What the Pandemic tells us about our faith in the economy

The Coronavirus has affected this world in more ways than one could ever have imagined. From department stores to international travel, every aspect of public life has been forced to be carefully reconsidered. Out of these reconsiderations, new solutions have come about — stores no longer allow customers to enter, for the first time ever, Indians respect the concept of one’s personal space and do not evade it, any form of travel across cities is accompanied with a two week home quarantine, or in the case of international travel, an institutional one. 

As one would expect, the effects of the virus are evident in the stock market as well. The NIFTY index (a portfolio of 50 industry-leading stocks listed on the National Stock Exchange, often used as a flagship index of the market) fell by almost 5,000 thousand points between 20th February (12,080) and 23rd March (7,610) when the lockdown was announced. This is, of course, not outside the ordinary at all. Businesses are expected to shut their operations, or at least shift to a work-from-home system. As the manufacturing and transportation of goods become a more problematic process, people are losing their jobs. No wonder the fall was so steep and significant, there is a deadly virus out on the loose brewing havoc in the world!

Although what has followed over the past few months is a lot more interesting. As cases have been surging, with no end to this madness in sight, the stock market has actually been gradually rising, as can be seen in this 

graph which covers the behaviour of NIFTY over the past six months. This phenomenon is not just limited to Indian markets. Apple just crossed the 2 trillion mark owing to high returns and positive sentiments over its 5G iPhone release, making it the world’s most valuable company. No other company’s value has ever crossed that threshold. 

Financial analysts and stock market pundits have tried to give their own explanations for this unprecedented behaviour. One such explanation is that excess liquidity in the economy, as a result of financial and monetary responses to COVID-19, has prompted investments in the market. Furthermore, a lot of the movement in the market is speculative i.e. agents do not take delivery of the shares they purchase, rather than investment. (Speculative buying/selling is characterized by day to day trading and not taking delivery of the stock) This graph describes the daily delivery percentage of Indian stock markets and clearly shows extremely low percentages — the lowest in the last 15 years — even lower than the financial crisis of 2008. 

Another very interesting phenomenon that is rocking the financial world right now is the shocking rise of gold (other than the recent dip in prices). Ignoring stock market developments, this would make a lot of sense during a pandemic-induced financial crisis. Gold is a stable and safe investment in the midst of a global economic crisis. The announcement of a nation-wide lockdown meant businesses were adversely affected, exports/imports were canceled as well. This drove people away from risky assets such as those in the stock market, and towards the financial safe haven, we call gold. Furthermore, falling interest rates and high liquidity (due to monetary decisions by the government and RBI) contribute to gold’s lucrative nature. 

Although discussing the reasons behind the behaviour of both gold and stock markets is not the main objective here, this behaviour gives us valuable insight into how people respond to economic and political instability: they run towards safe alternatives that they believe will be least affected, which seems intuitive. This also, however, means that people do not consider the banking system as one of the safer alternatives to turn towards. Yes, falling interest rates play a role as well, but the market’s sentiments also indicate a clear distrust for the banking system. 

In the context of a population that does not have faith in its economy and financial system, let us look at the lockdown and the country’s response to it. On 23rd March, a nationwide lockdown was imposed to curb the spread of Coronavirus. Although the virus was still in its infancy stages in the country, the general population rushed to convenience stores, vegetable vendors and essentially stocked up as if it’s Armageddon. A pandemic may indeed warrant such a response, however, it was definitely an overreaction in hindsight. The lockdown also prompted economic advisers and policymakers to ask questions like ‘Will coronavirus lockdown cause food shortages?’ and ‘Is India prepared to meet the supply for food?’. These clearly indicate that neither economists nor the general public have any faith in the system to survive even the smallest of instabilities. 

While the entire world is growing weary of stock markets and investment opportunities, primary sector activities are rarely under question. The story in India is much too different. During the first stage of the lockdown, demand for food was limited to the essentials: Wheat, dals (pulses), rice, and vegetables. The second wave of the lockdown saw a rise in demand for luxury food items and packaged products. This essentially signifies that any form of instability leads people to switch to survival mode, and over time, this wears off. 

The financial markets of India, as well as the world financial markets, are undergoing unprecedented changes as a result of the coronavirus. Despite a global economic recession, markets seem to be going up. Gold is increasingly becoming a more valuable commodity (although not as much of late). Market sentiments are constantly fluctuating, and influencing prices extensively. Higher liquidity in economies due to coronavirus relief packages is also playing a major role. In all of this confusion, food tells us an interesting, rather unfortunate, story about the societal institutions of India. As a lack of faith in financial systems drives gold prices, lack of faith in the economy to provide the basic necessities drives demand for food during the initial phases of the lockdown. This tells us about a lot more than the pandemic, it tells us about people’s responses to instability, about their fear for their livelihood every time the world changes, about the inability of our economy to withstand adversity. 

Varun Upamanyu is a third-year student of Ashoka University pursuing a major in economics and finance. 

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