Thursday, October 10, 2013

The cleansing of downturns

There is universal gloom in India today about economic conditions. This perspective is flawed in two ways.

First, every market economy experiences business cycle fluctuations. Trend growth is roughly 7%. When we get 10% growth in an expansion, we should not conclude that trend growth has gone up to 10%, and when we get 4% growth in a downturn, we should not conclude that trend growth has gone down to 4%.

Second, downturns are an essential part of capitalism. I have an article in the Economic Times today titled The cleansing of downturns. I feel these effects are more important in India when compared with mature market economies, where ethical standards are superior and where the policy process is less vulnerable. If the economy was permanently kept in good times through artificial means, we would damage the foundations and reduce trend growth. 

2 comments:

  1. Sir,

    I dont think I have anything to argue with the broad points you have very clearly elaborated. But I have some basic questions regarding how it will work out.

    - From 2005 we did see a huge capex boom.So we had these huge oil refineries, steel plants, aluminium smelters etc coming up. But most of these can possibly called a function of global commodity boom. That commodity boom didnt cause as much pain on the inflation side maybe because rupee was appreciating and govt finances had broadly been improving since start of century.

    - Even boom in power projects came up as power prices spiked. Govt took up road and other infra projects which did well in initial years but problems became bigger as time passed and govt finances went haywire.

    But practically all those big projects sectors have issues either because corporates are over leveraged or projects are delayed or new projects are not economically viable at todays input costs whether its land, labour etc.

    So my short question is can we get the momentum back without going through another bout of high core inflation, which is very low right now?

    I had written a very short, non technical, layman kind of piece on this.

    http://www.moneylife.in/article/we-can-have-growth-or-low-inflation-not-both/34776.html

    Would be great if you could give your sense on how this is likely to play out over next few years.

    Thanks
    Rahul

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  2. It's easy to marvel at the cleansing effect of downturns from a distance or an ivory tower. It's really harsh for those who have to suffer the consequences. Downturns can be blamed on the whole economy but a lot of times the bigger blame goes to those at the top who have to come up with the right public policies or corporate strategies. The ones who suffer the most are usually at the bottom of the food chain. This is the reason why our policy makers and managers repeat the same mistakes. There is no real accountability for these people.

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