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What is Animal Spirits in Economics? PM Modi unveils AMRIT KAAL a 25-year roadmap of new India.

What is Animal Spirits in Economics? PM Modi unveils AMRIT KAAL a 25-year roadmap of new India.

Relevance

  • GS 3 || Economy || Economic Reforms || Public Sector Reforms

Why is Animal Spirits?

  • The ‘animal spirit’ is a term coined by the famous British economist, John Maynard Keynes, to describe how people arrive at financial decisions, including buying and selling securities, in times of economic stress or uncertainty.
  • In their book titled “Animal Spirits”, George Akerlof and Robert Shiller (both Nobel prize-winning economists) describe five different aspects of animal spirits and how they affect economic decisions. These five are Confidence, fairness, corruption and antisocial behavior, money illusion, and stories.
  • The Prime Minister of India called for everyone’s effort for inclusive development and world-class infrastructure in his independence day address.
    • on India’s 75th Independence Day, Prime Minister Narendra Modi attempted to deliver a speech, exhorting fellow Indians to view the next 25 years as “Amrut Kaal”.
  • This desire to ignite the spark of animal spirits also lies at the heart of PM Modi’s latest speech.

Context

  • The post-demonetization, post-GST, and the post-Covid economy is witnessing the emergence of a new middle sector among Indian companies seeking to expand.
  • Because of the pandemic that caused economic damage all over the world, most governments have provided massive stimulus support for economic growth, and this easy money has triggered a stock market boom.
  • In the last 7 months, India has created more than 20 unicorns (startups valued by investors at more than $1 billion), with the possibility of another 20 being created before the end of the calendar year, which is expected to generate jobs and demand for a variety of goods and services.
  • Apart from foreign capital, government reforms have increased investment.

The shape of the Economy

  • India’s economy has four major drivers
    • Spending on consumption
    • Government spending
    • Investment
    • external trade
  • Spending by people is the largest contributor to India’s economic growth every year.
  • For every ₹100 in incremental GDP,₹60 to ₹70 comes from people’s consumption spending.
  • The lockdown shut off people from spending for two full months.
  • India’s economy will contract for the first time in nearly five decades.
  • With the global economy in tatters,trade is not a viable alternative to offset the loss from consumption.
  • Investment is also not a viable option at this stage since the demand for goods and services has fallen dramatically.

The slowdown in the economy

  • One of the reasons for the slowing down of growth can be attributed to the shortage of money. While currency in circulation is not a problem, the money that much of the formal economy uses for transactions, and see as bank deposits i.e. M3 or broad money, and is eight times the hard currency in circulation, is not finding its way to the market.
  • The recent failure of Non-Banking Finance Companies (NBFCs) which had stepped in to support credit growth has resulted in restricted growth to ensure survival, as a result of which system-wide credit growth has slowed sharply.
  • Bad loans-The government has also failed in addressing these issues as there is a general apprehension of running into the risk of another build-up of bad loans.
    • IBC has met limited success. It has been unable to resolve insolvency cases in a time-bound manner. Therefore it has led to the limited resolution of Non-performing assets and cases.
  • With each passing week and month, the economic stress continues to build because the economy is working well below its potential. That essentially translates to individuals earning less and, as a result, holding back consumption.
  • Unemployment:Unemployment is all-time high and has impacted the buying ability of individuals. Usher of new technologies, bad policies, and the inability of the manufacturing sector to boost up the growth has impacted the overall growth of the country.
  • Uncertainty in businesses
    • That, in turn, makes businesses wonder if they should take fresh loans and ramp up production.
    • It also makes banks unsure about extending new loans, especially because many previous loans are fast turning into nonperforming assets (NPAs).
    • There is no quick fix. Given that the Indian economy was already struggling to grow before COVID, the journey out of this crisis will likely take more time than usual.
    • But nothing will happen without astute and targeted policy action.

Trends in the contribution of different sectors

  • The share of agriculture and allied sector to India’s GDP has remained around 17-18% in the last decade from 2010-11 to 2020-21.
  • The Industry sector comprises Manufacturing, Mining, Electricity, Construction, Gas, Water supply, and other utility services. The share of Industry sector has declined in the last 5 years from 30% to 26%. In particular, the share of the manufacturing sector has declined from around 17% (2015) to 15% (2020). The decline in the share of the manufacturing sector has in turn led to poor job creation in the Indian economy.
  • The share of the services sector has increased from around 52% (2014-15) to around 55% (2019-20). The Sub-sectors included in the service sector are-
  • Trade, Hotels, Transport, Communication, and services related to broadcasting
  • Financial, real estate, and professional services
  • Public administration, Defence, and other services
    • Amongst these sub-sectors, the highest share is contributed by Financial, real estate, and professional services.

Major Steps Taken by the Indian Government

  • Introduction of the Insolvency and Bankruptcy Code, 2016The Insolvency and Bankruptcy Code, 2016 (the “Code“) was introduced in December 2016.
    • The Code aims to complete the insolvency resolution process in a time-bound and efficient manner14. An important aspect of the Code is how it deals with the issue of NPAs. The Code enables all classes of creditors file an application for initiation of the corporate insolvency resolution process. The creditors may apply to the relevant authority under Code for the appointment of a resolution professional17, who will take over the management of a defaulting debtor.
    • The Code provides for an Insolvency Resolution Plan (“Resolution Plan”), and procedure for application thereof, as an alternative to the liquidation of the debtor concern/company. The Resolution Plan is to be approved by a creditor committee with a 75% majority
    • The period for completion of the Corporate Insolvency Resolution Process (“CIRP”) is specified under the Code as 180 days, which can be extended by the relevant Adjudicating Authority by a maximum of 90 days.
  • Taxation Reforms –The Taxation Laws (Amendment) Act, 2019 (the “Amendment Act“) amending the Income Tax Act, 1961 (the “Act“) and the Finance Act, 2019 (the “Finance Act’) came into force on September 20, 2019. The Amendment Act has introduced certain measures for the benefit of companies.
    • Domestic companies will have the option to pay tax at a rate of 25.17%, as opposed to the 30% rate before the Amendment Act. Such companies will also be exempt from minimum alternate tax.
    • Domestic companies incorporated on or after 1stOctober 2019 making a fresh investment in manufacturing have an option to pay income tax at the rate of 15%.
    • This tax rate is contingent upon such companies commencing their production on or before 31stMarch 2023. This provision has been put in place to boost the ‘Make in India’ initiative and to attract fresh investment in manufacturing.
  • Structural reforms were also announced as part of the AtmaNirbhar Bharat Package which, inter alia, included deregulation of the agricultural sector, change in the definition of MSMEs, new PSU policy, commercialization of coal mining, higher FDI limits in the defence and space sector, development of Industrial Land/ Land Bank and Industrial Information System, revamp of Viability Gap Funding scheme for social infrastructure, new power tariff policy and incentivizing States to undertake sector reforms.
  • Reinvigorating Human Capital-Key measures include qualitative strengthening of 15,000 schools under National Education Policy, setting up of 100 new Sainik Schools, Higher Education Commission of India, Central University in Leh, 750 Eklavya model residential schools in tribal areas, revamped Post Matric Scholarship Scheme for the welfare of SCs, measures to enhance skilling like realignment of existing National Apprenticeship Training Scheme (NATS), etc.

Way forward

  • India’s growth has been impressive in recent years but this is a country whose development is hampered by endemic structural problems.
  • India requires significant investment in infrastructure, manufacturing, and agriculture for the rapid growth rates of the last fifteen to twenty years to be sustained.
    • To fulfill this it needs to create a robust financial structure that can serve the needs and demands of a growing nation.
  • Governance in Indian banks (especially those in the public sector) needs to be reformed urgently.
    • The P J Nayak Committee’s report of 2014 had outlined a set of sensible reforms but, apart from some cosmetic changes, very little has been done on that front.
  • Investment in SHE (Skill, Education, and Health): Increasing additional jobs for ensuring basic health and good quality education up to the secondary level to all so that any meaningful skill formation is possible should be another aim.
    • It should raise public employment by filling all vacant sanctioned posts in the Central and State Governments, which would be around 2.5 million jobs.
    • The government should also focus on promoting labor-intensive sectors such as gems and jewelry, textiles and garments, and leather goods.
    • Human capital formation will give a big push to start-ups and MSMEs.
  • Reviving consumption demand and private investment is critical. It could include: bolstering the banking and non-banking sectors,
  • Increased infrastructure spending.
  • Implementation of long-overdue structural reforms in labor laws and taxation.
  • Other legal reforms will make it easier to do business in India-Steps must be taken to improve our ranking in Ease of Doing Business on contract enforcement (Presently, India ranks 163rd).
  • Judicial reforms: for quick disposals of commercial cases.
  • Faster implementation of capital expenditures by public authorities, as announced recently by the Finance Ministry, has the potential to inject growth impulses into the economy.

Conclusion

  • There is a need for world-class infrastructure to achieve these aspirations and open new economic opportunities.
  • India has to move forward with all the five aspects mentioned in the speech.
  • All these should include the ideas and feelings of 130 crore people of the country.

Mains model Question

  • What is ‘Animal spirits’ in Economics? Explain the meaning of investment in an economy in terms of capital formation.

References