A day after he assumed charge of the finance ministry, prime minister Manmohan Singh urged his officials to revive the ‘animal spirits’ in the country’s economy. The next day I asked my economics students the meaning of ‘animal spirits.’ None of them seemed to know its meaning and I had to go the extra mile to explain its meaning and implications.
The term ‘animal spirits’ popularised by celebrated economist John Maynard Keynes in his book, The General Theory of Employment Interest and Money is related to consumer or business confidence. More importantly, it means a sense of trust, an emotional state that dismisses doubts about others. It is our sense of fairness in economic dealings. When animal spirits are low, consumers do not want to spend and business does not want to make capital investments or hire people. The etymological origin of the term animal spirits is the Latin spiritus animales, meaning the spirit (or fluid) that drives human thought, feeling and action.
To Keynes, business cycles are driven by animal spirits. Business cycles are periodic fluctuations in economic activities of organised communities. As Keynes says, they are caused by volatile expectations about future sales and profits — the animal spirits. There are good times (prosperity) when people have substantial trust and associated feelings that contribute to an environment of confidence. They make decisions spontaneously, which is basically an animal trait. People instinctively believe they will be successful, and suspend their suspicions and apprehensions. As long as large numbers of people remain trusting, there will be business optimism, leading to revival and prosperity.
So, one of the most important ingredients of economic prosperity is confidence, leading to spontaneous decision making.
While the prosperity phase of business cycle is characterised by expansion in all macroeconomic variables, the recessionary phase exhibits a downturn marked by widespread contraction of business in many sectors of the economy. The economic data released on May 31 shows that the Indian economy grew at its slowest in nine years, registering a growth rate of 5.3%.This has led to 6.5% growth for the year ending March 31, 2012, as opposed to the earlier projection of 6.9%.This steep climb down from the 9% achieved in the last three years is characterised by a decline in growth rates in almost all sectors of the economy.
The growth trend of the economy was characterised by high inflation; high level of fiscal deficit and current account deficits. The combination of low growth and high inflation can weaken the economy further. Slower growth can lead to unemployment, sluggish tax collections, stressed government budgets and flight of capital. The Economist dated June 9 even predicted a farewell to ‘incredible India’ and stated that India is destined for a period of lower growth. Rating agencies describe India to be the weakest among the BRICS nations.
Most analysts are of the opinion that the government’s inaction and policy paralysis are the major reasons for the current predicament. Certainly India is passing through a recession. India’s slow down is due mainly to problems at home. The prime minister’s call to revive ‘animal spirits’ should be understood in this backdrop.
Very often, attempts by politicians and others to talk up confidence by making optimistic noises about economic prospects have rarely done much good. But the economist that he is, Singh’s confidence-building steps is expected to be realistic and pragmatic. He has already urged decision makers to provide stimulus packages and confidence building measures as early as possible. The revival programmes must be strong enough to offset the downward spiral of animal spirits that is underway in the economy.
If the actions we take are not aggressive enough to have a substantial, visible impact on the economy, then our confidence level will continue to remain low. Reform measures must immediately take full effect.
So, for reviving our animal spirits, and thus economic growth rate, we should have massive and targeted programmes that are strong enough to impact public confidence. The economy really needs strong fiscal stimuli. The Reserve Bank of India deserves special praise for the inventive and aggressive policies that were introduced recently.
With the prime minister’s reassurance that the govt will do all that it can to revive animal spirits, there has been a resurgence of interest in this concept. To speed up the process of building up business confidence, immediate steps must be taken. People should be motivated to take positive action.
The writer is professor of economics, Christ University, Bangalore