1. Fed move and Indian markets
The US Federal Reserve has signalled a possible hike in interest rates soon, leading to a nervous reaction in Indian markets.
Impacts on India:
- When interest rates rise in US, the gap between those and rates in countries such as India reduces, giving less incentive for foreign investors to pump money into overseas market.
- This can lead to foreign capital outflows not only from equity but also from debt. In January itself, foreign investors have pulled out from 22000 crore from equity markets anticipating a hike in US fed rates.
- It will lead to higher cost of funds, and fund mobilization in overseas market will become costly.
- The increase in cost of funds will also lead to increase in cost of capital expenditure for India and will increase the cost of developing infrastructure.
- It can also strain the profit margins of companies.
- Outflow of dollar will effect Indian rupee too.
Other factors impacting market:
- Growing geopolitical tensions between Russia and Ukraine
- Spike in crude oil prices
Way forward for investors:
- Investments in mid and small cap companies can be reduced as they will be more volatile and vulnerable to rise in interest rates.
- Redeploy some funds in hybrid schemes.
- Invest in long term view and opt for business cycle based funds as India’s business cycle remains robust.
2. India’s economy and the challenge of informality
- A defining characteristic of economic development is the movement of low-productivity informal (traditional) sector workers to the formal or modern (or organised) sector — known as structural transformation.
RESEARCH BY SBI:
SBI recently reported the economy formalised rapidly during the pandemic year of 2020-21, with the informal sector’s GDP share shrinking to less than 20%, from about 50% a few years ago.
These findings do not represent a sustained structural transformation
They are a temporary (and unfortunate) outcome of the pandemic and severe lockdowns imposed in 2020 and 2021.
- Eg: East Asia witnessed rapid structural change in the second half of the 20th century as poor agrarian economies rapidly industrialised, drawing labour from traditional agriculture.
- Despite witnessing rapid economic growth over the last two decades, 90% of workers in India have remained informally employed, producing about half of GDP.
- Official PLFS data shows that 75% of informal workers are self-employed and casual wage workers with average earnings lower than regular salaried workers.
It has many layers:
- Industries thriving without paying taxes.
- Low productivity informal establishments working as household and self-employment units which represent “petty production”.
- Informalisation of the formal sector; eg: daily wage workers in real estates.
Reason for informal sector:
- “Fiscal perspective” of formalization: foregrounds the persistence of the informal sector to excessive state regulation of enterprises and labour which drives genuine economic activity outside the regulatory ambit.
- Political and economic reasons operating at the regional/local level in a competitive electoral democracy are responsible for this phenomenon.
- A well-regarded study, ‘Informality and Development’ argues that the persistence of informality is, in fact, a sign of underdevelopment. Across countries, the paper finds a negative association between informality (as measured by the share of self-employed in total workers) and per capita income.
The Government has made several efforts to formalise the economy:
- Introduction of the Goods and Services Tax (GST)
- Digitalisation of financial transactions and enrolment of informal sector workers on numerous government Internet portals.
- Widening the tax net and reducing tax evasion are necessary.
- Alleviating legal and regulatory hurdles to promote EODB.
- The economy will get formalised when informal enterprises become more productive through greater capital investment and increased education and skills are imparted to its workers.