On the 12th of November 2020, the Reserve Bank of India released a note saying that India has entered into a phase of what they call a technical recession. For anyone who understands the general interpretation of the word ‘technically’, it should be no surprise that this recession is more likely to be one of semantics than of economics. A recession if taken in the absolute meaning of the word, it’s anything that begins to move in an undesirable direction. Ever since the theory drawn out by Adam Smith on wealth, that it can grow infinitely, reduction in the nation’s wealth is seen as a time of economic recession. Adam Smith’s theory was available to public since 1776. Since then, there have been economic booms & recessions.
Just after the civil war ended in the year 1865, the USA moved into a phase called the “Reconstruction Era”. The nation was torn apart from 1861 and the very union of the states was drawn into question. Through the years of reconstruction, businesses were created across the nation. Railroads were being laid across the nation. These railroads were financed by what can be called literal public debt. All the railroad companies issued bonds, with many being long-term bonds. Everything appeared to be going well. Money was raised, roads were laid, and the results were tangible. Public confidence in these railroad bonds was very high; everyone could see that their money was yielding results. Yet, somehow, in the year 1893, the railroad companies had begun to default on their interest payments. The USA entered into a devastating recession, which was then outsized by what happened in 1929, & then later in 2008.
India after gaining independence from the British rule, tended to move towards the Eastern Bloc. Although, by 1947, India had an established history of entrepreneurs contributing to the economy. The move towards the soviets got cemented during the years of Indira Gandhi, with the move to make several businesses state-owned and state-run. We now call them PSUs, or Public Sector Units for short. Several of these PSUs established during the years of Indira Gandhi had machinery supplied by the erstwhile USSR. Through these years, much like what happens in any era where a government takes over business activities, it appeared as if it was a good decision. These initial years were the proposition to suggest that socialist policies with government fiat were better than the free market volatility.
India was economically backward, or, stuck in an undesirable position, and hadn’t moved ahead since 1947. It wasn’t that Indians were incapable. It was that the human capabilities weren’t unleashed. When humans are allowed to make free decisions, they become directly responsible for the consequences. Sometimes these consequences are desirable, sometimes they are not. A situation where this happens is why free market economies have cycles. A cyclical tendency of a market economy isn’t a bug. It’s the central feature. Following the recession of 1893, a few analytical minds saw that one needed to analyse businesses before investing in them. One such mind was Benjamin Graham, who used his theories to remain solvent through the Great Depression years from 1930 until the second world war ended. In the years of the rock solid central planned Soviet governments, quite a lot of mathematical minds were borne of the policies. The USSR often employed mathematicians to solve the problem of setting the prices & determining the supply across the society.
A volatile system incentivises someone to understand probabilistic systems of volatility & risk; a planned economy incentivises the creation of deterministic systems needing authority. It does seem safe to say that the USSR didn’t have a recession because there was nothing to recede from. The implication could be that if things were done right, the system would have worked. Some amount of planning has to be done when a government is elected by the people. One of the biggest moves of government being given the responsibility was to create money through a central banking institution in the nation. For India, this central bank is the RBI. The RBI is charged with the responsibility of monitoring the monetary system of India. The legislature, which is the Parliament, takes care of adjusting the taxes while the RBI handles the interest rates. Inject money into the system through a central bank, charge an interest rate for borrowing. The money injected would be used by the borrowers to consume goods produced in the economy, and taxes could be levied on these transactions. A perfect Keynesian dream, one could say.
Since banks that had accounts of laymen and deposits by the same people were curtailed by liquidity ratios to be maintained, it seemed apt to push for the creation of a lending agent which was funded by the market itself. Money that would be considered an investment by the public, either in a mutual fund or a fixed rate deposit, instead of being given just to consumers, would now be reinvested. The investee was the Indian economy itself. These corporations are the NBFCs. One couldn’t hold an account in these corporations, but could surely get easier lending as that was the sole purpose. Under the RBI regulations, one such kind of NBFC was an Investment Company (IC). These companies would lend to other companies for their capital requirements. One of these ICs was the Infrastructure Leasing & Financial Services corporation, more commonly known as ILFS. Funnily enough, the ILFS fell apart in 2019 much like the railroads of 1893 in USA. The fall of ILFS had caused a massive recession, yet for some reason, the RBI calls what is happening in 2020 to be a technical recession.
The RBI did have good intentions of wanting to provide capital to grow the economy. But the Keynesian dream is just what it is; a dream. The slowdown of the economy in 2020 is far more due to reduction in the points where someone is a part of the market. It isn’t enough to give people access to capital. If the injected capital isn’t spent anywhere, it is the same as leading a sedentary lifestyle without worrying about how much one is eating. To call this slowdown a technical recession is irresponsible. We live in an economy dominated by services more than products. With the restriction of services being provided without any relaxation on credit to service providers, it should be no surprise that businesses are closing shop & consumption of services has reduced. To suggest that what is happening in 2020 is worse than what happened in 2019 is a serious case of amnesia or, even worse, denial.
India has remained a self-sufficient & resilient economy since 1991 and there is no reason for the RBI to come out with statements ridden with blatant double standards. The fall in GDP is an indication of how far India has become a service driven economy & not a product driven economy. The fall was bad, no doubt. But what it meant was just good news. A service economy begins to use resources lower than product driven economies. We must see this slump of 2020 for what it is and not descend into a state of panic.