Monday, December 28, 2015

Macroeconomic conditions and outlook

I wrote a pair of columns in the Business Standard.

In A balance sheet recession? (14th December), I argue that we are in an unprecedented moment in India's history, where nominal GDP growth has slipped below the interest rate. This gives adverse debt dynamics. To achieve debt stability, a substantial fiscal correction is required in order to get to the required primary deficit. Firms also have adverse debt dynamics, with top line growth of 2.5% and interest rates of 13% and up. We have a balance sheet recession on our hands.

What will happen in the recovery? (29 December) thinks about how business cycle declines play out in India, where macro and finance policy are impaired and do little for stabilisation. Firms bear the brunt of the adjustment. Some firms exit, some firms get better. Capital and labour slowly move into the better firms. This sets the stage for the next expansion. This is roughly what happened from 1997 to 2002, and set the stage for the great expansion of 2002-2008, and may give us an insight into what comes next.

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