The Great Recession of late 2000!! Array of pictures cascaded by the situation just flips through the mind. Everyone from the Hyde Park, London’s most expensive street to the slums of Mumbai is affected. Over 100 million are added to the world's starving population. Questions arising over the persistence of Capitalism. Slogans arising for the implementation of regulated capitalism or socialist capitalism. Government bodies competing against each other reducing the interest rates and pumping in more liquidity in to the market. For Indians this might be the first recession that has a direct impact on their daily life. Its all were dreams they were living when the corporate earning climbed its peak, when investments pumped in giving the lower class a stable source of income which brought millions out of the poverty line, when the skyline of India started to change and many talented youngsters started representing the new face of India. Many thought of being doomed in uncertainty accepting the speculative predictions of the economists.
Question here is 'Is this recession a part of the economic activity?' May be the new face of India is not yet ready to think on this question because we just started to taste the goodness of capitalism or more precisely regulated capitalism. As an answer to the question we will look into the economic activity cycle or Business cycle. In a macroeconomic scenario where we calculate the real growth in terms of the GDP and per capita income, recession can be defined as a slowdown in the GDP growth or a contraction in Business cycle. In fact Business cycle refers to the fluctuation in the economic activity.
In Keynesian economics the factors that led to recession are increased savings and less liquidity. The high interest rates tend the consumer to save more which reduces the consumer demand. This in turn has an effect on the corporate earnings leading to unemployment which further reduces the consumer demand. As the consumer demand falls, the commodity prices starts falling leading to deflation. This deflation will switch consumer from a spending mode to a wait and watch mode. The reduced demand affects the corporate earning results in the crashing of stock market and multiple bankruptcies of firms occur. This kind of scenario is tackled by either decreasing the interest rates or by pumping in liquidity into the market, or by investing in the infrastructure. With the reduced interest rate, consumer tends to spend more which requires corporate to increase the production. Corporate will switch to a debt mode taking huge loans from the bank at low interest to expand the business. This leads to high productivity and high consumer demand. The high consumer demand leads to huge defaults for banks and increased inflation. In order to contain inflation government will step in and start increasing the interest rates again. This cycle continues… This indicates that recession is part of the economic activity. So now we have reached a point where we should think how we can minimize the impact.
But was this the reason for the economic slow down that India is facing. No. You might have noticed the nosedive of our stock market from 21000 in Dec 2007 to 8200 in Oct 2008. As the recession started tightening its grip on the western economies, the foreign institutional investors who have pumped in a major chunk of money into our market started pulling out. 2008 alone has seen FIIs pulling out 58000 crore from our market. In layman's terms it’s pulling out of the 58000 crore from his home. Second reason was the effect on export sector due to the reduced consumption in the western market. Some of the sectors that are badly affected are IT, Textile, Diamond, Iron ore and the list goes on. But most of the non export sectors are still healthy either due to the government policies or due to the inefficiency to have a global organization. One such sector is our banking sector where in RBI has highly efficient regulations for lending.
The obvious answers we got because of this recession are, we are now playing a much important role in the global economic scenario, our economy is inclusive (Less dependent on export compared to other economies like China and other East Asian Economies), our banking sector is strong, and we will be among the first to recover.
Question here is 'Is this recession a part of the economic activity?' May be the new face of India is not yet ready to think on this question because we just started to taste the goodness of capitalism or more precisely regulated capitalism. As an answer to the question we will look into the economic activity cycle or Business cycle. In a macroeconomic scenario where we calculate the real growth in terms of the GDP and per capita income, recession can be defined as a slowdown in the GDP growth or a contraction in Business cycle. In fact Business cycle refers to the fluctuation in the economic activity.
In Keynesian economics the factors that led to recession are increased savings and less liquidity. The high interest rates tend the consumer to save more which reduces the consumer demand. This in turn has an effect on the corporate earnings leading to unemployment which further reduces the consumer demand. As the consumer demand falls, the commodity prices starts falling leading to deflation. This deflation will switch consumer from a spending mode to a wait and watch mode. The reduced demand affects the corporate earning results in the crashing of stock market and multiple bankruptcies of firms occur. This kind of scenario is tackled by either decreasing the interest rates or by pumping in liquidity into the market, or by investing in the infrastructure. With the reduced interest rate, consumer tends to spend more which requires corporate to increase the production. Corporate will switch to a debt mode taking huge loans from the bank at low interest to expand the business. This leads to high productivity and high consumer demand. The high consumer demand leads to huge defaults for banks and increased inflation. In order to contain inflation government will step in and start increasing the interest rates again. This cycle continues… This indicates that recession is part of the economic activity. So now we have reached a point where we should think how we can minimize the impact.
But was this the reason for the economic slow down that India is facing. No. You might have noticed the nosedive of our stock market from 21000 in Dec 2007 to 8200 in Oct 2008. As the recession started tightening its grip on the western economies, the foreign institutional investors who have pumped in a major chunk of money into our market started pulling out. 2008 alone has seen FIIs pulling out 58000 crore from our market. In layman's terms it’s pulling out of the 58000 crore from his home. Second reason was the effect on export sector due to the reduced consumption in the western market. Some of the sectors that are badly affected are IT, Textile, Diamond, Iron ore and the list goes on. But most of the non export sectors are still healthy either due to the government policies or due to the inefficiency to have a global organization. One such sector is our banking sector where in RBI has highly efficient regulations for lending.
The obvious answers we got because of this recession are, we are now playing a much important role in the global economic scenario, our economy is inclusive (Less dependent on export compared to other economies like China and other East Asian Economies), our banking sector is strong, and we will be among the first to recover.
2 comments:
Da,
good one! excellent writeup!
Keep it up!
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