It is universally known that trade cycle acts in every economic system but more frequently it occurs in the capitalistic system. Theoretically, the cycle seems to be simple-Recession-Recovery-Boom-Recession- but it has its devastating impact on human society, even if occurs for short periods. Some of the leading economies, therefore, had adopted socialistic pattern of economic system thereby, maintaining safeguards against the ruthless laws of open market. Stricter regulations and governments’ intervention in all the spheres of economy kept heavy restraints on entrepreneurs’ activities. Consequently, the growth rates remained low and thus peoples’ behaviour remained controlled. Most of this category of economies strategically promoted domestic savings, lesser consumption, lower imports and higher exports.
Things were going fine ensuring a balance between Lassiaz faire and socialistic economics until our political economists were mesmerized with the glitters of capitalistic economic and had not accepted the higher rate of growth to be the sole mantra of generating higher income and employment and thus, panacea from poverty. Indian economy was typically a slow economy until it accepted to become a major role player in the world economy by adopting the open market system. The mantra of “think global, act local” changed the whole scenario and since 1989, the country surrendered it to the market forces or in other words, to the fundamentals of capitalist system. The Indians witnessed higher growth in income, technological and IT revolution, rapid urbanization, upgraded lifestyles and greater power of spending on mundane articles. In the pursuit of materialistic happiness, the Indians blindly followed the American and European lifestyle which continuously provoke overspending and encourage artificial disposable income (through personal loans and bearing multiple credit cards) all that for running their show.
Not, that the Americans are facing recession for the first time, but this time it is more conspicuous due to expansion of world wide web and other media provisions. Since 1850, the American economy has staggered 32 times but every time it did not last for more than ten months. Only once, the period of recession continued for 16 months from November 1973 to March 1975. In the year 1980, it lost its balance for six months (from January to July) and again from July 1982 to November 1982. The recurrence continued on every sixth year and the present recessionary state had marked its fourth presence since then. The cash rich economy has turned into bankrupt one. The domestic savings has reached (-) 1% in the first week of February 2009 and the unemployment has touched a record high to 10.9%. The number of poors has swelled up to 3.8 crores and those without health insurance cover has reached to 4.26 crores. Retrenchment, lay-offs are rampant and on an average 5000 Americans are losing their jobs per day since July 2008. Behind all these mishaps and mismanagement, artificial income (borrowed income) and extravaganza stand to be the basic reasons. Large number of banks failed in series (also in Europe) because the basic norms of capital adequacy ratio, much hyped by the western economies, was thrown to the air by the propagators themselves. Now the situation is that, the American government is forced to accumulate cash by auctioning airports, lakes, bridges, streets, parks etc to bridge the yawning gap of demand for liquidity.
India’s position is not that bad as yet, but the impact of sinking ship is being felt in this economy too. Most of the developed countries had outsourced their economic activities to India because of availability of best of brains and cheap labour force over here. But when the corporates are running high and dry due to liquidity crunch and shrinking demands, naturally, they have opted retrenchments and layoffs. As per quick estimate made by the Labour Ministry recently, at least 5 lakh employees have lost their jobs since November 2008. The worst hit industries are the automobiles, gems & jewellery, manufacturing and building construction which are known to be the star income and employment generators of the organized sector. The finance and insurance sectors are also following the same suit after debacle of Lehman Brothers, Citibank, General Motors and AIG etc. The ILO has recently estimated thaty around 5.1 crore employees will lose their jobs between July 2008 and November 2009 in the organised sector worldwide. The plight of the labourers in the unorganised sector is far worse in India, and when the labourers in the organised sector are losing jobs to that extent, the state of labourers’ bargaining power and fundamental rights for safeguarding their working conditions can easily be assessed.
Even a few weeks back, the Indian economy was suffering from higher inflationary pressure to the tune of 13% and new it is suffering from Shrinking domestic demands and stagflation at the same time. Worst hit is the real estate sector. The abnormal rise in sensex was largely attributed the real estate sector’s activities which has now proved to be a bubble burst. The sensex has come down dramatically from 21000 to 9000 in India, thereby impoverishing large number of small and big investors. Rapid fall in demand and steep rise in the prices of raw materials have paralyzed the realtor and this situation is expected to continue till June 2010. The realtors have stopped investing in mega and luxurious building projects and trying to patch up their losses by building low-cost houses in large numbers. Low cost and high turnover may bring them the temporary respite but still it is not going to take less than 10 months to take off. Slow down in real estate sector has adversely affected the people of different social strata. The labourers have lost their income and ongoing employment, traders have lost their business, industries are forced to restrict their production, engineers, architects and contractors are going idle and the purchasers are losing hopes.
Amidst the economic slowdown and financial chaos, the ray of hoe is coming from software industry. The NASSCOM has estimated that software industry will register a growth of 17% and the earnings will go up by $71.7 billion during the fiscal 2008-09. The export share of software goods and related services may register 40% growth and will provide large base for income and employment generation to the white collar workers in the next fiscal year.
The great recession of 1929-33 had resulted in “New Deal” thereby bringing stability in world economy through extensive public works undertaken by the developed countries. This time too, the public works will be the main instrument for countering the seething recession being coupled with bank’s support.
Indian banking system holds tremendous strength and capacity to reshape the economy. Unlike American banking system, its major strength are maintenance of CRR, SLR and capital adequacy ratio besides strong regulatory system. The banks may extend their support in terms of (i) low interest rate on advances (ii) longer repayment periods (iii) greater moratorium periods (iv) least possible collateral security based advances (v) extending sizeable fund to MSME (vi) differential rate of interest for rural area loans and advances and (vii) promotion of PPP models for augmenting economic activities at all levels.
The social impact of recession is dangerous. It not only snatches income and employment of common labouring class but alos reaps the seeds of widespread lethargy unrest, fear, anger, helplessness and crime. Since the recession has struck the global economy, the rate of burglary, dacoity, arsoning, misappropriation of funds through cyber crimes, murders, accidents and suicides have risen dramatically in all the effected countries. Our policy makers should clearly understand that economic stability might be brought by strategic financial adjustments and regulations within a short period of time but destabilized social and political order take much longer time to settle and became a major deterrent factor in the way of economic process and prosperity.
(Edit page article in Northern India Patrika 13 Feb 2011)
- Dr Amit M Bhattacharya, an Economist did his post graduate and doctoral degrees from Benaras Hindu University. He worked as a banker, took retirement to teach. Presently, he teaches at LP University, Phagwara, Punjab