FLUCTUATIONS AND BUSINESS CYCLES IN GLOBALIZED INDIAN BUSINESS ENVIRONMENT

-BY RONAL MUKHERJEE 11/MBA/64

OBJECTIVE
To examine the presence of business cycles in the Indian economy. The slowing down of growth in the Indian economy, particularly in the industrial sector, has raised significant interest in business cycle indicators. Does the Indian economy witness business cycles? Only if the answer is yes, does this question need to be followed by other questions such as what are patterns in the cycles, what are the explanations of these cycles, how can they be predicted?

INTRODUCTION

The studies span the different approaches viz., the classical business cycle, growth cycle and growth rate cycle. The classical business cycles are identified as recurrent, alternating phases of expansion and contraction in a large number of economic activities such as output, consumption, prices, investment, employment, etc. The cycles are characterized by co movements in the fluctuations of the economic activities, with periodicities larger than one year. The concept of growth cycles can be defined in terms of the deviations of the actual growth rate from the long-term growth rate. On the other hand, the growth rate cycles refer to the changes in the growth rate of economic activity

BUSINESS CYCLES
Meaning

Business cycles are economy wide fluctuations in total national output, income, and employment, usually lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in most sectors of the economy.
Typically economists divide business cycles into two main phases, recession and expansion. Peaks and troughs mark the turning points of the cycles. No two cycles are quite the same. They are like mountain ranges with different levels of hills and valleys.

BUSINESS CYCLE OR TRADE CYCLE

R e a l G D P
DEPRESSION TROUGHS BOOM PEAK
Potential GDP

RECOVERY

Year

BUSINESS CYCLES
The downturn of a business cycle is called a recession. A recession is a recurring period of decline in total output, income, and employment, usually lasting from 6 months to a year and marked by widespread contractions in many sectors of the economy. A depression is a recession that is major in both scale and duration. Business Cycles Theories 1. Monetary theories attribute business fluctuations to the expansion and contraction of money and credit (M .Friedman). Under this approach, monetary factors are the primary source of fluctuations in aggregate demand. For example, the recession of 1981-1982 was

BUSINESS CYCLES
triggered when the Federal Reserve raised nominal interest rates to 18 % to fight inflation. 2. The multiplier-accelerator model, proposes that exogenous shocks are propagated by the multiplier mechanism, along with the accelerator principle. This theory shows how the interaction of multiplier and accelerator can lead to regular cycles in aggregate demand; It is one of the few models that generates internal cycles.

BUSINESS CYCLES
3. Political theories of business cycles attribute fluctuations to politicians who manipulate economic policies in order to be reelected (W. Nordhaus, E. Tufte). Historically, presidential elections are sensitive to economic conditions in the year preceding the election. As a result, if they have a choice, most presidents would prefer to follow President Ronald Reagans example. Although the U.S. economy went through a deep recession early in his term, by the time he was running for reelection in 1984, the economy

BUSINESS CYCLES
was growing rapidly, which contributed to a reelection landslide. 4. Equilibrium-business-cycle theories claim that misperceptions about price and wage movements lead people to supply too much or too little labor, which leads to fluctuations of output and employment (R. Lucas, R. Barro, T. Sargent). In one version of these theories, unemployment rises in recessions because workers are holding out for wages that are too high.

BUSINESS CYCLES

5. Supply shocks occur when fluctuations are caused by shifts in aggregate supply (R.J. Gordon). The classic examples came during the oil crises of the 1970s, when sharp increases in oil prices contracted aggregate supply, increased inflation, and lowered output and employment. Many economists think that the low inflation and rapid growth of the American economy in the 1994-2000 period may be explained by favorable supply shocks.

INDIA IN TRANSITION
A careful analysis of business cycle facts assume greater relevance for an economy like India that is subject to significant transformation over the last two decades. In this section, some of the key elements of transformation in the Indian economy from 1950 2009 is presented. 1. Reduction in the consumption-output ratio. 2. Declining share of agriculture. 3. Shift away from state domination. 4. Emergence of a conventional business cycle 5. Increased integration with the rest of the world

DATING OF BUSINESS CYCLES

A number of methods have been developed to identify cycles and turning points. The focus of these methods is to forecast the beginning of a recession or expansion in the economy. National Bureau of Economic Researchs (NBER) approach, the most popular among these has a long history of research on U.S business cycles. The NBER selects the peaks and trough dates by looking for clear changes in both the trend and level of economic activity. A number of data series, which seem to be coincidental with the aggregate economy are analyzed and clustering of turning points are used to set the reference cycle dates.

CONCLUSION

Indian economy has experienced cycles that can be tracked by changes in annual GDP. Studies of business cycles in India show slowdown prior to the nineties, GDP growth fell in 1957-8, 1965-66, 197273 and 1979-80. However, before the nineties, fluctuations in economic activity in India were primarily on account of the monsoon. In the 1990s there has not been an actual fall in output. Cycles, that did occur, can be defined more accurately as "growth cycles" in which there is a periodic fluctuation in the growth rate of output, rather than in the output.