WEEKLY WRAP-UP – Economic disparity post-pandemic not sustainable

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The IMF forecast the global economy to expand further in the next two years, with India's GDP expected to rise by as much as 7.8 percent in 2019.

The new COVID-19 surge remains a near-term threat to the economic recovery. But over the course of the last 10 months, the economy has turned out to be more resilient in adapting to the virus and more responsive to monetary and fiscal policy support than many predicted. The development of several effective vaccines indicates that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished.

Yet, there’s little doubt that the current global economic system is broken. Underlying economic injustices have been magnified by the coronavirus pandemic. A younger generation now faces a historic amount of debt, similar to having faced a World War, in addition to the challenges of irreversible climate change and global biodiversity collapse.

A closer examination of this growing inequality reveals just how fragile current economic structures have become, with social unrest bubbling just under the surface in many countries around the world. Amid higher health risks, lost schooling, mass unemployment and economic ruin, ten billionaires alone saw their wealth increase by $450 billion during the pandemic. The wealthiest 2000 billionaires in the world saw their assets hit new highs, increasing to over $10 trillion in value. An economic system with such disparities, that rewards those with access to capital, is not sustainable.

AGRICULTURE

It is the same threat of disparity of incomes that is the root cause of farmers’ agitation in India as well. The three farm bills threaten to snatch the reins of agriculture from farmers to a few corporate houses. Farmers are marching In and around Delhi on tractors and foot from all across the country demanding repeal of the three Farm Bills. The government has unequivocally denied repealing the laws. Farmers continue to be adamant. 

Meanwhile the government continues to procure Kharif 2020-21 crops at MSP from farmers. A government statement said, “About 57.47 lakh farmers have already been benefitted from the ongoing Kharif Marketing Season procurement Operations with MSP value of Rs 87,391.98 crore.” Out of the total purchase of 462.88 lakh tonnes, Punjab has contributed 202.77 lakh tonnes, which is 43.80 per cent of the total procurement. Till December, a quantity of 69,56,291 cotton bales valuing Rs 20,391.36 crore has been procured benefitting 13,53,139 farmers.

METALS

The northward movement of the steel prices remains unabated, with the rate touching an all-time high of Rs 58,000 per tonne (ex-Mumbai) for benchmark hot-rolled coil (HRC) product. Domestic steelmakers have been facing flak from different quarters that include MSME and road transport and highways minister Nitin Gadakri for jacking up prices exorbitantly over the last few months.

While Gadkari wrote to the Prime Minister seeking intervention at the highest-level to rein in the rising prices, Indian Steel Association (ISA), the representative body of the domestic steel producers, in a communique to the Prime Minister’s Office recently attributed the price rise to acute shortage of iron ore leading to a sharp rise in its prices, northward movement of steel prices in international markets with which Indian prices ‘move in sympathy’ and subdued domestic steel production.

GOLD

Gold price fell to Rs 54,160 per 10 grams at the close of the week from Rs 54,650 a day earlier. Silver price was trending at Rs 69,700 per kg. Internationally, spot gold eased 0.1% to $1,911.32 per ounce. US gold futures shed 0.1% to $1,912.30 per ounce. Gold inched lower as the U.S. dollar and Treasury yields firmed, although hopes for additional stimulus in the world’s largest economy kept bullion on course for a second straight weekly gain.

The economic fundamentals still point in favour towards gold. We’re witnessing negative real returns on bonds, huge government debt and threats of inflation. Perhaps year 2021 would see an emergence of inflation we may not have seen in the last decade.

A stronger dollar makes bullion more expensive for holders of other currencies, while higher bond yields increase the opportunity cost of holding the non-interest yielding gold. The Democrats’ control of the U.S. Senate has fuelled hopes of large stimulus measures and boosted inflation expectations, underpinning gold’s appeal as an inflationary-hedge.

Gold’s long-term trend remains pretty constructive with lower rates and negative real yields.

ENERGY

The surprise cuts in production by Saudi Arabia following the OPEC+ meeting have provided oil bulls with a major boost, sending Brent crude above $55 a barrel at the end of the week. Other forces are at play as well, including monetary stimulus, the prospects of deeper fiscal stimulus in the U.S., and vaccine optimism. Saudi Crown Prince Mohammed bin Salman called off a multi-year blockade of Qatar this week, and it also said it would voluntarily cut 1 million barrels per day of oil production. Petrol and diesel prices in India have been touching all-time highs exceeding Rs 80 and Rs 90 a litre for diesel and petrol.

The rise in fuel prices is another threat to the already high inflation in the country. When crude was ruling around $ 20 a barrel in May this year, India hiked its excise duty to almost Rs 14 a litre on retail gasoline sale, thus preventing any sharp drop in retail prices. Now that crude is on a bull run, domestic price of fuel continues to rise exorbitantly. 

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