August 30, 2019

When the politically impossible becomes the politically inevitable

The economy has slowed. Now that there is a consensus on that, the debate has moved to how severe it is, how long it can last, and where the intervention needs to be. Like a snowball that grows bigger as it rolls on, economic momentum builds in a certain direction till a force (intervention) is applied. The later the response, the stronger the necessary intervention.

This amplification of the prevailing trend plays out on several fronts. Let us start with financial conditions. Once financing conditions tightened after the default by a large financial firm about a year back, the resultant economic weakness pushed more firms into default.

For a few quarters, private financial firms that had the potential to grow took advantage of the lack of competition and grew their loan-books profitably. But now, as the underlying issues stayed unresolved and growth has weakened further, afraid of new bad loans, even they are slowing down credit disbursement. This is now likely to cause the next round of weakness.


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