Basic Economics of Recession – For Technocrats Only

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Economics
Economics

Like fashion and history go together. Similarly recession is a cyclic process. It’s just like a death which is dead sure to happen after a particular interval of time in this globalized economy. My view is only God can refrain the world economy from stepping into global turmoil. Though there are measures through which we can control it but can’t stop it at all.

As per economics, if GDP of a nation dips for 2 quarters consecutively, it’s means its economy is in recession. GDP of a country can defined as.GDP(Y) = Consumption (C) +Investment (I) + Government spending (G) +Excess of Export over Import (E) (exports− imports),

Since above equation is a factor of time but since currency keeps on changing with the time so differentiating the above equation w.r.t. the country specific currency(x) to get the accurate results.

dy/dx= dc/dx + di/dx + dg/dx + de/dx

dy/dx may assume only 3 values depending upon the value of y and x.

If dy/dx<0,  economic activity is decreasing (slow growth / deflationary scenario)

If dy/dx= 0, economic activity is stagnant (no growth)

If dy/dx> 0, economic activity is increasing (high growth / inflationary scenario)

Mathematically speaking recession can’t be avoided at any cost but of course it can be deferred i.e. changing behaviour of dy/dx can be made time bound but that too is more than impossible task as controlling y and x together is extremely difficult here. Even if any of the factors on R.H.S. is stagnant for a year, it might adversely affect the nation’s GDP.

In today’s world 82% global business is driven by US and UK. Slowdown in US economy has always sent the ripples to the entire world economic table. Recession is mostly attributed to US economy.US has suffered almost 47 recessions till date and just because they couldn’t control one or more factors present on the R.H.S. of this equation.

In following ways, we can control the behavior of x and y to push back the recession for a particular interval of time.

Currency fluctuation

1 Currency of every country keeps on fluctuating with the time. If in the above equation x remains constant i.e. if there is a concept of global currency, the behavior of dy/dx can be controlled in the above equation but the point is bringing international/global currency in the world economy is itself extremely difficult. The behavior of dx in the above equation can be controlled through digital currency as well.

2 The first factor dc/dx in the equation keeps on varying based on demand and supply factor. Demand rule says if prices of goods are shooting up, people will demand less and hence lesser consumption (negative dc/dx will impact the original equation and hence the GDP). Supply rule says higher the price, higher the quantity will be supplied i.e. producers supply more at a higher price because selling a higher quantity at higher price increases their revenue. This also means people have more purchasing power. This will add to the inflation as again negative dc/dx will impact the original equation and hence the GDP. Keeping equilibrium between demand and supply is a bit possible if population, selective credit control, land prices and, metal prices are controlled. Creating jobs also help to stabilize this factor.

3 The second factor di/dx in the equation depends upon various factors like

Capital Investment & Foreign Investment

  • Capital investment done by business houses, Investment banks as well as Government. The investment done by business houses depends upon rising costs, rising interest rates as decided by RBI, profit margin,  their time prediction, clientele, higher labor costs, environment/climate, industrial production and corporate taxation regimes. Investment banks are always too big to fail. There must be strong financial regulations laid down by country specific Government so that their assets are not exposed to NPAs and they never lose investors’ confidence. Government invests as per finance budget passed every year by the FM. For government sector investment, the priorities have to be correct else it would again hit Government’s profit margins.
  • FDIs (a foreign company holding a direct stake in a PSU) as well as FIIs (foreign investment bankers investing in Indian markets). FDIs are dependent upon the direct investment on the forex reserves. They are responsible to make the real estates, factories, power plants, telecom networks, etc in a country. Unlike FDIs, FII investments are called hot money, because at any time FIIs could be sold out and take back. FIIs exit the country at the first sign of trouble. FIIs have direct impact on stock markets. By bringing more FDIs, we can have better infrastructure set up as well as investment set up by utilizing land, technology and resource. Precisely HNIs mainly focus on FDIs while Investment banks mainly focus on FIIs.

Fund allocation

4 The third factor dg/dx in the equation keeps on varying depending upon the fund allocated by the Government in the different sectors like health care, education, defense, public welfare, schemes and employees’ pensions etc. Fund allocation to the various sectors requires prudent fiscal deficit. Examples of better fiscal deficit are 100% tax collection, lesser corruption, lesser calamities, solid infrastructure and good weather for agriculture.

5 The last factor de/dx in the equation keeps on varying depending upon the exchange rate, LIBOR as well crude oil trade. You can’t export more than you make, and you can’t import more than your economy will allow you to buy. Any imbalance between these two animates the trade deficit as well as national debt. To control this factor, country should have robust energy making policies to be resilient. Since Middle East is the main source of crude oil. Any miss happening in Middle East creates uncertainty and upsurges the crude oil price. Crude Oil prices have direct impact on petrol, diesel and cooking gas prices and, hence consumers are affected. They also have impact on import as well export. Solar Energy is one such area which is still not completely explored by our country. Crude oil prices depend upon the various factors like supply and demand factor, the Middle East, the weak dollar, the summer, the speculation factor and the drill, drill, drill argument. So, at a glance in order to control the recession, following may be the remedies.  (1)Concept of international currency or digital currency can surely remove the hawala network. But setting up the digital currency would require digital currency id from each country apart from setting up a dedicated network for this. I am anticipating concept of digital currency might be introduced in the near future. All illegal networks can be breached only by making international consent/pressure through UN. Money flown through hawala network in a single day is more than annual turnover of HSBC bank. If money received from all these networks is propelled into the world economy, we can prevent the recession for a very long time. This seems to be the only panacea for recession (2) Keep only top10 public sectors banks (SBI, PNB, Bank of Baroda, IDBI, and Bank of India, and so on so forth) in India, rest public sector banks can be merged with larger public sector banks. This will enable RBI to have better money control and hence ease it to revise its monetary policies twice in a year .(3) Globalize IMF so that it could have better control on money supply around the world economies.(4) Check on population by putting it on the top of list of social reforms. It is also the root cause of most of the problems.(5) Make the country corruption free so that country has sufficient amount of fund reserves to inject into the economy in case of any downturn.(6) Prudent investments by Govt. Put agricultural(1), rural(2), industry(3),power sector(4) and Railways(5) on the top of its agenda. To cite few instances, create more and more jobs in the rural areas especially by providing them vocational courses. Government may attract business tycoons to set up SEZs and IT parks in almost every state especially in tier-2 cities. SEZs may be developed in outskirts of state capitals so that population density could be reduced from NCR, Bombay, Chennai, Kolkata, Hyderabad, Bangalore and Pune. This will also help to limit the inflation, land prices as well as population density. If US has ExxonMobil, as the world’s largest private oil giant why India can’t develop such companies. India has many sea shores where such oil companies can be set up with public private partnership with OIC, ONGC. Being an energy starved country, I believe the day the whole country can be run only through solar energy, this country will never be impacted by any recession in the future. India may have several tie ups with countries like Germany, Italy, Japan, Taiwan and France to lay the high speed railway networks. I believe creating high speed railway network will incur lesser cost than current aviation industry. This is also much safer than the latter. Investment in railways is the safest for Government.(7) Government may aim for 100% tax collection. This is possible only if most of the Government sectors are organized i.e. are properly tax levied.(8)Attract more and more FDIs as well as FIIs in order to pump them into economy. What Government can so is reserve some shares for them permanently but abiding some terms and conditions.(9) Listing state capitals on BSE/NSE may give better economic view to India by quickly back tracking the loopholes. (10) Its time for Government to raise SLR from 25% to at least 30% as I believe investment is the biggest power for the economy of a country.

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