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LATEST NEWS UPDATES | Sentiments do have real economic benefits -Renu Kohli

Sentiments do have real economic benefits -Renu Kohli

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published Published on Sep 1, 2019   modified Modified on Sep 1, 2019
-The Telegraph

Investors may be buying stocks again, but fundamental drivers such as expected corporate performance remain unchanged

Sentiments matter for economic growth. Optimistic or upbeat sentiments encourage consumers to buy and borrow; businesses, on the other hand, are spurred to plan and invest. But when in reverse gear, downbeat or negative sentiments can hold back spending, restricting activities and stifling growth. For an economy seeking to revive itself, be it India or the world, the mood of consumers and investors has to be buoyant to turn things around. No wonder the governor of the Reserve Bank of India recently underlined the importance of “sentiment” and “mood” for the real economy. These, he added, were not sufficiently “positive” and “optimistic”, urging all to look ahead with greater confidence.

The mood of Indian businesses and consumers has indeed been sombre for a while. Economic signs have progressively deteriorated for over a year: GDP growth decelerated for four straight quarters to 5.8 per cent this March. The hefty 2.3 percentage point drop over last year was large enough to dent confidence about potential demand. Sales of mainstays, such as consumer durable and non-durable goods and automobiles, are dropping precipitously each month. The steady deceleration in corporate earnings, industrial output, exports, imports, air passenger traffic, tax collections and so on further undermined confidence. A strained financial system, almost pushed to the brink by the IL&FS default last year, triggered a liquidity squeeze, risk-aversion and lack of confidence in other non-bank financial companies. That has rippled across the larger shadow banking segment; conditions have still to normalize.

Demand prospects are poor: GDP growth in the April-June quarter is widely expected to be slower at 5.6-5.7 per cent. Most forecast that FY20 GDP growth would lie in a range of 6 -6.5 per cent, which is lower than last year’s 6.8 per cent. The prolonged private investment decline since 2011 continues. With the government running out of resources, the public capital expenditure prop has weakened. In short, there seems no fire left in any engine. Other tangible mood spoilers have been the government’s tax policies, approach on fuel shifts by automobile manufacturers, and sundry other business-related issues. The cumulative effects are visible in weakened demand for business and consumer credit, productions cuts and lay-offs, that are impacting employment and incomes.

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The Telegraph, 30 August, 2019, https://www.telegraphindia.com/opinion/sentiments-do-have-real-economic-benefits/cid/1701207


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