There are certain mechanisms in applied physics, biology and economics which automatically correct various imbalances. While things like voltage stabilisers, ?fuse?, thermostat are some examples in physics; depreciating currency, income tax rate, unemployment benefit rate are examples in macroeconomics. This article attempts to draw a parallel between physics and economics, and suggest setting up new ?automatic stabilisers? to correct the major economic imbalances. Interestingly, management education sector offers one!
?Fuse? in an electric circuit has wire with low melting point, so an overload of current generating excess heat melts the fuse wire and opens the electric circuit, thereby saving the entire electric system. Some people replace the fuse-wire with another metallic wire with higher melting point, so that the fuse doesn?t go off frequently, oblivious that they are exposing the entire system to the risk of burning! Instead, they should fix the devise which pulls excessive current. Similarly, when the rupee depreciates continuously, trying desperately to attract foreign money of all sorts, probably fixes the problem temporarily, but exposes the Indian financial market and hence the real economy to the risk of huge foreign indebtedness and the possibility of sudden capital out-flight, leading to a re-run of the South-East Asia-like currency crisis. Rather, policymakers must identify the root cause, the CAD, and correct it by boosting exports and finding novel ways of reducing imports?for example, actively discouraging imports of conspicuous consumption; finding alternative sources of energy, developing a good public transport system and saving oil-imports. Also, a deliberate repeat of the pre-Independence ?Swadeshi? movement can receive popular support.
The bi-metallic strip of thermostat bends due to the different expansion levels in the two metals when an overload of current generates excessive heat, thus opening the electric circuit temporarily and saving the device wherein the thermostat is fitted. As temperature drops, the strip bends back to the normal position, closes the circuit and restores the current. A negative Balance of Payments (BoP) has a similar in-built mechanism. It depreciates the currency, encourages exports and discourages imports, thereby narrowing and ultimately eliminating the gap in the BoP. But a sterilised intervention by the central bank suspends this automatic correction mechanism. Better is aiming at zero CAD.
In the human body, the in-built mechanism of ?unconsciousness? automatically blocks any human pains when they cross a threshold level. Medicos then treat the root cause of the pain, and bring the patient to consciousness as the pain reduces within bearable limits. The policy paralysis that India suffered for months at length probably saved the policymakers from the pains of undertaking politically difficult reforms, but aggravated the recession for India. Despite the change in finance ministry, the political unconsciousness didn?t really end. So, the Reserve Bank of India (RBI) had to take the onus, tirelessly tightening repo, jeopardising growth while not helping inflation! There is a vicious cycle here. Unless the polity wakes up and shows guts, the economy will not revive, and unless the economy revives, politicians will not receive the ?saline? to save the economy from moving towards stagflation. The patient himself is the doctor, and the whole economy, helpless silent sufferers. Well, until elections at least.
?Inverters? are mini-generators which draw their energy from the normal electric current provided by state electricity boards and store it up in large batteries. If and when normal power goes off, the inverter takes over automatically without lapse of a second, to ensure continued flow of electricity. When the economy does well?such as in the pre-2008 worldwide prosperity phase of which India too enjoyed a part?most of us earn well, stock up adequately and even built assets. In the process, we have used the infrastructure?not just roads, airways and power, but also education facilities, medical care, financial accesses, imported luxuries, government resources etc. Now, the Indian economy is in a mess with high unemployment plus adamant inflation. The government is heavily indebted and is about to enter the scary ?debt trap?. At such difficult time, shouldn?t we automatically start giving back to the society from where we have taken so much? We must pay our taxes honestly, contribute to the cash-starved NGOs, stop buying imported products, use fuel-efficient vehicles, use public transport and save petrol, welcome compulsory CSR when profits exceed a certain amount.
There are some known automatic fiscal stabilisers like the income tax rate and the unemployment benefit rate. Despite both being constant, during recession, the government?s tax collection reduces and transfer payment increases, raising the government deficit automatically, generating anti-recessionary and counter-cyclical impact. In stock-markets, ?circuit breakers? automatically keep stock movements in a pre-decided band. Like ball-corks automatically avoid water tank overflow, the US ?debt ceiling? reduces government expenditure automatically and we too should have something similar.
The education sector, being counter-cyclical in nature, offers another excellent stabiliser. The government could have the banks lend interest-free 100% education loans with easy and long repayment period to those losing jobs in downsizing from falling orders, or closure of own business for lack of demand. Their unemployment period will be best spent receiving higher/management education or new skills or vocational training which they always wanted to learn, but couldn?t. This will not only generate employment in the education sector in recession, but create a more skilled and educated workforce ready to contribute as soon as the economy revives. This will also enhance the demographic dividend India enjoys which could otherwise become a curse. A stitch in time will save nine and good economics will also be good politics for once!
The author is faculty of economics in SIMS, Symbiosis International University, Pune.