The Indian economy has now been in tailspin for a long time, stagnation looms over almost all sectors, and most of it is fuelled by lack of spending on the part of consumers. This has led to non-emergence of proper investment opportunities despite the prevalence of low interest rates.
This bad performance on part of the overall economy has led to firms failing to pay back their interest loans, and the loans become what we know as non-performing assets (NPA). Once the balance-sheet of the banks are burdened by the prevalence of these bad loans, it hinders their ability to give out more credit to sectors in dire need, and this further results in their decline.
This happened when the retail sector of India took a hit when it was not able to get loans and production had to be halted at a number of places. The other story is the growing lending to the government on part of the public and private sector banks that on one hand, crowds investments and on the other, takes credit that could have been utilised differently.
The government in recent times is running a huge deficit, and in order to finance those deficits, the government borrows from banks and the public, raising pressure on banks.
Need for fiscal stimulus
There is a lot of uncertainty that is built into the system. At present, the Indian economy needs a strong stimulus such as large packages of government spending in infrastructure and government projects.
Once additional money is pumped into the economic system, it flows through its pipes into the hands of consumers, who spend, and through their spending, demand is generated. Capitalising on this, entrepreneurs will undertake investments that will lead to creation of employment, which will further create new consumers and increased consumption. The cycle, therefore, continues and multiplies.
The government should act in the same way, by spending and stimulating the economy and maximising the interest of the society. If done the right way, the return from profit-making capital investments of government can be used in the future to pay off debts.
Furthermore, with government investments, employment will increase and more income earners will mean that the tax base will automatically increase. This would inevitably increase tax receipts, again contributing to lowering of deficits. Thus, increasing government spending can have a positive effect of lowering fiscal deficits in the future.
Fiscal consolidation is truly necessary for economic development in the long run, but as J.M Keynes said, “In the long run we are all dead.”
Optimism drives the way
Economics has rightly been called the dismal science in the past, starting from Malthus prediction about the population trap that did not come into being.
I believe we should be spreading optimism about the wealth and prospects of the economy, as participants in economies are not like the abstract objects of physics that are not affect by theorisation.
But in economics, the agents are human beings who are more connected than ever. In this day and age, investors are continuously looking at the mood and presence of market forces, therefore optimism by the press and social media can help nudge investors make investments and stimulate the economy.
In today’s economy, people invest in markets based on everyone else’s opinions. If people expect a company to prosper, everyone will bet on it. Similarly, an atmosphere of prevailing economic uncertainty dampens hopes of investors even if they stand a chance to accrue profit.
This can even lead to people hoarding money, rather than spending it, if they expect to lose their jobs in the near future, contributing to less investments and rising unemployment.
Vibhu Vikramaditya is a student of MIT World Peace University, Pune