Indian economic thought is still fired up with the keynesesian remedies prescribed for the industrial countries in the late 1930s. The keynesian analysis was that there was an excess of saving over investment and,as there was large unemployment,the remedy was for the government to undertake pump-priming.
In the aftermath of the 2008 global economic crisis, Indian economists are ecstatic that pump priming was being restored in a big way in the industrial countries which then gave legitimacy to India restoring to pump priming. The unexpected monitory fiscal expansion resulted in a sharp expansion of inflation,and put paid to the aspirations of double-digit growth.
OVER INVESTMENT THEORY:
In India, there is a lack of appreciation for business cycles. It was argued that since India is a planned economy it was immune to business cycles. As Indian economic thought was allured by the keynesian doctrine,it totally ignored the over investment theory of business cycle set out in F.A. Hayek's Prices and Production(1931). Under the Hayekian approach, there is excess of investment over saving,and this has to be equilibrated by forced saving via created money. At each successive round of production,the created money has to be larger and larger,and as inflation gathers momentum,the central bank inevitably presses the panic button and the economy goes into a tailspin. In the Hayekian model. the upper turning point is the most important point of the business cycle. John Hicks in his 'Hayeks story ' in Critical Essays in Monetary Theory (1966) emphasized that it was Hayekian approach which was relevant to developing countries.
The lesson is that monetary tightening should be undertaken during the upswing of the business cycle,well before the upper point is reached ,this is easier said than done as the central bank is accused of being the spoil sport ruining the party. Invariably monetary tightening is undertaken after the upper turning point,when the downturn has started, and this accentuates the downturn. Earlier monetary tightening is optimal as the extent of tightening is mild.
In the aftermath of the 2008 global economic crisis, Indian economists are ecstatic that pump priming was being restored in a big way in the industrial countries which then gave legitimacy to India restoring to pump priming. The unexpected monitory fiscal expansion resulted in a sharp expansion of inflation,and put paid to the aspirations of double-digit growth.
OVER INVESTMENT THEORY:
In India, there is a lack of appreciation for business cycles. It was argued that since India is a planned economy it was immune to business cycles. As Indian economic thought was allured by the keynesian doctrine,it totally ignored the over investment theory of business cycle set out in F.A. Hayek's Prices and Production(1931). Under the Hayekian approach, there is excess of investment over saving,and this has to be equilibrated by forced saving via created money. At each successive round of production,the created money has to be larger and larger,and as inflation gathers momentum,the central bank inevitably presses the panic button and the economy goes into a tailspin. In the Hayekian model. the upper turning point is the most important point of the business cycle. John Hicks in his 'Hayeks story ' in Critical Essays in Monetary Theory (1966) emphasized that it was Hayekian approach which was relevant to developing countries.
The lesson is that monetary tightening should be undertaken during the upswing of the business cycle,well before the upper point is reached ,this is easier said than done as the central bank is accused of being the spoil sport ruining the party. Invariably monetary tightening is undertaken after the upper turning point,when the downturn has started, and this accentuates the downturn. Earlier monetary tightening is optimal as the extent of tightening is mild.
