Wednesday, December 31, 2008

Nonsense stimulus

Every time depression invent new stimulus which have no clear indication to combat demand deepening path. 

Madan Sabnavis disproves the stimulus theses. 

  • “Let us go back to the rudimentary text book where output is the sum of C(onsumption), I(nvestment), G(overnment), E(xports) and I(mports). This holds for any sector. The table shows that consumption growth does not have a strong relationship with industrial growth — which means that we need more of the other factors to help in growth. Government expenditure also does not impact industry in the same year — this means that all the fiscal stimulus packages would really take time to work out as the impact is indirect. Trade however is significant.
  • Therefore, the primary factors are really investment and foreign trade growth. Further, the growth in capital issues, foreign investment and the Sensex are not associated with industrial growth. This means that the rate of change in these variables is not correlated with the industrial growth rate. 
  • Given this picture, how can we relate the present circumstances with the industrial scenario? On the supply side, we have witnessed growth in bank credit rising and imports, which means that industrial growth has taken place up to October. Sentiments are low as gauged by FII, FDI and capital market indicators. There is a shoulder shrug as far as investment is concerned as we do not have clear indications — bank credit partly reflects growth but lower capital issues could negate this performance. The government stimulus package does not appear to have the strength to change things, nor would private consumption. As exports growth is not too impressive, the demand stimulus would not be there. The imports route will work provided the demand is there, as imports only talk of the supply side”.

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