GROWING WITHOUT BUBBLES. The key challenge for India is to continue to ensure moderate credit creation in the real sector of the economy India needs an alternative model for economic growth. A model which is more inclusive, less dependent on credit and clearly not driven by wealth creation from manipulated asset prices alone. The standard developed-market model of growth has significant problems since it’s centred on a framework of constant credit infusion. In this model, a credit-infused growth cycle creates short-term prosperity and above trend economic growth for some time before an ensuing bubble on account of this credit creation busts the economy forcing the central bank to begin a new round of monetary stimulus yet again. The global central banks need to take responsibility for these credit-related catastrophes and need a more prudent approach to money creation and credit. Printing money and lending it to consumers to get them to spend on items they cannot afford have been the drivers of growth in the developed world for quite some time. These economies exhibit low saving rates, high rates of subjective time preference and focus exclusively on current consumption. Consumers and corporations imprudently borrow because of the availability of ready-made credit only to realize this eventually becomes a huge noose around their neck. Debt to GDP ratios in the U.S. and Europe are strong testimony to this morally hazardous behaviour. At these levels of debt, the citizens and the financial institutions that serve them become prisoners to the vagaries of financial markets and panic every time growth slows down or interest rates go up since their viability is threatened at the core. Indian context is different For India to aspire to walk in these footsteps would be truly tragic. We have a young dynamic work force, a culture where the pitfalls of leverage are well understood and a low subjective rate of time preference. This enables us to save more and think about a smoothened consumption profile over time rather than the gluttonous model of high current consumption. We, as a society, also care a lot about the next generation and are able and willing to sacrifice current consumption in order to leave behind a greater future consumption possibility set for our children. Consumer debt-to-GDP for India is at 12 per cent and is the lowest amongst large-sized economies. To want to tweak with this framework in any way, I think is dangerous..
Posted on: Tue, 23 Dec 2014 22:23:36 +0000
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