Ramesh Singh Summary: Inflation & Business Cycle- 2 | Indian Economy for UPSC CSE PDF Download

If depression visits an economy, the common response is to replicate the policy measures of 1929. The best strategy to avoid depression is to prevent its occurrence. Therefore, modern economies closely monitor key economic indicators to implement timely prevention measures and avoid depression.

Key Points:

• Replication of 1929 Measures: Using historical policy measures as a guide.
• Prevention Focus: Vigilant monitoring of economic indicators to implement timely measures.

Recovery

When an economy attempts to exit a low production phase, whether it be a depression, recession, or slowdown, governments implement various fiscal and monetary measures to boost demand and production. This leads to an economic recovery, characterized by the following traits:

1. Upturn in Aggregate Demand: Accompanied by increased production.
2. Expanded Production: Attracts new investments.
3. Rising Inflation: Makes borrowing cheaper for investors.
4. New Employment Opportunities: Decline in unemployment rates.

Increased incomes from these factors create new demand, starting a cycle of demand and production that aids economic recovery. Common government measures include tax breaks, interest cuts, and salary increases for employees. Innovations by entrepreneurs, incentivized by the government, also play a crucial role in recovery.

Key Points:

• Boost Demand and Production: Through fiscal and monetary measures.
• Tax Breaks and Interest Cuts: Common government actions.
• Entrepreneurial Innovation: Critical for recovery, incentivized by the government.

Boom

A boom is a strong upward fluctuation in economic activities, often resulting from recovery measures taken by governments and the private sector. The major traits of a boom include:

1. Accelerated Demand Increase: Prolonged and significant.
2. Peak Demand: Exceeds sustainable production levels.
3. Demand-Supply Lag: Economic heating up.
4. Inflation Rise: Due to demand-supply disequilibrium.
5. Structural Problems: Shortage of investable capital, lower savings, falling living standards, and a seller's market.

While recovery is positive, leading to a boom, it often results in rising prices. The experience of developed economies in the 1990s, especially the US, and India in the early 2000s illustrates this pattern. The symptoms of overheating, following a boom, include:

1. Downturn in Aggregate Demand: Decline in overall demand.
2. Falling Production Levels: Reduced output.
3. Stagnant Employment Growth: Lack of new employment opportunities.
4. Voluntary Labor Cuts: Increasing unemployment rates.
5. Risk of Depression: If not addressed by the government.
6. Low Inflation Rates: Discouraging new investments.

Key Points:

• Strong Upward Fluctuation: In economic activities.
• Demand Exceeds Production: Leading to inflation.
• Overheating Symptoms: Decline in demand and production, rising unemployment.

Recession

A recession is similar to a depression but milder, potentially leading to depression if not managed properly. The recent global financial crises triggered severe recessionary trends. The major traits of a recession include:

1. General Fall in Demand: Economic activities downturn.
2. Low or Falling Inflation: Further signs of decline.
3. Rising Unemployment: Declining employment rate.
4. Price Cuts by Industries: To sustain business.

In 1996-97, India experienced a recession due to a general downturn in domestic and foreign demands, initiated by the Southeast Asian Currency Crisis. Recovery was achieved only by the end of the decade. Government measures to combat recession typically include:

1. Cutting Taxes: Direct and indirect, to increase consumer disposable income and make goods cheaper.
2. Reducing Burden of Direct Taxes: Income tax, dividend tax, and interest tax to stimulate demand.

Key Points:

• Milder Form of Depression: Fatal if not handled properly.
• Tax Reductions: To increase disposable income and stimulate demand.
• Historical Examples: India's recovery in the late 1990s.