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Daily Current Affairs 02.07.2021 (Relief and recompense, A bubble burst is no figment of the imagination)

Daily Current Affairs 02.07.2021 (Relief and recompense, A bubble burst is no figment of the imagination)

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1.Relief and recompense

The judiciary did well to assert the rights of pandemic-hit workers and families

It is a matter of relief and satisfaction that the Supreme Court has prodded the Union government to perform its statutory duty of fixing a compensation for the families of those who lost their kin to the COVID-19 pandemic. The order comes close on the heels of a slew of directions on registering the country’s vast unorganised workforce and its army of inter-State labourers on a national database and ensuring that none of them went hungry. On the issue of making an ex gratia payment to those affected by the pandemic, a notified disaster under the Disaster Management Act, the Centre initially took the untenable stand that it lacked the financial resources to compensate for every COVID-19 death. However, it later admitted that it was not the adequacy of resources that made it avoid any compensation, but rather its decision to prioritise expenditure in response to the pandemic. It is indeed true that unlike more frequent disasters such as cyclones, earthquakes and floods, a pandemic that has hit every country is not a one-time calamity, but an ongoing and prolonged phenomenon. However, the Court has rightly found that this was not reason enough for the Government to evade its duty to include ex gratia assistance on account of loss of life in its guidelines for “minimum standards of relief” to those hit by the disaster. The Court correctly did not fix a compensation amount for each death, leaving it to a policy decision by the National Disaster Management Authority and the Centre.

In an earlier order, the Court dealt with the need for comprehensive registration of all inter-State and unorganised workers in the country. It is unfortunate that it needed a pandemic, and the resulting humanitarian, social and economic crisis for millions of workers, to give an impetus to the process. The Supreme Court, while disposing of suo motu proceedings on the miseries of migrant labourers, has now fixed a deadline of December 31 this year for all States and Union Territories to complete the process. The Centre has been given a deadline of July 31 to make available a portal for its National Database for Unorganised Workers (NDUW) project so that it may be used for registering unorganised workers across the country. However, the Union government, which was directed to make such a common module available to the States as far back as in August 2018, claimed the work on developing the portal was affected due to the fallout of the pandemic. The Court has pulled up the Union Labour Ministry for its “apathy and lackadaisical attitude” and directed that the process of registration should begin by July 31. The verdicts open up the possibility that the inter-State and unorganised workers will at last be able to reap the benefits of welfare laws enacted for them. These interventions signify the rejuvenation and assertion of a court seen as somewhat reticent until recently.

Why in News    

Recently, the Ministry of Home Affairs invoked Disaster Management Act, 2005 (DM Act) and ordered free inter-state movement of oxygen carrying vehicles.

  • Earlier in March 2020 various government authorities invoked their respective powers under the DM Act to deal with the novel coronavirus (Covid-19) outbreak in the country.

Key Points

  • About:
    The DM Act was passed by the government of India in 2005 for the ‘efficient management of disasters and other matters connected to it. However it came into force in January 2006.
    • Objective:
      To manage disasters, including preparation of mitigation strategies, capacity-building and more.

      • Definition of a “disaster” in Section 2 (d) of the DM Act states that a disaster means a “catastrophe, mishap, calamity or grave occurrence in any area, arising from natural or man made causes.
      • Major Features of The Act:
        Nodal Agency:
        The Act designates the Ministry of Home Affairs as the nodal ministry for steering the overall national disaster management.
    • Institutional Structure: It puts into place a systematic structure of institutions at the national, state and district levels.
      • National Level Important Entities:
  • The National Disaster Management Authority (NDMA):

    It is tasked with laying down disaster management policies and ensuring timely and effective response mechanisms.
      • The National Executive Committee (NEC):
        It is constituted under Section 8 of the DM Act to assist the National Disaster Management Authority in the performance of its functions.
      • The NEC is responsible for the preparation of the National Disaster Management Plan for the whole country and to ensure that it is “reviewed and updated annually.
      • The National Institute of Disaster Management (NIDM):
        • It is an institute for training and capacity development programs for managing natural calamities.
        • National Disaster Response Force (NDRF):
          It refers to trained professional units that are called upon for specialized response to disasters
        • State and District level:
          The Act also provides for state and district level authorities responsible for, among other things, drawing plans for implementation of national plans and preparing local plans.
          State Disaster Management Authority
        • District Disaster Management Authority.
      • Finance:
        It contains the provisions for financial mechanisms such as the creation of funds for emergency response, National Disaster Response Fund and similar funds at the state and district levels.
      • Civil and Criminal Liabilities:
        The Act also devotes several sections various civil and criminal liabilities resulting from violation of provisions of the act.
      • Under Section 51 of the Act, anyone refusing to comply with orders is liable for punishment with imprisonment up to one year, or fine, or both. In case this refusal leads to death of people, the person liable shall be punished with imprisonment up to two years.
  • Challenges:
    • Absence of Disaster Prone Zones:
      • One of the most glaring inadequacies in the Act is the absence of a provision for declaration of ‘disaster- prone zones’.
      • Almost all disaster related legislations in the world have mapped out disaster- prone zones within their respective jurisdictions.
      • The state cannot be expected to play a pro- active role unless an area is declared ‘disaster- prone’. Classification helps in determining the extent of damages as well.
    • Neglects Progressive Behavior of Disasters:
      • The Act portrays every disaster as a sudden occurrence and completely fails to take into account that disasters can be progressive in nature as well.

In 2006, over 3,500 people were affected by dengue, a disease with a history of outbreaks in India, yet no effective mechanism has been put in place to check such an ordeal.
Tuberculosis is known to kill thousands of people in the country each year but since its occurrence is not sudden or at once, it has not found a place in the Act.

  • Overlapping Functions:
      • The Act calls for establishment of multiple- national level bodies, the functions of which seem to be overlapping, making coordination between them cumbersome.
      • The local authorities, who have a very valuable role to play in the wake of any disaster as first responders, barely find a mention at all. There are no substantive provisions to guide them, merely a minor reference to taking ‘necessary measures’.
    • Procedural Delays and Inadequate Technology:
      • Added to that, delayed response, inappropriate implementation of the plans and policies, and procedural lags plague the disaster management scheme in India.
      • Inadequate technological capacity for accurate prediction and measurement of the disaster result in large scale damage.

2.A bubble burst is no figment of the imagination

Economic parameters appear confused and investors should not be tempted to ignore macroeconomic factors

‘Your investment would have doubled by now, had you invested in the stock market in March 2020.’ An assertion like this triggers an urgent rush to invest in the market and is akin to being under the influence of a “feel-good” hormone. This makes the expectation of ‘winning big’ feel better than ‘just winning’ leading to impulsive, even detrimental decisions, attributable to behaviour biases, to use the terminology of behavioural economists.

Perception versus reality

Investors may not necessarily be always sensible or even capable of perceiving the larger picture. Nobel laureate Daniel Kahneman argues that humans usually use the ‘first system’ of ‘fast thinking’ to hurriedly act and perceive their environment. Consequently, they are susceptible to the ‘priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ and ‘availability heuristic’.

These phenomena, thus, play their part in pervading optimistic market conditions. As a result, investors often end up ignoring or overlooking uncertainties and risks involved in their decision. They get so enamoured with the idea of making a killing that they forget that in the month of March last year itself, the market had tanked a fourth of its capitalisation causing mayhem.

At the same time, investors’ decision choices could be significantly influenced by ‘nudging’, a deliberate tactics and method of behaviour modification by which it is the ‘choice architect’ that decides who does what and who does so, as argued by the Nobel laureate, Richard H. Thaler. The present surge in the Indian stock market is indeed nudging individual investors to trade more. But who is playing the role of the choice architect and what their intentions are, remain the moot questions.

Focus on individual investor

National Stock Exchange data indicate that the share of the non-institutional individual investors in equity trading volume has risen to one half of the total turnover in 2021 as compared to around a third in 2016. In contrast, the share of Foreign Institutional Investors (FIIs) in the total trading volume has shrunk to just about a tenth making it half of what it used to be in 2016. Trading in the stock market, the sudden rise, the intraday moves, etc., are, thus, attributable largely to individual traders now.

Their large trading volumes notwithstanding, individual investors have actually contracted their holding of the market capitalisation. Going by the floating stocks of the market collectively, the FIIs currently own around half of the free float of all Indian companies. Apparently, the retail investors have constantly sold their stake to end up holding less than 20% shares now. Trading, thus, seems to be the mainstay of retail investors and this is what makes them more vulnerable to the vagaries of the market.

The market today

During the period under discussion, the fundamental, economic and environmental parameters look confused. GDP has shrunk by at least 7.5%, unemployment rate has been on the rise, and an overwhelming number of people are said to be sliding back into poverty or becoming poorer than a year before. At the same time, Centre for Monitoring Indian Economy Pvt. Ltd. data of the listed companies reveal a rise in their profit, due to rationalisation and cost-cutting.

Investors might be tempted to ignore macroeconomic factors and invest in such stock believing that it is the profit that impels the stock prices. In reality, however, share price is expected to ascend if a company declares to cut its wage bill. This probably explains why stock markets around the world have been on the rise amidst the novel coronavirus pandemic; demand may have declined but profits have been least impacted. At the larger economic level, however, real wages have plunged. Clearly, the market has not entirely decoupled itself from the economic indicators.

Stimulus or profit or euphoria caused by happy hormones, whatever the reason apart, the stock market has been drawing available excess liquidity. Simultaneously, frequent trading has been propelling the stock market further up. But how long can this last? Established wisdom suggests that corporates cannot sustain contraction in the economy for long. Sustained decline in demand caused by waning disposable household income would catch them soon

A grey cloud

Consequently, corporates would be saddled with unsold goods or services, leading to a drop in their prices, with a consequential effect on their revenue which would exert downward pressure on their stock prices. This is, however, not to deny that stock markets are always futuristic and stock prices imitate investors expectations. But how long can expectation drive the market if the economy does not revive soon?

Robert J. Shiller, another Nobel laureate, attributes this phenomenon of creating a possible bubble to irrational exuberance. And bubbles are seldom long lasting and burst sooner rather than later. When bubbles burst, they cause a kind of financial earthquake, in turn destabilising public trust in the integrity of the financial system. Critically, as the past portrays, individual investors, with all their vulnerabilities, suffer the most devastating consequences.

Retail investors are as well susceptible to overreaction when negative news hits the market. For example, a week of turbulence eroded market capitalisation of over ₹1-lakh crore in the case of just six listed companies of the Adani group. For an individual investor, who had purchased these shares during the last month, this means that he lost his entire investment. These companies are closely held, with promoters holding around 75% stake, but imagine the mayhem if this happens to a widely held company. A bubble burst is in the realm of recurrent reality and cannot be ignored as a figment of the imagination.

What Is Macroeconomics?     

Macroeconomics is a branch of economics that studies how an overall economy—the market or other systems that operate on a large scale—behaves. Macroeconomics studies economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.

Some of the key questions addressed by macroeconomics include: What causes unemployment? What causes inflation? What creates or stimulates economic growth? Macroeconomics attempts to measure how well an economy is performing, to understand what forces drive it, and to project how performance can improve.

Macroeconomics deals with the performance, structure, and behavior of the entire economy, in contrast to microeconomics, which is more focused on the choices made by individual actors in the economy (like people, households, industries, etc.).

KEY TAKEAWAYS

  • Macroeconomics is the branch of economics that deals with the structure, performance, behavior, and decision-making of the whole, or aggregate, economy.
  • The two main areas of macroeconomic research are long-term economic growth and shorter-term business cycles.
  • Macroeconomics in its modern form is often defined as starting with John Maynard Keynes and his theories about market behavior and governmental policies in the 1930s; several schools of thought have developed since.
  • In contrast to macroeconomics, microeconomics is more focused on the influences on and choices made by individual actors in the economy (people, companies, industries, etc.).

Understanding Macroeconomics

There are two sides to the study of economics: macroeconomics and microeconomics. As the term implies, macroeconomics looks at the overall, big-picture scenario of the economy. Put simply, it focuses on the way the economy performs as a whole and then analyzes how different sectors of the economy relate to one another to understand how the aggregate functions. This includes looking at variables like unemployment, GDP, and inflation. Macroeconomists develop models explaining relationships between these factors. Such macroeconomic models, and the forecasts they produce, are used by government entities to aid in the construction and evaluation of economic, monetary, and fiscal policy; by businesses to set strategy in domestic and global markets; and by investors to predict and plan for movements in various asset classes.

Given the enormous scale of government budgets and the impact of economic policy on consumers and businesses, macroeconomics clearly concerns itself with significant issues. Properly applied, economic theories can offer illuminating insights on how economies function and the long-term consequences of particular policies and decisions. Macroeconomic theory can also help individual businesses and investors make better decisions through a more thorough understanding of the effects of broad economic trends and policies on their own industries.

Limits of Macroeconomics

It is also important to understand the limitations of economic theory. Theories are often created in a vacuum and lack certain real-world details like taxation, regulation, and transaction costs. The real world is also decidedly complicated and includes matters of social preference and conscience that do not lend themselves to mathematical analysis.

Even with the limits of economic theory, it is important and worthwhile to follow the major macroeconomic indicators like GDP, inflation, and unemployment. The performance of companies, and by extension their stocks, is significantly influenced by the economic conditions in which the companies operate and the study of macroeconomic statistics can help an investor make better decisions and spot turning points.

Likewise, it can be invaluable to understand which theories are in favor and influencing a particular government administration. The underlying economic principles of a government will say much about how that government will approach taxation, regulation, government spending, and similar policies. By better understanding economics and the ramifications of economic decisions, investors can get at least a glimpse of the probable future and act accordingly with confidence.

Areas of Macroeconomic Research

Macroeconomics is a rather broad field, but two specific areas of research are representative of this discipline. The first area is the factors that determine long-term economic growth, or increases in the national income. The other involves the causes and consequences of short-term fluctuations in national income and employment, also known as the business cycle.

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