Monday, May 11, 2009

RECESSION DEMYSTIFIED


The whole world is engulfed in a cacophony of recession. Every capitalist country is worried about it and every communist country too is. Emergency measures are being hurriedly explored. Newer packages are being doled out by the hour. Tax structures are being refurbished. India too is taking precautionary measures.

Many people have tried to comprehend this quagmire from an economist’s perspective. Well known sociologists and economists are unanimous in their pronouncement that in précis, recession means greatly diminished purchasing power of the individual.

Strangely, they are unable to convincingly define” the common man”, “recession’s effect on him” and “his purchasing power”. Even men of wisdom refrain from speaking about effects on the common man and digress the discussion towards sensex, export-import deficit, demand-supply anomaly, up-down inflation, growth rate etc.,

The real worldwide effect seen post recession is that petroleum products’ prices crashed to a fourth within a few months. The moot question is –did the purchasing power of common man across the world suddenly deteriorate proportionally? If production did not increase, demand did not decrease, then how did we arrive at this huge fluctuation? Some banks in the US went kaput, others went into red, but how did it affect the petroleum products primarily?

In the Indian context, the second immediate visible effect was that the sensex came down sharply. Five years ago, on the eve of the present government assuming office, the sensex was at around 6300 which came crashing down to 5000 three days later. In just 4 ½ years, the sensex zoomed up to 21000 and in the last six months crashed to 11000. Where is the recession here? In 4 ½ years if the sensex zigzagged its way from 5000 to 11000, is it recession or progression? Assuming that our nation’s growth rate is 9%, the corresponding sensex at 11000 is still too high a growth tangent. Why all this worry and fuss? Who benefitted when it went up from 5000 to 21000 and who lost when it crashed from 21000 to 11000? The fact is that whereas in 1998, there were more than 22 million retail investors in the Indian stock market, the number today stands at less than 19 million. Either way, the rest of 100 million odd populace of India remains unaffected by sensex.

Another issue the economists are worried about is the growth rate. It is incomprehensible as to who is affected by it. The growth rate of the poor in India stands at 1% whereas that of the affluent is at 17% and the mean is taken to be 9%. In the altered scenario, it may perhaps be a mean rate of 7% between a high of 13% and a low of 1%. The point is –the rate of growth of poor will still hover around the 1% mark.

The biggest cacophony is heard in the real estate and housing sectors. Rates are falling in both the markets. Ideally, this seems to be the solution rather than a problem. If housing prices are falling, how can it be termed as a crisis to the society? Interest rates for potential home buyers are being slashed. Why give relief to them when prices are falling anyways. Why give such a double advantage? It is beyond anybody’s logic as to how recession is adversely affecting the 80 million people who aren’t part of this weird economic ballet.

Unemployment too is a fancy referral. One does not see any variation of employment/unemployment in the 80 million poor working class in the unorganized sector. The rest 20 million above poverty lines’ employment scene may oscillate, but that cannot be termed as a national crisis. In the last five years, employment has risen frenziedly only in the urban, affluent, intellectual sector and not in the working, poor village class.

The real meaning of recession is a decrease in the economic will power of the individual and certainly not a decrease in demand. If people speculate that exorbitant rates of goods will come down to an affordable level, they postpone purchase. Purchasing power is not something that crashes worldwide overnight. The real issue is -what should be the governmental role in such circumstances? If this is a market game and the governments were not players when it was boom time, it is imprudent to intervene at bust time. If the theory of free market is practiced, why arrest fall now when no ceiling was put to its unbridled growth.

If diesel and petrol prices fall, if bikes become cheaper, if housing starts becoming affordable, if intellectual labor costs plummet, then it seems an ideal solution for all the ills plaguing the poor workaholic villager. How can it be justified as a problem?

The truth is that recession may be a problem for affluent nations, but for countries like India, it seems like a boon. In spite of this, if the government intervenes in this issue, it will only unmask its stated position of being pro-poor.

There are two types of governance in the world today. 1) State controlled. 2) State protected. The first is seen in communist nations and dictatorships and the second is seen in democracies and capitalist countries. The first one has withered. The second type has demonstrated its limitations ahead of its full bloom.

The moot point is, we as people have to evolve a newer system of economic governance which is immune to such wild oscillations. There can be three options. 1) An uncontrolled economic mechanism. 2) An independent economic institution on the lines of legislature, executive and the judiciary, 3) De-centralized unitary economies which are autonomous to a certain degree.

Which is the best may be an issue of debate and will need our further collective deliberations…








Karpuri Thakur

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