The economic fallout of COVID-19

Financial boom at a time of economic stagnation

Divergences between the booming financial and the stagnant real sectors, which appear rather confounding as well as disconcerting, warrant an explanation.

Enumerating the facts in India’s major secondary stock market, the Sensex (the benchmark index of the BSE Limited, or formerly the Bombay Stock Exchange Ltd.) has been found tracking an upward path, from 40,817 on January 8, 2020 to 48,569 a year later, on January 8, 2021. In between, the temporary downward slides were responses to the pandemic-related lockdowns during early 2020. Jubilant upward strides in the stock market continued, along with speculatory financial transactions in real estate, gold and even commodities. However, we notice that financial gains booked in the market on transactions do not originate from productive activities in the real economy, a fact which contrasts the floating of shares by enterprises, as initial primary offerings (IPOs) for capacity expansions.

With the start of the novel coronavirus pandemic during April-June (Q1) of 2020, India’s GDP growth rate in real terms sank to a low of minus 23.1%. The deceleration in the second quarter continued at minus 7.5%. The official advance estimate for 2020-21 as a whole also stands at a negative again, of minus 7.5%. GDP in India has been subdued even before the pandemic, declining from 6.12% in 2018 to 4.18% for 2019, while the financial sector has continued moving up.

In advanced economies too

The paradox of the continuing financial boom with the real economy going through a stagnation has been found to be replicated in other developing as well as advanced economies. These include the major emerging economies such as Brazil and Argentina along with advanced economies such as the United States and the United Kingdom. Simultaneously, the story of employment in countries has been dismal, with jobs at levels much less than what is needed .

The discord within countries between the real and financial activities clearly imparts a dissonance within economies. Thus in India, the bonanza reaped in the stock market bears no testimony to the dark side of the economy — these include the uprooting of migrants following the pandemic lockdowns, protesting farmers on land rights and the vast stream of the jobless in the country. It remains an open question whether this can continue. An answer, if negative, casts a gloom not only on those having large exposures in the financial market but also for the economy as a whole.


To understand a little bit more the magical properties of the on-going prosperity in the financial sector and to question its sustainability over time, we need to recognise the circuit of financial flows beyond the real economy.

Flows of finance

Finance as above, having no counterpart in the productive sector, was identified, first by Karl Marx, as fictitious capital. Flows of fictitious finance consist of credit in circulation, bonds on the basis of future earnings, interest on loans (at the cost of foregone consumption or from surplus value when loans permit an access to productive resources). Earnings from fictitious capital include interests, dividends and capital gains as well as profits on derivatives such as forwards and futures used to hedge against uncertainty in de-regulated markets. All the above come in the category of unearned or rentier capital.

Despite the fact that flows of fictitious finance do not originate from the real economy, their accumulation, however, leaves a mark by generating financial wealth for those with access to the financial circuit. Interestingly, financial assets, sold with capital gains at higher prices, are met with a rising rather than with the usual declines in demand. Evidently, possibilities of accumulating assets turn even brighter with the high value assets (used as collaterals), fetching credit for further business. As for the stock prices, which reflect the stream of dividends over time discounted by interest rates, lower rates can help pitch stock prices higher. We recall that cuts in interest rates are often preferred as tools under mainstream prescriptions limiting expansionary policies, which evidently helps stock prices.

Also read | India’s private credit-to-GDP ratio lowest among peers: Amitabh Kant

A journey as above for the financial circuit continues, is subject to market confidence, along a concentric circle which widens with rising asset prices, asset incomes and capital gains. The ingrained uncertainty in de-regulated markets works as a barometer for setting the pace of expectations and decisions. The market may suddenly stall when expectations turn adverse. The standard computer-run packages in the market available for investment decisions, while based on the rather erroneous calculation of probabilities, fail to work to attain the desired goals of profitability. Recent examples include instances of the financial collapse with the dot-com bubble or the sub-prime crisis of 2008, inflicting large social costs of unemployment and poverty in the real economy.

Link to state

Finally, to look at how finance has attained its present status as the major happening sector within economies, especially, as a major force in the power relations, we need to look at the evolving pattern of the alliances between finance and the ruling state. The path started with the sweeping pace of financial de-regulation in the late-1990s when banks were allowed to profit by dealing with securities and with the emergence of hedging devices such as futures and options in the market. It also reflects the rise of non-bank financial institutions as well as shadow banks operating beyond regulations even at cost for the regular banks which had large exposures to the non-banks. The state’s close proximity to big finance is also evident in the revamping of downhill finance, even with bailouts in the name of restoring financial stability. It speaks even more of the pro-finance stance of the state in the benign official neglect of upswings in the financial sector despite the continuing downslides in the real economy.

Also read | Stretched valuations threaten stability: Shaktikanta Das

Alternative policies, caution

Possibilities of a sudden collapse of confidence in the financial sector, incurring financial losses borne by those holding such assets go further with social costs borne by the economy as a whole — a reality which cannot be ignored. Catastrophes, as mentioned above, highlight the need for alternative policies on the part of the state as well as a bit of caution on part of individual investors — in a bid to usher in a sustainable and equitable path of growth for the economy as a whole.

Sunanda Sen is a former Professor of Jawaharlal Nehru University, New Delhi

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Printable version | Mar 1, 2021 9:19:28 AM |

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