Indian Economy Needs Rekindled Animal Spirits

                                  

Economics is not a science. Economists and textbooks of economics will die trying to convince you that it is indeed a science but let me tell you, it is not. Economics is more of an ex post facto kind of science, even if it is any. It is a rarity when it is able to predict correctly the outcome or repercussions of any measure, which is the touchstone of any scientific discipline, the capacity to foresee. It does explain, with great precision, the rationale behind the events that have already taken place. In those aspects, it does work on logic and has theories and principles of its own. But for ensuing events, it relies more on sentiments than on any logic or equation. Sentiments of the market I mean.

With the world market nose-diving, courtesy trade war, rising oil prices, trade protectionism, geopolitical tensions, and numerous other reasons, the resilient Indian economy has also been gasping for breath. The GDP growth percentage has almost halved in a year. While the pundits are still struggling with fundamental questions like, whether the slowdown is structural or cyclic? Have liquidity and cash inflow been stabilized in the market yet? Government and the bureaucracy have already started surgery to amputate the infected part, albeit the diagnosis reports are yet to be published by pundits.

One of the surgical tools which could be employed by the government is that of ‘Animal Spirits’.  The CEO of NITI Aayog, Amitabh Kant in India Today Conclave Mumbai 2019 in a panel discussion actually hinted in at it but any tangible action is yet to be taken. He argued that what the Indian economy needs is rekindled animal spirits. In line with his submissions, what the government and finance ministry should attempt is to bring back the lost credibility into the economy and aggressively mobilize the general opinion. Of course, this has to be coupled with steps like reducing corporate taxes, personal taxes et cetera, as positive steps towards. But tax reductions alone, without any attempt to calm the sentiments, are destined to fail. Since in economics two plus two is not always four. As already argued above, economics is not a science, it has an element of sentiments too.

British Economist John Maynard Keynes in his magnum opus, The General Theory of Employment, Interest, and Money used the term ‘animal spirits’ for the very first time in the context of economics.  In his view, the term symbolizes the process by which investors arrive at financial decisions, including buying and selling securities, in times when there is high volatility in the market.  It takes consumer and business sentiments into consideration. Consumers and investors, angels or otherwise, rely more on their gut feeling than on any rock-solid analysis in taking the market decision. Often dubbed as ‘spontaneous optimism’, it is a call for action over inaction in times of uncertainty. Also, animal spirits are not only limited to economics, but a large chunk of our everyday decisions are premised on this, instead of hardcore logic.

Moreover, the government has to work on this if it hopes to see the economic recovery anytime soon because it has become more than apparent that this slowdown is structural. I say so because the economy has already been in doldrums long enough to cross out the option of a cyclic slowdown. Consumers and investors as a group are very sensitive and receptive in nature, more often than not guided by emotions and sentiments emanating from the market. This leads us to a precarious situation where slowdown takes place when everyone says that there is one. Whereas applying the same analogy, slowdown ceases when the general opinion is slowdown is over.

The bright side of having this knowledge is that the architects of our economic policy can actually work on sentiments of the investors in the market to cure an ailing economy. And this panacea is more imperative now since animal spirit is actually a double-edged sword. If the requisite actions suggested above are not heeded to, then the same animal spirit has the potential to devour the complete economy. It can add to the economic instability through speculations of collapse and/or market crash. The idea is to take steps that reinstall the confidence of the investors and consumers in the economy.  Right now, the biggest hurdle to recovery and the 5 trillion dollar dream, this investor sentiment, if appropriated in the correct fashion, can become the government’s brahmastra.