Thursday, September 8, 2011

Will the Indian Economy be overheated by 2012?


Recently the Business and Economy magazine which is published by IIPM asked me to write a column on Indian economy's future. They specifically wanted to know whether the Indian economy will overheat i.e., will it experience high rates of inflation or possible hyperinflation. Below I am reproducing my column which I wrote for IIPM. This will give an idea to all of you for what economic dangers we all are facing in coming future.

 

Will the Indian Economy be overheated by 2012?


By
Madhusudan Raj,
Alumnus, Ludwig von Mises Institute, Auburn, Alabama, U.S.A.

and

Visiting Lecturer in Economics, Department of Human Resource Development, Veer Narmad South Gujarat University, Surat, Gujarat, India.



If I reinterpret the economic meaning of this nonscientific Keynesian language of overheating[1] of the economy then the question is, whether the Indian economy will experience very high level of inflationary effects by 2012? Although we Austrian economist know about the dangers of making any precise prediction of the future state of the economy, but nonetheless based on theoretical and thymological knowledge it is possible to discuss some of the possible future scenarios. What is going to happen in future will mainly depend on what kind of economic - especially monetary - policies the Indian government is going to pursue in present. In the following paragraphs I analyze possible governmental economic policies and their consequences.

First and foremost, if you are reading everyday news headlines and doing daily shopping in the market then you must by now be knowing that the economy is already experiencing the harmful effects of high rate of inflation - which government has created by printing gigantic amount of money after the initiation of 2007 financial crisis - in the form of high prices of various goods and services. Apart from the present day inflationary situation in future mainly two things can happen:

  1. If the Indian government and RBI continue to follow their present day easy money policy of printing heaps of money out of thin air then inflation or possible hyperinflation is already created by them. If they print and spend this money now then its effect in the form of high prices of goods and services or alternatively and more accurately stated, the lower purchasing power of money will be seen in 2012 or possibly by the end of this year. Giving a precise date for such phenomena is impossible as well as not advisable because economy is very complex and there are many factors which can alter the situation very quickly e.g., a possible drought this monsoon combined with reckless easy money policy of government can result into very high prices even before 2012 or a sudden collapse of dollar, a possible break-up of EU and demise of Euro, or may be the collapse of unsustainable Chinese economy can also have a big impact on the Indian economy. In short, rupee will continue to lose its purchasing power as long as Indian government and RBI are running their money printing presses at full speed; and   
  2.  If they stop printing money then you will see a healthy liquidation of prior mal-investments and economy improving quickly through corrective recessionary phase. People need to understand that recession per se is not bad; what was bad was the prior artificial boom which was created by the central bank through its lackluster easy money policies. If there is no artificial boom to begin with then there won’t be any recession. During recession entrepreneurs adjust their actions according to the subjective time preferences of individual citizens by allocating resources where they are most urgently needed by them. So, if government stops printing truckload of money then economy will enter into a brief period of recession and then again start its normal course of action.

Now the question is - which one is the more likely scenario? The answer lies in historic and thymological knowledge. If history is our guide then all that the past tells us is, that all governments are inherently inflationary in nature. Human nature indicates that people like to recklessly spend others’ money or the money which they can create out of thin air without doing any productive work. Politicians and bureaucrats are precisely in this position. They don’t have to do any productive work in the market to earn their income; they just have to rob the tax payers through taxation and inflation to go on their spending spree in the name of growth and development.  The absurd Keynesian economics, which government policy makers love to follow, gives them the much needed excuse for their reckless spending. Not only it provides excuses, but it advises them to actually spend more money to get the economy out of recession viz., the so-called pump priming program. I fail to understand how a normal person can advise a policy of fiscal extravagance when our economic woes are result of precisely this same policy of reckless government spending in past. How can you solve a problem of debt by taking on more debt? Einstein defined insanity as, that tendency of human beings of doing the same thing over and over again and expecting different results!  

Actually the government policy makers have painted themselves in the corner. On one side if they stop printing money then the economy will enter in a short but painful recession which for them is politically incorrect policy. Most mainstream economists see price deflation as a bad economic phenomenon thus they advise governments to avoid it at any cost. For them price stabilization is the best policy, which actually is the cause of this economic mess. Thus, to avoid the correcting recession they are just going to print more and more money. And this money printing is going to create high rate of inflation or possible hyperinflation in the economy, which again will be politically dangerous for them. In either case they are going to collapse the economy. Most mainstream economists will say that this is an unavoidable trade-off between inflation and growth! But, this so-called trade-off between inflation and growth is a pure myth; an artifact of faulty economic reasoning. In reality there is no trade-off between inflation and growth. We can have growth without inflation[2], but such policies are anathema to the politicians who always want to cling to power by keeping the public weak and dependent.

Considering this theoretical and thymological knowledge it is pretty much sure that government officials will continue to print money; they voluntarily will never stop wrecking inflationary havoc in our lives. They will finally be compelled by the market forces - i.e., peoples’ actions - to stop their inflationary madness. Such inflationary policies cannot help for long because sooner or later such situation will go out of politicians’ control[3] and a crack-up boom will ultimately collapse the whole monetary system of fiat paper currency, as it happened a couple of years ago in Zimbabwe.

Looking at this dire future, everyone should prepare for the worst because we are entering very volatile phase of our time where inflation and depression (stagflation) can follow by a possible world war because this very Keynesian economists - e.g., Paul Krugman - wrongly believe that destruction in the form of war or natural disaster etc., is good for the health of an economy! They believe that 2nd World War brought the American economy out of great depression! I don’t want to scare people and play a role of a doomsayer but at the same time I cannot afford to keep my audience in dark about the realities of today’s world. These are all possibilities which any sane person cannot afford to ignore today. So, continue to accumulate real hard assets like gold and silver regularly and stay away from paper promises. Preserving our wealth in the form of real savings will help us all in seeing through the coming economic disaster.  








[1] Nonscientific because economy is not a car and consumption is not an engine of that car so that the economy will overheat! Comparing economy with a car is absurd. Making such false analogies is very dangerous for understanding the true nature of the economy. Use of such metaphors can guide as well as misguide us in our understanding. This is the reason why it is necessary to use the precise economic concepts while doing sound economic analysis.
[2] Because of space constraint I cannot elaborate this point here. Interested readers can find the detailed analysis of this in, Jesus Huerto De Soto, Money, Bank Credit, and Economic Cycles (Auburn, Alabama: Ludwig von Mises Institute, 2006).
[3] Indian Prime Minister Manmohan Singh already said that, the inflationary condition is out of his control! Instead of making such irresponsible statements he should read and understand Henry Hazlitt’s brilliant one page explanation of inflation, Henry Hazlitt, "Inflation in One Page," The Freeman 54, no. 9 (2004): 41. Understanding inflation correctly will help him stop it.

4 comments:

  1. Hello Sir,

    I am Dhiraj Nair, your student of MHRD SEM - 1, DIV: A. Now in MS University - MHRM. Hope you remember me. We had quite healthy discussion on various current issues pertained to economics, political scenerio etc...

    I have a question..

    The question is based in context to India. It is said that TAX is the one of the main Revenue Models for the country which helps the nation to achieve the set target growth rate. If the tax is reduced, wont it affect the growth rate adversely? and if not, than what are the various revenue models that the government can adopt to reach the set target growth rate with reduced the tax structure?

    ReplyDelete
  2. @Dhiraj: Tax is robbery, period. So eliminating taxes altogether will help India progress. It will tremendously increase the standard of living of people.

    And it is none of government's business to target various growth target. Government itself is the root cause of all our problems. Instead of increasing revenue of government you should be thinking about how to reduce their revenue! The day when government's revenue will become zero and they will be out of our lives, civilization will progress peacefully.

    ReplyDelete
  3. Sir,

    If there is no Government!

    No targets of Growth Rate how we can measure the progress? We people select the Government so as to maintain the governance of the nation, as a common man do not possess enough time and allied capabilities. History tells there is a particular structure which runs the country on behalf of nation. But can we expect the big revolution that happened in Soviet Russia in India? One factor is true that development should be in not in terms of Physical Assets like big buildings, malls etc..but the class of people striving for the basic needs. If government gets an hint that the Standard of Living is increasing wont they go for higher rate of inflation?

    ReplyDelete
  4. @Dhiraj - Please email me your comments using your valid email ID so I can reply and we can continue our discussion further. You can find my email ID in above 'post a comment' section.

    ReplyDelete

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