Response to stimuli
|
Four rate cuts in four months, two stimulus packages … the important question to ask is whether things would improve after all this. No. And it has nothing to do with the government’s action or inaction. Some have complained that the package is too little. China and even, Thailand have spent more. But I believe that given the leakages that happen in our developmental schemes, it’s best to give targeted packages. As I understand it, growth is a function of demand and supply. When there is demand (for anything), either rising supply has to match it or there will be a rise in prices (inflation). But in today’s market, the question is how does one generate demand? In an uncertain environment, when there have been job and salary cuts across sectors, a very few would be willing to purchase a new residence or car. It’s simply too risky. On the contrary, there have been stories about young couples, who have sold their house and paid off the bank as they are unsure if they would be able to pay hefty EMIs in months to come. With such drastic measures being taken, it is unlikely that there will be too many big expenses lined up. Even banks have been wary about extending loans as well. Already, there have been quite a few defaults. Scared, many banks have started cutting credit limits to their customers, especially cash limits. Further, investors in the stock market have already seen their investments eroding by over 50 per cent. In other words, when salaries are not steady, credit is unavailable and a negative return on investments… where’s the money to spend? To stimulate demand, salaries and incomes will have to rise or at least, be steady. More importantly, safety of jobs will have to be ensured. And I don’t know how much of a role can the government play in ensuring these, especially in the private sector. The bottom line: Till people start making money, they will not spend. And that means no or little demand. The response to the stimulus packages will be slow… perhaps, even painfully slow |
(5 votes, average: 3.2 out of 5)
Loading ...Disclaimer
All the content posted in the 'Business Standard Blogs' section, unless specified otherwise, are made by Business Standard employees. The content posted in 'Business Standard Blogs' does not follow routine internal Business Standard reviews and editorial processes and should be considered only as the views and opinions of the employees and not of Business Standard.
January 9th, 2009 at 4:17 pm
Montek Ahluwalia’s interview in today’s BS is a must-read for everyone. He has explained in a short paragraph on global imbalances what the economic crisis is really about. It is for the intelligent to place his words in context and draw conclusions about how much good all these stimulus packages can achieve without an addressal of “root causes”, that much maligned phrase of unreconstructed liberals who still insist the world must prosper as one.
January 7th, 2009 at 6:13 pm
Hi Joydeep,
Thanks for flagging me on to your blog……it’s a bit of a catch 22 situation isn’t it? In UK, an hour ago chancellor Alistair Darling has said that the crisis in Britain is ‘far from through’ and his comments have come on the eve of another expected interest rate cut from the Bank of England tomorrow - it is widely speculated that borrowing cost will be slashed between 0.5 and 1.0 %, making it the lowest in UK history!!
So, in spite of all these rate cuts and targeted packages aimed at the financial sector, automobile sector, etc. demand is not being generated to adequate levels….why? I think it’s due to public sentiment - remember the old economic maxim - ‘ money flees from where there is fear’ That’s what has happened - there is a fear psychosis and again partly the media is to blame - because in UK every tabloid, every paper, every TV channel has only been speaking about credit crunch so much so that even my 9 year old son and his friends know the term - this has caused a public apathy to investing and spending, leading to a bearish sentiment of hoarding and waiting and watching. Yet, I tell you one thing - the day Christmas sales opened up in UK during 2nd week of December, the papers reported that a million pounds a minute was spent across the UK - in the first few hours….so where did that money come from? People in this country WILL buy for Christmas like we would for Diwali/ Durga Puja/ whatever…..so the money is there, everyone from institutions and companies to common people are in fear of recession - governments across US/ UK/ EEU/ INDIA / China all need to come together and be able to first restore confidence by showing a plan of action which they should sign up to and follow - I feel this will ensure that demand returns - at the end of the day a nations economy is for the people and run by the people - this is lesson governments will have to learn.
January 6th, 2009 at 11:16 pm
Good Article, our PC who was then FM, maybe had a an inkling of all these, that’s why he started by waiver of farm loans, and then by the generous sixth pay commission to the govt employees. the demand will surely pick up in time.
January 6th, 2009 at 9:21 pm
Well said… demand is also a creation of excess money in hand….how many couples started off with 2 BHK flats in Mumbai when, in the earlier generation, people moved to 2 BHK flats only towards retirement. Cheap money was one reason for all the bubble, and rate cuts are doing the same thing again…. so does this mean the cycle will come back to haunt us in 2015? The Seven year hitch?
January 5th, 2009 at 7:35 pm
The piece makes sense..how to generate demand? text book macroeconomics says that either the public sector(read govt) infuses demand or the private sector..presently the private sector is down and out, so that leaves the govt to do so? but given the dismal performance in implementing developmental schemes not much can be hoped for though money shall flow into the system. But there is a ray of hope and that is the potential rural consumer base ; and how do u cultivate that?? put purchasisng power in their hand and the way to do it is investment in “agriculture” the mainstay of 70% of the population of this country. Long ago Lord Keynes said”In the long run we are all dead” so not to worry about the long run, but i am sure if Keynes was witness to these times he would have no hesitation in saying - even in the short run the option seems to be running out!!!