The Science of economics

Without a doubt the flavor of the season is “economic slowdown”.

Sir Isaac Newton was an English mathematician, physicist, astronomer, theologian, and author who is widely recognised as one of the most influential scientists of all time, and a key figure in the scientific revolution. Unfortunately, he has not been credited with propounding economic theories. You may argue, as most persons of Science, he too was an economic illiterate. I would argue otherwise. He discovered the two major principles that drive an economy.

1.    The theory of “free fall”. Remember the story of Issac N’s encounter with the falling apple. Yes, economies generally go into a free fall when supports are withdrawn.

2.    The theory of “motion”. Allow me to recall

·       Law 1. An economy persists in its state of rest or uniform motion in a straight line unless it is compelled to change that state by forces impressed on it

·       Law 2. Force is equal to change in momentum per change in time. For constant mass, force equals mass time acceleration F = ma

·       Law 3. For every action, there is an equal and opposite reaction

The state of uniform motion an un-satiated perpetual desire to own and use consumer durables and non-durables, (remember “neighbour’s envy, owner’s pride” and “Uski sari meri sari se zyada safed kyun hai?”) that spurred consumption in the last two decades has been hit by external forces. To start with, private consumption has taken a beating as consumers suddenly prefer to hoard cash or keep it in the bank or invest in SIP instead of spending on consumer goods. In fact this “uniform motion of consumption has been hit in many ways –  One smart phone has replaced TV, lap top, notebooks, outings (swiggy hai na?) and so on. In Bangalore whenever I have to go to places outside my comfort zone (RSI, Golf course, et al) I find it much easier to call in a cab. No hazzles. For emergencies ek car to hain na? The pattern of consumption has changed as a result of such “disruptive” forces acting on it.

There is a change in momentum in the way people now spend money – or rather don’t spend money. One may argue that many don’t have money to spend. Yes. But that was how it always has been. There are many who have bought multiple houses while many can’t afford even one. Now, a realization of the futility of owning multiple houses has dawned on the discerning. One retirement home per family is becoming the norm. If anything, taken in the larger context, there is more money available to be spent but nothing to spend on. Though Newton’s F = ma says m is a constant, in this case m is not a constant making the equation a bit more complicated.

Added to this is the fact that most Public Sector Banks are saddled with high NPAs or Non Performing Assets that have resulted in them tightening lending and instead, seeking deposits and otherwise repairing their balance sheets by making provisions for Bad Loans. This phenomenon is a classic case of bad actions attracting bad reactions. Mallayas, Modis, Goels and Ambanis (Anil as of today) are standing examples. As an illustration take the case of the Coffee Moghul from Karnataka. Like many successful business persons, Siddharth had access to easy loans from banks. The loans vanished due Inept ways of handling such easily gotten money. All these NPAs saddled on the many Banks and NBFCs are a reaction to unbridled lending.

Roll out of GST, other structural reforms (corporate tax, labour laws and such), Global slow down and retreat of globalization accentuates the slow down.

Having said that, I must confess that economy is not a science which follows empirical laws or edicts. Every economist will have different views of what is and what will be. The only definitive aspect of an economy is what was. At times corrective actions have to be taken on a trial and error basis, especially in the present day when there are far too many disruptive forces (technology, geopolitics, climate change, deglobalization, terrorism et al) acting on economies of the world. The slowdown is also part of a longer-term structural shift wherein the Economy is changing from the high investment era to a low investment era as well as a transition from being cash-driven to a digitally enabled economy.

It looks as though that the combined effect of all these factors means that the Indian Economy is likely to remain in a free fall for some time to come. The only option is for everybody to ride out the storm.