rubbish. Super rich have lots of options such as a move to Dubai or elsewhere.

Chandana: Sectors that will be most affected after lockdown?

Vivek: Service sectors such as multi-plexes, hotels, restaurants, retail chains, sellers of discretionary items such as cars, homes and more. Banking too takes a beating as there will be more defaults. In India, retail default rates are very low.

Vikram: What are the permanent changes you see?

Vivek: Companies realize there is no need for big physical space. Our infrastructure in India can’t really handle people going to work every day. It helps there. Anyone who needs a computer doesn’t need to go to the office. A wealth officer in a bank doesn’t need to go to his bank. This brings the demand for commercial real estate to go down. People get more time on their hands as they save on the commute time.

Encourage entrepreneurial people to work on their ideas.

Chandana: How does the global crisis impact India?

Vivek: Companies may look to get out of China. It is a good opportunity for India provided those companies to look at India and not elsewhere. Are we ready to cash in this opportunity?

Vikram: Impact on our environment?

Vivek: The economy is also inter-connected with the environment. Fresh air what cost is also a question. Love and fresh air can’t make a living too.

Chandana: Is this a good time for land and labor reforms?

Vivek: Always a good time.

Vikram: Will times of economic pressure bring corruption down?

Vivek: More land deals could mean more money into corruption. If the economy goes down, corruption goes down but its proportion as part of the GDP remains the same.




Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: