Reviving an Economy

Abstract

Nowadays, any discussion among economists with an India connection invariably gravitates towards a familiar topic: the slow and painful unraveling of the Indian economic juggernaut. This quarter the inflation rose to 7.35%, far above the 2-6% band targeted by the central bank. Such huge rise in prices limits the future wiggle room for monetary policy. Meanwhile, credit growth remains low, new mounds of bad loans keep hobbling the system, tax revenues are stagnant, consumer spending is slowing, there are few takers for public sector firms on the block, and the fiscal deficit targets keep getting breached many months in advance. Policies that should normally give a big fillip – like the cut in corporate tax rates, or a large infrastructure spending plan announced last month – seem to have barely made a dent. It is as if the economy has decided on an autopilot course down into the ground, and no amount of cajoling and coaxing can bring it back to its senses. While there are many details that are specific to the Indian system, economists have for long tried to understand better the broader phenomenon of foreboding that grips the economic climate at such times. In fact, the most wellknown economist of the last century, John Maynard Keynes, earned his stripes by proposing what was then a radical solution to the depression that was holding back the western economies in the 1920s and 30s. Keynesianism, as his macroeconomic school of thought came to be known, is one of the many prescriptions that economists nowadays bring to the policy table when conjuring up new ways to treat a failing economy. Just like doctors, economists don’t always agree on the best course of treatment. However, almost all economists agree that at this stage, all the myriad policy prescriptions have a simple underlying agenda: reviving the flagging expectations of economic agents.