Business Cycle

 Bank of International Settlement (BIS)

• BIS started in 1930 and is owned by the central banks of different countries.
• It serves as a bank for member central banks, and its role is to foster international monetary and financial stability and financial corporation.
• BASEL 1, 2, 3 Norms Regulation (Ex: Monetary Policy) for all central banks for stable Economy.

Business Cycle

• The fluctuations in the level of economic activity between the depressions and booms has been called by the economists as business cycle or trade cycle with recession and recovery as the main intermediate stages.
• Economists have pointed out that the business cycle is characterised by four phases or stages in which economies alternate:
• Depression
• Recovery
• Boom
• Recession

Counter Cyclic Fiscal Policy

• When Economy is Boom (People & Firm have money) – Government Reduce Expenditure.
• When Economy is Depression (People & Firm have less or No Money) – Government Increase Expenditure.
• Counter the Business Cycle. Mixed Economy (Capitalistic play major Role)

Cyclic Fiscal Policy

• Socialistic Economy. Go in the Cycle.

There are many factors responsible for this fluctuation, they are

1. Economic instability or uncertainty which discourages investments (Ex: US economy fail cause uncertainty in Indian Economy).
2. Overall slowdown in production (Ex: Demonetization)
3. Anti-inflationary government policies (Ex: Improper policy).
4. Unforeseen disasters (Ex: Covid).

Depression

(GDP growth rate is negative (Bottom low).

Ex: Last year GDP is 3 Trillion, Current year GDP is 1.5 Trillion. Indicate negative growth rate [Continuous Recession Cause Depression]).

The major traits of depression could be as given below:

• An extremely low aggregate demand in the economy causes activities to decelerate; Fall in money supply
• The inflation being comparatively lower;
• The employment avenues start shrinking forcing unemployment rate to grow fast;
• To keep the business going, production houses go for forced labour-cuts or retrenchment (to cut down production cost and be competitive in the market,) etc.

Major steps taken by RBI

1. Cheap money policy - Reduces the interest rates in order to boost money supply and aggregate demand.

Steps taken by Government

1. Deficit Financing.
2. Tax cuts (Direct & Indirect Tax).
3. Increasing the subsidies.
4. Increasing the development expenditure.

Recovery

(Recovery of economy form depression. Inflation increase Slowly)

It is a situation in which economy experiences upward trend in growth and development because of the interventions of RBI and Government after depression or recession.

• The business cycle of recovery may show the following major economy traits:
• an upturn in aggregate (total) demand which has to be accompanied by increase in the level of production;
• production process expands and new investments become attractive;
• as demand goes upward, inflation also moves upward making borrowing cheaper for investors; (Creeping Inflation)
• with an upturn in production, new employment avenues are created and unemployment rate starts declining; etc.

Major steps taken by RBI

1. Cheap money policy continues i.e., RBI reduces the interest rates in order to boost money supply and aggregate demand

Steps taken by Government

1. Reduction of Tax cuts.
2. Subsidies

Boom

(Peak of GDP [Demand pull Inflation High]. Continuous Recovery caused Boom)

A strong upward fluctuation in the economic activities is called boom.80 As economies try to recover out of the phases of slowdown, recession and depression

The major economic traits of boom may be listed as given below:

• an accelerated and prolonged increase in the demand;
• demand peaks up to such a high level that it exceeds sustainable output/ production levels;
• the economy heats up and a demand supply lag is visible;
• the market forces mismatch (i.e., demand and supply disequilibirium) and tend to create a situation where inflation starts going upward;

The phase of recovery is considered good for the economy and it reaches the stage of boom which is considered better. But the boom has its negative side also. Boom is usually followed by price rise.

• As a boom is a strong upward fluctuation in an economy, the supply-side pattern of the economy starts lagging behind the pace of the accelerated aggregate demand.
• This leads to situation of Over heating

Over Heating

• At a particular stage demand is higher than Supply (D >>> S).
• Fiscal Drag control over Heating - Person Move from one tax slab from other, need to pay more tax, Reduce Disposal income, Cause drag in Economy control over heating.

The symptoms of overheating are as follows:

- (At Boom, High Money in hands cause more demand in economy. Supply Constant demand high → Demand Pull Inflation

- After sometime demand fall below the supply. So firms reduce supply (Production fall, Unemployment) cause slowdown. Without take Proper action, slowdown lead to Recession, later lead to Depression).

• There is a downturn in the aggregate demand on overall fall in the demand;
• as demand falls, the level of production (output) in the economy also falls;
• as producers cut down their production levels, new employment opportunities are not created—thus employment growth rate falls;
• as demand keeps on falling, usually producers start cutting down their labour force to adjust their overhead expenditure and the cost of production (labour-cut is not ‘forced’ here but, ‘voluntary’)— resulting in increase in the unemployment rate;
• if the government fails to rescue the economy from the phase of recession, the dangerous stage of depression remains the logical follow up;
• the rate of inflation always remains at lower levels—discouraging new investments and lending.

Major steps taken by RBI

1. Tight money policy during Boom, prevents over heating

Steps taken by Government

1. Checking Monetary Policy & Fiscal deficit.
2. Regulation of loans and quality.
3. Increase in taxes.

Slowdown

• Continue slowdown for some time and implement schemes and make GBP growth (Avoid Recession, if not take action cause Recession).

Scheme

• Atma nirbhar Bharath.
• Atma nirbhar Bharath Rozgar Yojana.
• Prathan Mantri Garib Kalyan Yojana.

Recession

(Slower growth rate (little Negative growth), without taking action lead to Recession).

This is somewhat similar to the phase of ‘depression’ — we may call it a mild form of depression fatal for economies as this may lead to depression if not handled with care and in time.

• Characteristics of Recession
• It is a situation when economy experiences negative growth rate for two consecutive quarters
• there is a general fall in demand as economic activities takes a downturn;
• inflation remains lower or/and shows further signs of falling down;
• employment rate falls/unemployment rate grows;
• Industries resort to ‘price cuts’ to sustain their business.

Major steps taken by RBI

1. Cheap money policy by RBI during recession, prevents economy from entering into depression.

Steps taken by Government

1. Increased expenditure.
2. Increase in fiscal deficit.
3. Tax cuts.
4. Subsidies and income support.
5. Boost employment opportunities.