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Money can't buy optimism

Mar 23, 2009

The Reserve Bank of India (RBI) is trying all the tricks in its bag to pump in more liquidity into the system. But we remain unsure as to how much of a difference that will really make. For in this case, the amount of money in circulation in the country is not any lower than what it used to be in 2007 - 2008. Agreed that few sources of money like FII inflows and IPOs have dried up but RBI's recent measures like drop in CRR have to some extent made up for the shortfall. It has to be noted that we were doing just fine in 2007-2008, even with that much lesser amount of money in circulation at that point of time. Infact, we were doing fabulously. So if the money supply isn't the problem, would it really make much of a difference if the RBI were to adopt more and more aggressive tactics to increase the money supply from its end? It really hasn't been of any practical value so far. They've been trying bolder and bolder actions, without any concrete results.

Thus, there stands a very real possibility that the problem lies elsewhere. One of the more plausible ones is that like banks, who have the money but are reluctant to lend, every other entity in the country is also displaying the same attitude. Banks are not lending for fear of defaults. Companies are perceived as likely to default as they are facing dwindling demand. They put expansion plans on hold and have gone into job cutting mode due to that. They are in turn facing weak demand because consumers are not spending. Consumers are not spending due to insecurity in the anticipation of job cuts and the like.

All in all, it's just one big vicious circle. There's no one entity in this chain who is the culprit. All of them are together making things worse for each other.

So in conclusion, increasing money supply has not helped so far and probably won't help in future too. Because it is not its scarcity that is causing the problem in the first place. And here the situation is not even like the US where there is tremendous deleveraging to be done. At the root of all the current problems here in India lies only one thing. A deep psychological pessimism and cynicism in everyone's outlook. It is only when that cloud of pessimism stops clouding people's minds that all these problems will sort themselves out.

As Robert J. Samuelson, contributing editor of Newsweek and Washington Post, put it, "Depression' captures a general alarm. The vague fear that something bad is happening, by whatever label, causes consumers and business managers to protect themselves by conserving their cash and slashing their spending. They hope for the best and prepare for the worst. When people stop worrying about depression, when the shadow lifts, the crisis will be over."

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