IASbhai Daily Editorial Hunt | 18th Jan

“The whole secret of a successful life is to find out what is one’s destiny to do, and then do it.” —Henry Ford

Dear Aspirants
IASbhai Editorial Hunt is an initiative to dilute major Editorials of leading Newspapers in India which are most relevant to UPSC preparation –‘THE HINDU, LIVEMINT , INDIAN EXPRESS’ and help millions of readers who find difficulty in answer writing and making notes everyday. Here we choose two editorials on daily basis and analyse them with respect to UPSC MAINS 2020-21.

EDITORIAL HUNT #320 :“Financial Boom and Economic Stagnation | UPSC 

Financial Boom and Economic Stagnation | UPSC

Sunanda Sen
Financial Boom and Economic Stagnation | UPSC

Sunanda Sen is a former Professor of Jawaharlal Nehru University, New Delhi

      HEADLINES:

Financial boom at a time of economic stagnation

      CENTRAL THEME:

The paradox becomes clearer by recognising the circuit of financial flows beyond the real economy

SYLLABUS COVERED: GS 3 : Economy

      MAINS QUESTION:

What are the signs of a stagnant economy ? Explain the flow of finances in a volatile economy.  -(GS 3)

      LEARNING: 

  • Stagnant Economies
  • Advanced Economies
  • Flow of finance
  • Way forward

      INTRODUCTION: 

  • STAGNANT REAL SECTORS : Divergences between the booming financial and the stagnant real sectors, which appear rather confounding as well as disconcerting, warrant an explanation.
  • TRACKING SENSEX : Enumerating the facts in India’s major secondary stock market, the Sensex has been found tracking an upward path in the recent times.
  • DOWNWARD SLIDES : In between, the temporary downward slides were responses to the pandemic-related lockdowns during early 2020.
  • UPWARD STRIDES : Jubilant upward strides in the stock market continued, along with speculatory financial transactions in real estate, gold and even commodities.
  • FINANCIAL GAINS : However, we notice that financial gains booked in the market on transactions do not originate from productive activities in the real economy.

With the start of the novel coronavirus pandemic during April-June (Q1) of 2020, India’s GDP growth rate in real terms sank to a low of minus 23.1%.

  • DECLINING GDP : GDP in India has been subdued even before the pandemic, declining from 6.12% in 2018 to 4.18% for 2019, while the financial sector has continued moving up.

      BODY: 

IN ADVANCED ECONOMIES TOO

  • CONTINUED STAGNATION : The paradox of the continuing financial boom with the real economy going through a stagnation has been found to be replicated in other developing as well as advanced economies.

EXAMPLE
These include the major emerging economies such as Brazil and Argentina along with advanced economies such as the United States and the United Kingdom. 

  • UNEMPLOYMENT : Simultaneously, the story of employment in countries has been dismal, with jobs at levels much less than what is needed .
  • DARK SIDE OF THE ECONOMY : Several other factors are also impacting— these include the uprooting of migrants following the pandemic lockdowns, protesting farmers on land rights etc.

FLOWS OF FINANCE

  • FICTITIOUS CAPITAL : Finance as above, having no counterpart in the productive sector, was identified, first by Karl Marx, as fictitious capital.

Flows of fictitious finance consist of credit in circulation, bonds on the basis of future earnings, interest on loans

  • MONETIZATION : Earnings from fictitious capital include interests, dividends and capital gains as well as profits on derivatives such as forwards and futures used to hedge against uncertainty in de-regulated markets.
  • RENTIER CAPITAL : All the above come in the category of unearned or rentier capital.
  • FLOW OF FICTITIOUS FINANCE : Despite the fact that flows of fictitious finance do not originate from the real economy, their accumulation, however, leaves a mark by generating financial wealth for those with access to the financial circuit.

Interestingly, financial assets, sold with capital gains at higher prices, are met with a rising rather than with the usual declines in demand
 

  • ACCUMULATION OF ASSETS : Evidently, possibilities of accumulating assets turn even brighter with the high value assets (used as collaterals), fetching credit for further business.
  • STOCK PRICES : As for the stock prices, which reflect the stream of dividends over time discounted by interest rates, lower rates can help pitch stock prices higher.
  • We recall that cuts in interest rates are often preferred as tools under mainstream prescriptions limiting expansionary policies, which evidently helps stock prices.
  • MARKET CONFIDENCE : A journey as above for the financial circuit continues, is subject to market confidence, along a concentric circle which widens with rising asset prices, asset incomes and capital gains.

The market may suddenly stall when expectations turn adverse.

  • CALCULATIONS OF POSSIBILITIES : The standard computer-run packages in the market available for investment decisions, while based on the rather erroneous calculation of probabilities, fail to work to attain the desired goals of profitability.

EXAMPLE
Instances of the financial collapse with the dot-com bubble or the sub-prime crisis of 2008, inflicting large social costs of unemployment and poverty in the real economy.

Finally, to look at how finance has attained its present status , we need to look at the evolving pattern of the alliances between finance and the ruling state, 

  • PATH OF FINANCIAL DEREGULATION : The path started with the sweeping pace of financial de-regulation in the late-1990s when banks were allowed to profit by dealing with securities and with the emergence of hedging devices such as futures and options in the market.
  • SHADOW BANKS : It also reflects the rise of non-bank financial institutions as well as shadow banks operating beyond regulations even at cost for the regular banks which had large exposures to the non-banks.
  • REAPING BENEFITS : The state’s close proximity to big finance is also evident in the revamping of downhill finance, even with bailouts in the name of restoring financial stability.
  • PRO FINANCE STANCE : It speaks even more of the pro-finance stance of the state in the benign official neglect of upswings in the financial sector despite the continuing downslides in the real economy.

      IASbhai Windup: 

ALTERNATIVE POLICIES, CAUTION

  • Possibilities of a sudden collapse of confidence in the financial sector, incurring financial losses borne by those holding such assets go further with social costs borne by the economy as a whole — a reality which cannot be ignored.
  • Catastrophes, as mentioned above, highlight the need for alternative policies on the part of the state as well as a bit of caution on part of individual investors — in a bid to usher equitable path of growth for the economy as a whole.
       SOURCES:   THE HINDU EDITORIAL HUNT | Financial Boom and Economic Stagnation | UPSC 

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