Caution on RBI's caution

The RBI has issued a word of caution against the ongoing bull run in equity market and termed it a "Bubble". This hasty and baseless statement of RBI has the power to send a shiver down the spine of investors. 

Without getting into under what capacity let's just focus on the groundless "Caution".

RBI, while stating "This order of asset price inflation in the context of the estimated 8% contraction of GDP in 2020-21 poses the risk of a bubble", assumed that an economic contraction would significantly affect the corporate balance sheets of the few listed companies out of the millions present in India without giving a thought to the fact that most of these companies because of limited reserves, might be forced to scale down or, in the worst case scenario, shut operations. This phenomenon of elimination of weak hands, if I put it crudely, would result in passing of their businesses to the huge corporates, who have enough reserves to see them through the pandemic, most of them having a presence on the exchange.

To support this aforementioned argument let's look at the P/E ratio, a ratio which simply shows how overvalued the price of a particular stock is vis-a-vis its earning, of Nifty. 

The P/E of Nifty index before pandemic was in the range of 24-25, meaning for every one rupee earned investors were willing to pay 24-25 rs for the Index. The P/E ratio started escalating from 30 in August 2020 and went as high as 40 in March 2021. Here comes the best part, the P/E fell to 32.73 in April 2021 and 29.27 in May 2021(same as in June 2019, before pandemic) despite the market continuing its bull run, this put simply means that the corporate balance sheets did really well. The prices of shares of companies were more costlier, in May 2021, than they were in June 2019 but at the same time their earnings are in tandem compared to their earnings in June of 2019, as this is evident by the same P/E ratio.

Many companies posted their best ever quarterly results, supply side constraints favoured these companies. 

RBI's job is not to disrupt the market forces of demand and supply, which it might end up doing by issuing such uninformed statements, these forces should be left uninterrupted to dictate the course of the market.

90:10 Ratio

Surprisingly this article, 90:10 ratio, is not another on persistent and ever increasing income inequality in India but rather on a possible solution to a problem gripping everyone equally, the Covid-19 pandemic. 

It has been more than three months and yet the "pharmacy of the world" is struggling with its own campaign of vaccinating citizens. There are many problems right from the  production to the distribution and even pricing, but the biggest of them all is the shortfall in production. India needs 7 million doses of vaccines daily, as against an extrapolated production capacity of 4-4.5 million doses daily, to vaccinate all above 18 twice by January 2022. 

The manufacturer of these vaccines could be nearing their production threshold or might have reached it. In both case, it's a worrisome situation. The solution to this might lie in the 90:10 ratio arrangement.

Given the shortfall in production voices are rising in the favour of compulsory licensing. Even a country like USA, which has been very adamant on protection of IPR, is considering the move. Compulsory licensing would surely allow generic companies to help ramp up the shortfall, but would also definitely affect investors confidence thereby affecting flow of FDI into India, that too at a time when we are trying to attract investors fed-up with Chinese IPR regime into India. 

In the midst of all this, In my opinion, this 90:10 arrangement could act as a middle path or a win-win for all. 

This arrangement is a simple profit sharing arrangement between the current vaccine manufacturer and the other pharma companies who would be granted permissions to produce vaccines.

To compensate for the R&D expenses and to remunerate for IPR the generic vaccine manufacturer would share 90% of their profits with the existing manufacturers(SII and Bharat Biotech). Concerns of existing manufacturers regarding fair profit sharing via fair reporting of production could be taken care of by the CoWin app. Another of their concern regarding loosing market share from competitive prices could be addressed by capping production of these generic companies.

Now the question arises 'why would generic companies agree to a 10% profit and that too with capped production limits?'. Well, the answer to this lies in the probability of government agreeing to compulsory licensing which, as of now, seems 90:10 in favour of existing manufacturers. Even a 10% profit on profit, given the demand would culminate into higher revenues. 

At the same time existing manufacturers should agree to this 10% potential income loss and look at it as insurance against loosing almost everything if compulsory licensing was initiated.