The Prime Minister, Dr Manmohan Singh has announced the return of finance portfolio to himself with a call to entrepreneurs to revive their ‘animal spirits’.
Those who are unfamiliar with economists’ jargon need to know that the term ‘animal spirits’ was coined by the legendary economist Keynes to mean the psychological confidence entrepreneurs must have in order to make economic prosperity for the nation possible. Just as a healthy man must put aside the fear of death, so must investors must put aside the fear of ultimate loss. This confidence, this optimism - this animal spirit – is what distinguishes quitters from winners.
However, we do not know how many of domestic or foreign entrepreneurs will pay heed to his call. For he is not the first politician to try and coax businesses to revive their animal spirits. Politicians in almost all countries have tried that, and the usual response of investors has been indifferent. Because the call sounds hollow to them. The entrepreneurs think they better wait for the political leaderships to take steps to revive the animal spirits. Just making noise asking investors to shed their pessimism is not going to help Dr Manmohan Singh then. Because the key to the revival of animal spirits lies with him. As long as he does not find the key, investors will hold that economic prospects are going to remain gloomy.
Dr Singh should learn from the mistakes of the advocates of ‘animal spirits’ in the US. Both the US government and businesses believed that animal spirits meant the growing optimism with which stories about the nature of the economy that passed from person to person. In the years preceding the dot-com bubble, the animal spirits rose to a maddening pitch. Everybody was sharing confidence with everybody that Internet and technology-related companies are the ones going to be phenomenally rising in value, so they all put lots of money into their stocks. The stock markets all over the world rose dramatically. It was the animal spirits that friends were sharing with one another and that were propagated through the media. Much of it, as we came to know after the dot-come bubble burst, was just manipulated to influence people’s confidence (animal spirits) in the technology stocks and the stock markets.
Animal spirits had to stay in exile a long while in the US before clever operators in the equity markets, the vested media and the politicians who wanted to present a rosy picture to their voters succeeded in getting them revived in the 2000s. Investments and equity markets again became a showcase for animal spirits. But the devil had to be found out by his devilry. The last time it was dot-com bubble. This time it would be the financial system collapse in the US.
What happened was an excess of animal spirits got into play. The financial system is supposed to be a supportive system in the capitalist economy. It is meant to extend credit to entrepreneurs who establish, operate and expand businesses and earn profits to repay the loans, pay taxes and employee salaries. Banks are the engine to the vehicle that we know as growth. What brought the house down in the US plunging the entire world in crisis was the rise of the animal spirits to monstrous proportions. The crisis arose because banks wanted to go beyond their supportive role and become drivers of growth themselves. They were not content with their modest interest income. They opened out their treasury to reckless investments which led to overproduction of things (primarily real estate) for which ultimately they were no buyers. Credit was over-given and over-taken but remained unpaid because there were no sales.
Here was a classic case of revival of animal spirits in which the spirits were so devastatingly aroused that the system started producing not only what Americans actually wanted but what bankers and speculators thought they wanted. If India has to avoid meeting similar fate, the first thing Dr Singh must do is stop egging on animal spirits. For animals, when they are aroused, can get wild and go out of control.
If the Prime Minister meant only to revive confidence of domestic and foreign investors in the ‘India story’, the method he should adopt is to remove the constraints on facilitation of investment flows that everybody has been talking about. For instance, Mr Pranab Mukherjee’s 2012-13 budget has created some serious confusion over tax policy that has rattled investor confidence. Officials partisan to Dr Singh had let it be known that he was not happy with the way Mr Mukherjee had handled controversial tax proposals in the budget, particularly the proposal to make retrospective claims on overseas deals involving Indian assets which caused concern among foreign investors and even an exodus of funds from India. Dr Singh must allay these concerns. Also, he needs to take measures to revive capital inflows to boost the equity market. Once these concerns are taken care of, animal spirits may start arising from slumber.