Transcript for EngageIn Econ Podcast 1

Newsflash for 31/1/2021 to 7/2/2021

Welcome to the first episode of the EngageIn Econ Podcast. We are your hosts: Nikhil Chidipothu and Luxan Sureshan and today we’ll providing you guys with a newsflash on things we found interesting in the news.

To kick things off, we’re going to talk about India’s annual budget. As we know, COVID 19’s impact is a detrimental one causing a plethora of externalities: the majority being negative whilst there are infact the occasional positive externalities. Facing its deepest recession, India has been seen a shrinkage in GDP, soaring employment and additional stress on their banking sector. Furthermore, the country has seen its fiscal deficit rise to 9.5% as well which is infact the highest since 1991 as a matter of fact.

Speaking of this, fiscal deficit, could you actually argue that it’s a good thing?

A government experiences a fiscal deficit when it spends more money than it takes in from taxes and other revenues excluding debt over some time period. Well, in my opinion a fiscal deficit isn’t so bad in the short term: an fiscal deficit in the short term can infact be beneficial as it indicates that a country can be growing and has more money to spend on things such as infrastructure or healthcare, for example. However, in the long run, it’s a different scenario, I believe as maintaining a fiscal deficit for too long can mean that the government is indebted to other countries so within a country, interest rates will have to go up therefore making it harder to borrow and thus lead to a reduced investment

India are aiming to reduce their fiscal deficit as announced in their budget but what else are they actually planning to do and what have they done?

Well, they have increased health spending by 137% to $30bn: more than double of their last year’s values. In previous years, their health care sector was under funded in fact receiving under 1.3% of GDP. Considering, that there’s a global pandemic going around, I feel this certainly makes sense: $4.8 bn are being committed by the government to India’s Covid vaccination program! Furthermore, as part of their program they are funding more than $8.5 bn to expand infrastructure. Although this may seem counter-intuitive as India are seemingly spending more to get themselves out of a deficit, it is actually, a great idea, in my opinion as due to the multiplier effect they government can in fact benefit by generating higher returns from this expenditure.

Furthermore, they started a new infrastructure program – the DFI whereby the government are funding $2.7 bn to scale large-scale infrastructural projects with the aim of offering relief to banks and allow for growth to occur again. Spending on infrastructure is up by 35% actually! This is obviously beneficial allowing for potential economic growth in the long run as it creates more jobs and the improve the potential supply capacity through improving things such as mobility of labour.

Finally, one of their other major plan is to reduce their investment (a $23bn disinvestment target by the end of 2021). To do so, they’ll have to sell off public sector companies including Air India: a company that has a lot of outstanding debt. Furthermore, the financial sector will be opened up further in order to maximise private foreign investment as the government liquidates assets through disinvestment to make profit and encourage people to invest in the new companies.

So to conclude, is this budget going to help India? According to many experts across the globe, the implementation of such policies will cause a turn around in India’s economy which is projected to contract by 7.7% this year but grow by 11% in 2021-2022. However, in this situation of COVID, the unpredictability and instability we face makes it hard for us to confirm anything for sure.

Our next topic will be about the other big story in the news is that Tesla sends Bitcoin to a record high with a whopping $1.5 billion investment. Tesla said it purchased the bitcoins after changing its investment policy last month to “diversify and maximise” returns on its cash and they are planning to accept payments in the cryptocurrency. Less than two years ago Tesla with bankruptcy, “as its reserves dipped close to $2bn at a time when its car-making business was bleeding money.” The bitcoin investment amounts to some of the billions of dollars Musk has been able to raise from stock market investors on the back of Tesla’s increasing share price. As a result of this investment, Tesla shares jumped 2.5% in pre-market trading to $873.88. Due to this Bitcoin’s value increased more than 10 per cent to a record high of $44,100. Musk’s personal backing for cryptocurrencies and other speculative investments has had a massive impact and this can be seen with Dogecoin’s value increasing 11-fold, since Musk wrote a tweet in support of it late last month.

Do you think this is a wise move from Tesla? Is there potential for this to backfire?

Yes of course. What a stupid question!!! Lots of central banks are still sceptical about investing and using Bitcoin. Bank of England governor Andrew Bailey said “I have to be honest, it is hard to see that Bitcoin has what we tend to call intrinsic value.” Intrinsic value is a measure of what an asset is worth, which is worked out by means of an objective calculation (modulus of the current price minus the strike price), rather than using the currently trading market price of that asset. He carries on to say it has lots of extrinsic value (the difference between the market price of an option, also knowns as its premium, and its intrinsic price), as it’s price is extremely volatile and “in the sense that people want it.” Tesla have warned investors that the value of its digital assets could fluctuate wildly as it is requires technology for its existence and validation, which may mean there is a chance of “malicious attacks and technological obsolescence." Even Musk recognises the risk of holding cryptocurrencies, as on Dec. 20, he tweeted, "Bitcoin is almost as BS as fiat money,” Considering this quote, it is actually surprising that he decided to buy $1.5 billion worth of Bitcoin.

In other news, Rishi Sunak has offered more help to over 1.4m firms repaying Covid loans. Sunak is planning to offer loans of up to 50,000 GBP to these firms accounting to about 45bn being borrowed overall. Small firms are supposedly going to receive more time to pay back loans in order to help these firms by giving “breathing space to get back on their feet”. In these challenging times, Sunak has been under constant pressure to revitalise the economy and prevent company closures. As a result, he’s created this ‘pay-as-you-grow’ initiative whereby companies essentially pay back their loans after they experience growth. Under the existing scheme, firms get interest-free loans for the first year. But many will start repaying the money in May, when economic recovery is still expected to be weak. However under the new scheme Sunak has given firms 3 options:

1. Extending the length of loan from 6 years to 10 years – thus giving firms the option to pay back loans but spend back more time to do so.

1. Making interest-only payments for six months, with the option to use this up to three times throughout the loan: therefore reducing the overall magnitude of loans but only by a small amount

1. Pausing repayments entirely for up to six months.

The plan aims to offer flexible repayment options essentially as economy strengthens. Sunak specifically states that “businesses are continuing to feel impact of extended disruption from COVID-19 and we’re determined to give them the backing and confidence they need to get through the pandemic.” He then proceeds to say: “That’s why we’re giving  Bounce Back Loan borrowers breathing space to get back on their feet, through greater flexibility and time to repay their loans on their terms." From Monday, banks will be asked to contact customers regarding this new scheme with implementation of it rolling out soon. Well what do you about this scheme? Will it work? Are there any drawbacks?

Personally, I think this scheme is a great initiative from Rishi Sunak, helping to ease the increasing pressures that COVID-19 is mounting on firms right now. By making it easier to payback loans, it will decrease the strain on firms to pay back loans and instead they can focus on growth and recovery. However, there is the very obvious drawback of this scheme being that loans are still not necessarily going to be paid back in time regardless if for example a firm under the scheme collapses. This would mean that the banks are under even more pressure as they would have simply given out money not knowing whether they’d receive it back. Nonetheless, I would still argue that this scheme is as good as it can be regarding our desperate economic situation.

The final topic of today will be the price of Brent Oil returning to pre-pandemic levels. The cost of crude for April delivery reached $60.63 a barrel on Monday - a rise of 2%, building on a surge in value since early November when costs stood at $39. The coronavirus pandemic saw oil consumption plummet in 2020. Oil demand in China collapsed by 20% in February after the country went into lock down due to the coronavirus pandemic. In March, a price war between Saudi Arabia and Russia, over how to respond to the demand drop, sent shockwaves across the oil markets and added to black gold’s struggles. They also had a feud due to Russia increasing its production of oil when Saudi Arabia were planning to reduce production to increase oil’s price. This meant that Saudi Arabia increased production too, thus reducing its prices. As a result, in April for the first time in history US futures traded below zero, as the world was so awash in crude and the WTI collapsed to minus $40.32 per barrel at the time, meaning that producers paid buyers to take the oil. In the case of Brent crude there was a huge glut in supply versus demand and it fell below $20 last April to a 21-year low, when it became clear the virus had spread to Europe

What factors have caused the rise in price for oil?

Prices have been boosted thanks to rising demand across the world, particularly China, the world’s second-largest oil user. Brent crude futures (BZ=F) have soared around 60% since November, while West Texas Intermediate (WTI), the US benchmark, jumped above $55 a barrel last week for the first time in a year. Brent is currently 0.81% higher at $60.04 while WTI futures (CL=F) have risen 1.2% at $57.55 per barrel. “The biggest driver for the latest surge in prices seen through last week was a sharp upturn in expectations for economic and oil demand recovery on signs that the coronavirus may finally be in retreat,” Vandana Hari, founder of Singapore-based oil markets data firm Vanda Insights told the BBC. Experts said a weaker dollar was providing a boost to commodities priced in the US currency amid growing expectations of a new economic stimulus programme from President Joe Biden that, it is hoped, will boost demand.

That’s it for today! Thanks for listening to our podcast! We have been your hosts, Nikhil Chidipothu and Luxan Sureshan. Be sure to subscribe to our Youtube Channel or follow our Spotify – EngageIn Econ. Stay tuned for the next podcast!