Part II: COVID-19, fictitious capital and financial crisis

Part II: COVID-19, fictitious capital and financial crisis

Economy, India
Reading Time: 8 minutes

A severe economic crisis has gripped the world since early March 2020 and India has not escaped this onslaught. The stock market has no potential to be stable, one day the share prices rise but the next day it is clear from the fall of the stocks that the government or the central banks are in a dilemma to stabilise the stock market. According to Raghuram Rajan, India will face a huge fiscal deficit this year as a result of the current crisis. Although the real economy has no direct relationship with the stock market, the stock market collapses as the real economy collapses.

In an interview with the BBC, renowned economist Arun Kumar also spoke of the huge economic losses as a result of the lockdown, which will result in the loss of many jobs as well as the sighing of the unemployed. Also, according to the IMF’s announcement on April 15th, India’s potential growth rate of national production has been reduced from 5.9% to 1. 9% has been paid. As a result, it is clear that the whole of India will face a severe economic crisis due to the lockdown and it will take a long time for the government to get out of this crisis.

According to a report by Livemint on April 17th 2020, investors in the stock market have made a whopping Rs 2.53 trillion. The 3.22% increase in one day during this crisis has brought to capitalism a mild climate like the first rains of the monsoon after the scorching heat of summer. This rise in the stock market, according to several economists, is absolutely temporary and there is no need to have a very positive attitude towards this sudden jump. But what is the cause of this sudden insanity in the stock market and will it result in rice in the mouths of the poor common people? Let’s find out the answer.

Despite the furore in the stock market in the early 2020s, the market started collapsing after February 17th 2020. The crisis in the stock market has been intensifying since last year and the Coronavirus (COVID-19) has set fire to the accumulated gunpowder of that crisis. Following are the declines of various sectors in the stock market as per year-to-date (YTD,  the period starting from the beginning of the current year and continuing up to the present day) data on 5th May 2020:

Sector IndicesDrop in share price
BSE Auto33.13%
BSE PSU35.07%
BSE oil & gas21.17%
BSE industrials32.05%
BSE realty42.55%
Source [Last accessed on May 5th 2020]

Also in the case of NIFTY the fall in share price was significant.

Sector IndicesDrop in Share Price
NIFTY Bank40.08%
NIFTY Finance34.86%
NIFTY MNC14.10%
NIFTY Commodity26.11%
NIFTY Media39.16%
Source [Last accessed on May 5th 2020]

From mid-February 2020, bank share prices began to fall around the world. Multiple large and institutional shareholders began selling their shares. In India, too, there was no exception, and by the end of March 2020, the share price was falling. The drop in share price on 30th April 2020 according to The Economic Times is given below:

Bank nameDrop in share price (%)
Indian Bank4.86
Bank of Baroda3.86
Canara Bank3.72
Indian Overseas Bank3.42
State Bank of India3.34
Union Bank of India2.24
Central Bank of India2.02
Punjab National Bank1.79
UCO Bank1.1

But this chart can be the reason of argument and definitely strong evidence of the worthlessness of public sector banks. But private banks are also running in the same track. A report published in Money Control, published on 5th May clearly shows that private banks could not escape from this crisis and suffered a huge loss over a day.

Bank nameDrop in share price (%)
Axis Bank3.38%
ICICI Bank2.19%
JK Bank4.10%
Federal Bank2.38%
HDFC Bank1.24%

There are only a handful of companies that control the stock markets around the world. They sell shares after the stock prices reach a certain level and pocket huge profits (read my previous article to know more about this).

After February 18th, they started selling a large number of shares due to the risk they faced. The mainstream press refrained from serving or disseminating this information and they did not emphasise on such issues. The crisis of these banks was already clear a few days ago. Because the amount of unpaid corporate debt has been increasing in the last few years, the amount of unpaid debt increased by 2000% between 2005 and 2019. Although several newspapers have written about unpaid debts before the COVID-19  outbreak, after the pandemic they have turned a blind eye to the discussion. However, many capitalists think that by telling the story of their huge losses due to COVID-19, they will be able to get huge tax exemptions, retrench workers without any hindrance, take loans at low-interest rates and deprive the workers of their due wages.

Re-purchase of shares, and increase of fictitious capital

Banks and other large institutions are repurchasing their shares from the market to make their shareholders richer and to stabilise the stock markets during crisis. The stock market frenzy continued in January 2020, although various sectors faced a real crisis. Lending to multiple corporations at low interest rates resulted in huge demand for shares, as a result, the share prices skyrocketed. But as the gap between real prices and capital on paper grew, the stock markets plunged in February 2020, and the crisis was palpable until mid-March.

As a result, the Reserve Bank of India (RBI) took several decisions to stabilise the stock markets. One of its most important is to make the repurchase of shares tax-free. As a result, banks and large corporations are repurchasing their own shares one after another. In the first half of 2019, 60 companies completed repurchases of shares worth Rs 354.60 billion or $5.2 billion, although the shares have been repurchased since the March 5th 2019 budget presentation. However, since the budget was tabled on March 5th 2019, the repurchase of shares has been hampered because the Government of India put a whopping 22.5% tax on share buyback. But from whom are they buying their shares? Of course from their big shareholders.

For example, let’s say a big shareholder has a block of Rs 60 per share in his own bank. If the share price rises by Rs.100 and the shareholder sells his shares to his bank or institution, then his profit per share is 40%. When corporations announce the repurchase of shares, shareholders are encouraged because they can expect more value in the form of “bonuses” than the final price of the shares. As a result they are encouraged to hold their shares and accept offers to repurchase. This way the share price is higher.

When a company repurchases its shares, it resells them. It has one more advantage. As a result, the share price/earnings ratio increases (the price-earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company’s share price to the company’s earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued) and it increases the demand for shares in the market resulting in further increase in the value of the company.

As a result, the demand for shares is maintained and the share price goes up. As a result, the amount of fictitious capital increases and the bubble of imaginary wealth begins to bloom. If the difference between real capital and fictitious capital becomes so great that it is no longer possible to sell shares or securities in the market, then the big shareholders start selling their shares so that they initially make huge profits and the huge sale causes the stock market to collapse. In this way, the Mumbai stock market in India lost about 25. 5% of the assets, ie, Rs 54 trillion vanished into the complex web of the economy in between February 16th and March 16th 2020. Which is about 40% of India’s GDP in equivalent terms! As a result, to protect the capitalists from losses, the RBI has announced low-interest lending so that the demand for shares is maintained again and as a result of this demand, share prices start rising again and capital bubbles begin to inflate.

RBI and the government’s love for capitalists

As one country after another enters the economic crisis, banks have come up with one way after another to appease the capitalists in various ways. For example, in 2006-07, they  bought $1.3 trillion worth of toxic asset structures from American banks. The same thing is happening all over the world now. The US Federal Reserve has already cut interest rates and announced a 0% interest rate on repurchase of shares. In the case of India, the repo rate has already been slashed by 75 basis points from 5.15% to 4.4% in one fell swoop to reduce the huge losses in the stock market.

On the one hand, the RBI promised to purchase corporate bonds worth Rs 100 billion  and, on the other hand, it promised to infuse Rs 17 trillion-worth liquidity. This will increase the amount of low interest borrowing as well as the tendency to repurchase the share with the borrowed money. As there is no duty on repurchase of shares around the world, in the case of India, there was no duty on repurchase of shares in India till 2019. As a result, multiple companies and banks have made their large shareholders and managers richer by repurchasing shares.

In the financial year (FY) 2016-17, Tata Consultancy Services alone repurchased shares worth Rs 160 billion. In addition, a total of Rs 1.8 billion worth of shares have been repurchased from the Bombay Stock Exchange in FY 2017-18 and shares worth a total of Rs 4.8 billion have been repurchased in FY 2018-19. The Budget 2019 put a 22.5% tax on the repurchase of shares. It was clear that even if 22.5% tax was imposed, it would not last long. The RBI has decided on March 16th to reduce the interest rate on the repurchase of shares to 0% due to the bursting of fictitious assets due to the COVID-19 outbreak. So that the companies can repurchase their shares and keep the share price high. As a result, on the one hand, just as a small number of people will be rich, on the other hand, there will be a huge increase in the capital on paper.

Since repurchase of shares has been made tax-free due to COVID-19, there has been a craze to repurchase shares. According to the SEBI, from March to April 30th, Thomas Cook India Limited, Granules India Limited, Asthaar DM Health Care Limited, Supreme Petrochem Limited, Aditya Vision Limited, Tipu Industries Limited, Ekartech Limited and Coal India have expressed a desire to buy their own shares. Also, on April 23rd and 24th, India’s stock market rebounded slightly as Reliance bought a large number of its own shares spending billions.

Attempts to redevelop fictitious capital bubbles and capitalise on the possibility of a subsequent economic crisis

As a result of repurchase of shares, fictitious capital bubbles have started to inflate again. As a result, even if the share price rises again in a few days, it can be seen falling again in the next few days. It’s clear from the whooping profit of Rs 2.53 trillion that capitalists, with support of RBI, have already started gambling to increase their profit but this bubble will not develop for long as lenders, including banks, reduce their interest rates to maintain the insanity of buying shares in the stock market but due to plunge in demand in real economy will cause huge difference in between real capital and fictitious capital.  So it will certainly disappear in the complex circuit of the economy. Although the RBI already promised to buy corporate bond worth Rs 100 billion, but the major part of that will disappear in upcoming crisis which will lead to bankruptcy.

Conclusion

Repeated attempts are being made to prove that the economy is recovering by showing the growth of the stock market. This insanity will be temporary and will benefit only a handful of people of the society. But if the banks go bankrupt due to the economic crisis, common people will suffer.

As a result of prolonged lockdowns due to COVID-19, the market demand is now almost zero, and there is no prospect of an increase in demand after the lockdown. As a result, the economic crisis will come down to us very soon. Therefore, there should be a demand to immediately close the stock markets to stop capitalising by speculating with low-interest loans in the interest of capitalists. Also, the assets that the big capitalists have created in various fields through shares have to be acquired immediately without compensation. Besides, there is no way to stop the rise of fictitious capital and the economic crisis that reappears in regular interval.

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An avid reader and a leftist. Believes in socialism and a merciless critique of capitalism. Writes columns on politics, economy and society.

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