Conventional economists have long argued that monetary and
the real economies interact in a limited way through the determination of
nominal quantities such as prices, wages, exchange rates and so forth.
Therefore although a change in the quantity of money may create short term
disruptions, the real economy would eventually settle at the same long term
equilibrium as before. Implying that at 'normal' levels of money, a change in
the money supply will not alter the long term economic equilibrium.
In short, additional money made available to people, without
any additional productive capacities made available, makes no difference to
real economy. It just increases the price of existing goods in the same
proportion as the additional money available.
The problem however occurs when the supply of additional
money becomes a constant and that too in an abnormal proportion. This not only
disrupts the short term equilibrium but alters the structure of long-term
equilibrium too. This is precisely what is happening in the case of economies
that have followed excessively loose monetary policies for an extended period
of time. In fact, this has impacted the emerging economies which fell prey to
this slush of excess money and let their medium to long term equilibrium
altered, believing that this excess money is ‘normal’ and would remain a
constant.
India unfortunately is one such economy that has allowed the
structure of its real economy tempered, though still not irretrievably, by easy
money in past 10-15years. For example, consider the following:
The excess money or credit that got created out of thin air
has not flown equally to all. It rather has got concentrated in few hands.
However, the illusion of growth and prosperity has engulfed all. The aggregate
numbers have become gigantic; and it has led to ballooning of the aspirations
of the underprivileged to unsustainable levels.
Given that we are democracy that works on “relative
majoritism” feeding these aspirations has become a central subject of
competitive politics. The state finances are therefore in a structural long
term pressure with no exit in sight.
The rush to accumulate cheap credit has lead to excessive
debt both at government as well as corporate level in past 7years. This has
brought a lot of unmanageable demand forward in time. For example, over 50GW
power projects were initiated and fertilizer policy was made when the feed
stock supply chain to fuel the power and fertilizer plants was far from ready.
The capacity to pay unaffordable toll was not there when over 5000km of toll
roads were commissioned. Many of these power plants are lying idle and so are
numerous industrial projects conceived based on supply assumptions from these
plants. Many toll roads have become unviable or are lying uncompleted.
If we believe that this misallocated capital and unmanageable
changes in consumption patterns are short term phenomenon, the correction is
sure going to be extremely painful- prepare for it. And if we think that these
are long term changes – there is no “great India story” as essayed by numerous
analysts and strategists.
Thought for the day
“If you do not change direction, you may end up where you are heading.”
Lao Tzu
Word of the day
Layette (n):
An outfit of clothing, bedding, etc., for a newborn baby.
(Source: Dictionary.com)
Shri Nārada Uvāca
100% FDI in telecom!
How does it help the ailing economy?
First, with the extant wavering policy environment it is difficult to believe that global players will jump in straight away.
Second, even if they do, it would essentially mean another round of disruptive pricing, implying further problems for existing players.
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