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LATEST NEWS UPDATES | In economic slowdown, a back story about falling investor confidence -Harish Damodaran

In economic slowdown, a back story about falling investor confidence -Harish Damodaran

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published Published on Aug 26, 2019   modified Modified on Aug 26, 2019
-The Indian Express

Fixing the economy today cannot happen through consumption; revival in investment is what's desperately needed.

New Delhi: Investment, unlike consumption, satisfies no immediate want. The businessman putting his money today is basically taking a bet on the future, when it would start yielding returns. Such bets are a function of the “state of confidence” at the time of investment. The investor has to be reasonably, if not absolutely, certain about the prospective yields — again based on today’s knowledge of tomorrow.

The longer the time horizon, the more uncertain is the above knowledge. As John Maynard Keynes famously wrote, “our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing”.

India’s current economic slowdown is showing because of consumption spending clearly falling, be it on cars or Rs 5 biscuit packs. But the crisis goes back longer, from the time companies stopped investing. Investment is what creates jobs and incomes. These, then, get spent and go into the pockets of others, who, in turn, fuel further consumption and income generation. As this flow of incomes from hand to hand expands the market, the “state of confidence” for businessmen to invest also goes up, reinforcing the virtual cycle.

A good indicator of “state of confidence” is new investment proposals. Their value, according to the Centre for Monitoring Indian Economy, fell from Rs 20 lakh crore in 2015-16, to Rs 16.2 lakh crore, Rs 11.4 lakh crore and Rs 10 lakh crore in the following three fiscals. During April-June this year, new projects announced (not all get off the ground) amounted to a mere Rs 74,000 crore, against Rs 3,45,000 crore in the same quarter of 2018-19.

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The Indian Express, 26 August, 2019, https://indianexpress.com/article/explained/explained-in-economic-slowdown-a-back-story-about-falling-investor-confidence-5936308/


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