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What the Samudra Manthan teaches us about the economics of bubbles

There are three smaller bubbles growing in the India economy at this time. Doubtless, they will fuel our development for years to come.

June 19, 2021 / 03:27 PM IST
A depiction of the mythological Sagar Mathan (via Wikimedia Commons)

A depiction of the mythological Sagar Mathan (via Wikimedia Commons)


Once, the forces of good and evil had a protracted battle. The battle lasted so long that both groups exhausted their resources and valour. Tired, wounded and frustrated, they approached the saviour Lord Vishnu. The saviour advised them to explore the great ocean, to find new resources and vigour to make a fresh beginning.

Following the advice, both groups went to the great ocean and churned it to draw up its gifts (sagar manthan). During this exploration, they discovered a multitude of wealth and resources. The goddess of wealth Lakshmi emerged from the waters, as did Amruta (an elixir that would immortalize anyone who drank it) and Vish (venom that would destroy anyone who consumed it).

Lord Vishnu then appropriated the pitcher of Amruta for the forces of good, and requested Lord Shiva to absorb the venom. Obliging, Lord Shiva drank the venom and locked it in his throat.

Post this, the forces of good became more powerful. Yet whenever they deviated from the path of common good, they were overpowered by the evil forces and dethroned. Each time, Lord Vishnu, Lord Shiva or the Mother Supreme rehabilitated the forces of good, but only after a great deal of repentance from the latter.

Over the years I have realized that these are not mere bedtime stories to be heard and forgotten by the morning. They apply to all aspects of life, even economics.

The sagar manthan basically symbolizes collaborative effort; setting aside differences and parochial interests, to find the solution to a common problem. Examples of such problems include devastating wars like the World Wars, and pandemics caused by bubonic plague, smallpox, HIV/AIDS or COVID-19. The experts, irrespective of their ideologies and affiliations, collaborate to find solutions like vaccines, nuclear deterrents, globalized markets, etc., to overcome the losses and prevent the recurrence of such problems.

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Economics of bubbles

From my negligible knowledge of the laws of physics, I understand that it takes considerably less force to stop an object that is falling from a cliff, than to reverse the direction of the falling object and move it upwards.

In the economic sense, a bubble is the extra force needed to reverse the direction of an economy. Bubbles are needed to neutralize the gravitational forces of unemployment, pessimism, poor demand, excessive indebtedness, deflation and poor fiscal health, etc., that work to pull the economy down into recession.

In modern economic parlance, therefore, the sagar manthan is akin to the period following a recession; it is marked by irrational exuberance, fiscal and monetary profligacy, and household extravagance.

When all participants get frustrated and exhausted from prolonged economic weakness, collaborative efforts are needed to stimulate economic activity. At this time, all the stakeholders muster courage - and supported by the 'authority' - they do things they would never do in normal times.

Invariably, this effort involves excessive and seemingly irrational borrowing, investing and spending. Capacities are built to a scale which is unfathomable during normal times.

Usually this effort drives asset prices to levels that cannot be explained or justified by conventional methods. These inexplicable phenomena are generally described as bubbles by the market.

The elixir or the good that emerges from these bubbles is shared by all. However the venom is consumed only by the financial investors, who invariably end up poorer after every bubble goes bust. The financial assets' prices correct upon the bursting of the bubble but the productive capacities built during the bubble phase stay for long, supporting and promoting growth and development.

Think about it: would India be an information technology-enabled services (ITeS) superpower without Y2K or the technology bubble of the late 1990s? Would we have built so many houses, roads, malls, power plants, cement plants, etc., during the 2000s, if it weren’t for a credit bubble? Would capital be so easily and cheaply available to Indian entrepreneurs without a quantitative easing (QE) bubble in the West? The capacities built during these bubbles shall continue to support India's growth and development for long, even though the financial investors lost significant fortunes during 2001-02 and 2008-09.

The present crisis is no different, even though it is much more severe, deeper and wider in its impact. This crisis needs a much stronger collaboration at all levels - scientific research and development, social development, economic revival, and political restraint, etc.

India’s tryst with bubbles

In the Indian context, our governments have used the force of bubbles rather reluctantly. We have mostly participated in global bubbles. Whether it was the commodities bubble in the early-1990s, the dot-com bubble in the late-1990s, or the credit bubble of the mid-2000s.

The first bubble in independent India was created to build a strong industrial base in the country, which was left totally devastated and depleted by colonial rule. The 1956 industrial policy of the Jawaharlal Nehru government, which was influenced by the Feldman–Mahalanobis model, laid down the foundation of industrialization of the country through the creation of public sector monopolistic behemoths. In hindsight, there is immense criticism of this policy. Nonetheless, the fact remains that the policy led to the development of a strong industrial base in the country, created millions of new jobs, and supported the development of private enterprise.

The second bubble was created by the Atal Bihari Vajpayee-led National Democratic Alliance government to fight the economic sanctions post-Pokhran 2.0 and dot-com bust. The government made large-scale investments in the infrastructure sector, especially roads and energy. In the process, many government monopolies like coal, oil and gas exploration and production (E&P), telecom, roads, power, airports, ports, etc., were divested. The bubble got support from easy global liquidity following the dot-com bubble bust. The consequence was (a) super-normal economic growth during the 2003-08 period; (b) colossal non-performing assets (NPAs) for the lenders; and (c) enormous wealth erosion of financial investors who bought infrastructure firms’ equity.

A third bubble, which is actually a collective of many smaller bubbles, is slowly inflating in India. Creation of manufacturing capacities to substitute imports and promote exports (Atmanirbhar Bharat), digitalization of Indian economy (e-commerce) and healthcare capacities in the wake of the COVID-19 pandemic are three evident bubbles under construction. These bubbles will indubitably help the Indian economy tremendously in the next couple of decades. How the investors in these businesses will fare is something to be seen. As Shakespeare said, “There are many events in the womb of time, which will be delivered.”
Vijay Kumar Gaba is Director, Equal India Foundation.

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