The First Bailout in India and the Depression 2008
V P Singh asked:
INTRODUCTION
Whatever the comments trying to lead the public astray be coming, the entrance of world depression 2008 can not be overlooked since it stands well entered in the Indian economy. The decision regarding closure of Tata’s Jamshedpur motors plant for three days, decision of Ashok Leyland to run only for three days a week for coming two months, decreasing interest rates, decrease in CRR, lowered REPO rate, cut in SLR, index of stock market in reverse gear, Rs 275000/= crores released by the Reserve Bank of India (RBI) to help industries and investors etc. are the events which indicate that RBI and the Government accept the entrance of depression 2008 in the Indian economy. Among all these events or the actions the Rs 275000/= crores bailout drew my attention most. The concern and worry of RBI and the Government over the depression are easily understandable to me. But, I could not understand whether RBI and the Government are worried for the economy or for the investors and industries of the economy. To my opinion both are the separate things and the economy should be given priority against industry and investors.
THE DEPRESSION 2008
A depression (economic depression) is caused either by the excess of supply or by the lack of demand. In both the conditions depression should be fought against by increasing demand instead of by decreasing supply in market because decrease in supply will always bring national income and employment down while any cut in national income and employment is never acceptable. The present world wide depression has been resulted by both the excess in supply and the deficiency in demand. The excess in supply has been generated by over production on account of heavy productive investment in developed economies and it came about in developing economies due to the dumping through ‘globalization’. The deficiency in demand came about due to deficiency in purchasing power in the hands of the dominant middle income mass which resulted by high level inequality in national income distribution in both the economies. I have explained in detail in my article ‘Story behind the World Depression 2008’ how the depression was generated in developed countries and how the developing economies have come in its grip. My said article (http://www.articlesbase.com/economics-articles/story-behind-the-world-depression-2008-626225.html) concluded that the problem of depression is the problem of increasing the (effective) demand by increasing the purchasing capacity of the dominant middle income group.
SIGNIFICANCE OF THE BAILOUT
The above said bailout seems to be similar in nature as the Wall Street bailout practiced in America. This type of measures taken in American could not make any dent on the root causes of there’s depression. The depression is still gaining more and more depth in America day by day. Then, how can we expect that the measures as taken in America would be proved fruitful in India? The monetary help to industries and investors preserves their profit whereby the production and employment level is preserved but for the time being only. The root cause of their falling profit remains untouched. Therefore, the bailouts towards helping the investors and industries only postpone for some time the cut in production and employment without helping the demand increase. I could find no way mentioned in economic literature to treat depression without increasing demand if supply side is kept unaltered. The market is suffering from deficiency in demand not because the investors are suffering from falling profits but the investors are suffering from falling profits because the market is suffering from deficiency in demand. Therefore, deficiency in demand should be treated to save both the economy and the investors. There are four conditions when a depressive trend emerges in an economy.
(1) When either the rigidity of demand prevents prices from rising to compensate the falling profits of producers in case of increasing costs.
(2) When the demand does not keep pace with increasing supply caused by extra production.
(3) When the demand decreases on account of emergence of some factor affecting the total consumption of general mass negatively.
(4) The dumping of goods by some depression stricken foreign country.
In case of any one or all of the first three conditions the demand should be increased to treat depression. If the fourth condition is the cause of depression, check on imports would provide fruitful results. The present depression 2008 in developing countries though emerged mostly on account of the fourth condition but due to their being abided by the terms of globalization they can not adopt the way of checking their imports. Therefore, the developing economies like India have no way but to increase demand of general mass to treat the present depression. Therefore any measure not helping increase in demand like above said bailout can not be proved fruitful to treat the depression. However, a bailout, if made to divert flow of funds towards the hands of ‘demand- dominating-middle-income-group’ will increase the total demand in market by increasing purchasing capacity of this group. Therefore, bailouts should be made but to help the consumers instead of helping the investors and industries. Moreover, the investors and industries also will be helped though indirectly but ultimately if the demand is raised by raising purchasing capacity of the dominating middle income group through bailouts because the so raised demand will enable the producers to sell their product at a price that keeps their profit preserved.
CONCLUSION AND SUGGESTIONS
The above discussion concludes that taking measures to save the investors for time being is not the treatment of the depression but it is only the postponement of the situation. To treat the depression measures should be taken to increase the demand, determined by the purchasing capacity of the general mass, through increased liquidity in their hands as the ‘marginal propensity to consume’ of general mass in a developing country is sufficiently high. Therefore, the bailouts should be made to help the demand increase instead of helping the supply be preserved. In other words, the horse should be made to pull the cart instead of making it to push cart. Hence, the bailouts should be made but utilized to protect income of the general mass against retrenchment, to provide cheap consumer loans and to finance the subsidy schemes launched for the purchase of consumer goods. _______________________________________________________
INTRODUCTION
Whatever the comments trying to lead the public astray be coming, the entrance of world depression 2008 can not be overlooked since it stands well entered in the Indian economy. The decision regarding closure of Tata’s Jamshedpur motors plant for three days, decision of Ashok Leyland to run only for three days a week for coming two months, decreasing interest rates, decrease in CRR, lowered REPO rate, cut in SLR, index of stock market in reverse gear, Rs 275000/= crores released by the Reserve Bank of India (RBI) to help industries and investors etc. are the events which indicate that RBI and the Government accept the entrance of depression 2008 in the Indian economy. Among all these events or the actions the Rs 275000/= crores bailout drew my attention most. The concern and worry of RBI and the Government over the depression are easily understandable to me. But, I could not understand whether RBI and the Government are worried for the economy or for the investors and industries of the economy. To my opinion both are the separate things and the economy should be given priority against industry and investors.
THE DEPRESSION 2008
A depression (economic depression) is caused either by the excess of supply or by the lack of demand. In both the conditions depression should be fought against by increasing demand instead of by decreasing supply in market because decrease in supply will always bring national income and employment down while any cut in national income and employment is never acceptable. The present world wide depression has been resulted by both the excess in supply and the deficiency in demand. The excess in supply has been generated by over production on account of heavy productive investment in developed economies and it came about in developing economies due to the dumping through ‘globalization’. The deficiency in demand came about due to deficiency in purchasing power in the hands of the dominant middle income mass which resulted by high level inequality in national income distribution in both the economies. I have explained in detail in my article ‘Story behind the World Depression 2008’ how the depression was generated in developed countries and how the developing economies have come in its grip. My said article (http://www.articlesbase.com/economics-articles/story-behind-the-world-depression-2008-626225.html) concluded that the problem of depression is the problem of increasing the (effective) demand by increasing the purchasing capacity of the dominant middle income group.
SIGNIFICANCE OF THE BAILOUT
The above said bailout seems to be similar in nature as the Wall Street bailout practiced in America. This type of measures taken in American could not make any dent on the root causes of there’s depression. The depression is still gaining more and more depth in America day by day. Then, how can we expect that the measures as taken in America would be proved fruitful in India? The monetary help to industries and investors preserves their profit whereby the production and employment level is preserved but for the time being only. The root cause of their falling profit remains untouched. Therefore, the bailouts towards helping the investors and industries only postpone for some time the cut in production and employment without helping the demand increase. I could find no way mentioned in economic literature to treat depression without increasing demand if supply side is kept unaltered. The market is suffering from deficiency in demand not because the investors are suffering from falling profits but the investors are suffering from falling profits because the market is suffering from deficiency in demand. Therefore, deficiency in demand should be treated to save both the economy and the investors. There are four conditions when a depressive trend emerges in an economy.
(1) When either the rigidity of demand prevents prices from rising to compensate the falling profits of producers in case of increasing costs.
(2) When the demand does not keep pace with increasing supply caused by extra production.
(3) When the demand decreases on account of emergence of some factor affecting the total consumption of general mass negatively.
(4) The dumping of goods by some depression stricken foreign country.
In case of any one or all of the first three conditions the demand should be increased to treat depression. If the fourth condition is the cause of depression, check on imports would provide fruitful results. The present depression 2008 in developing countries though emerged mostly on account of the fourth condition but due to their being abided by the terms of globalization they can not adopt the way of checking their imports. Therefore, the developing economies like India have no way but to increase demand of general mass to treat the present depression. Therefore any measure not helping increase in demand like above said bailout can not be proved fruitful to treat the depression. However, a bailout, if made to divert flow of funds towards the hands of ‘demand- dominating-middle-income-group’ will increase the total demand in market by increasing purchasing capacity of this group. Therefore, bailouts should be made but to help the consumers instead of helping the investors and industries. Moreover, the investors and industries also will be helped though indirectly but ultimately if the demand is raised by raising purchasing capacity of the dominating middle income group through bailouts because the so raised demand will enable the producers to sell their product at a price that keeps their profit preserved.
CONCLUSION AND SUGGESTIONS
The above discussion concludes that taking measures to save the investors for time being is not the treatment of the depression but it is only the postponement of the situation. To treat the depression measures should be taken to increase the demand, determined by the purchasing capacity of the general mass, through increased liquidity in their hands as the ‘marginal propensity to consume’ of general mass in a developing country is sufficiently high. Therefore, the bailouts should be made to help the demand increase instead of helping the supply be preserved. In other words, the horse should be made to pull the cart instead of making it to push cart. Hence, the bailouts should be made but utilized to protect income of the general mass against retrenchment, to provide cheap consumer loans and to finance the subsidy schemes launched for the purchase of consumer goods. _______________________________________________________