Saturday, September 8, 2012

FIscal Stimulus or Deficit reduction

Economies of most countries in the world are facing recessions or at least slowdown in growth. The growth rate of the Indian Economy is expected to be around 5%. Many economies in the developed world are also facing contraction in GDP. The contraction or even slowdown is effecting the sentiment of investors negatively. Investors include those that invest in the brick and mortar Industries and not those in the stock market. Investment in the secondary markets does not directly bring in cash to the Industry. This investment goes more to enhance investor value and thereby creating the right environment for people to invest when called for by the company.

Money investment in the primary market directly goes to the account of the companies and actually helps the running or expanding of businesses. The recession has vastly reduced the money mopped up from the primary market by companies. Companies are also finding it difficult to raise money by way of debt, both from the market as well as from financial institutions.

This is the case for companies who actually want to invest further into the business.

The same is not the case with most companies as they have put most of their investment decisions on hold on account of contraction in demand or fear of the same happening in the short run.

There are two schools of thought prevalent in the discourse as to the right way to address the issue. The first school of thought seeks to promote increase in government spending so as to increase aggregate demand. There are differences in thought even in this stream of thought on issues of quantum and duration of the stimulus. The second school of thought believes that the recession is on account of the large debt burden of individuals as well as governments and they feel that the only way out of the recession is to balance the budget and reduce the debt burden all around.

There does not seem to be any compromise on the matter anytime soon.

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