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FLUCTUATIONS AND BUSINESS CYCLESIN GLOBALIZED INDIAN BUSINESS
ENVIRONMENT
-BY
RONAL MUKHERJEE
11/MBA/64
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OBJECTIVE
To examine the presence of business cycles inthe Indian economy.
The slowing down of growth in the Indianeconomy, particularly in the industrial sector,has raised significant interest in business cycleindicators.
Does the Indian economy witness businesscycles? Only if the answer is yes, does this
question need to be followed by other questionssuch as what are patterns in the cycles, whatare the explanations of these cycles, how canthey be predicted?
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INTRODUCTION
The studies span the different approaches viz., the classicalbusiness 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 arecharacterized by co movements in the fluctuations of theeconomic activities, with periodicities larger than one year.
The concept of growth cycles can be defined in terms of thedeviations of the actual growth rate from the long-term growthrate.
On the other hand, the growth rate cycles refer to the changes inthe growth rate of economic activity
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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 widespreadexpansion or contraction in most sectors of the economy.
Typically economists divide business cycles into two main
phases, recession and expansion. Peaks and troughs markthe turning points of the cycles. No two cycles are quite
the same. They are like mountain ranges with different
levels of hills and valleys.
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BUSINESS CYCLE OR TRADE CYCLE
Year
Real
GDP
PEAK
DEPRESSION
RECOVERY
BOOM
TROUGHS
Potential
GDP
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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
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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 andaccelerator can lead to regular cycles in aggregate
demand; It is one of the few models that generates
internal cycles.
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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. economywent through a deep recession early in his term, by the
time he was running for reelection in 1984, the economy
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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.
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BUSINESS CYCLES
5. Supply shocks occur when fluctuations are caused by
shifts in aggregate supply (R.J. Gordon). The classicexamples 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.
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INDIA IN TRANSITION
A careful analysis of business cycle facts assumegreater relevance for an economy like India that issubject to significant transformation over the last twodecades. In this section, some of the key elements of
transformation in the Indian economy from 1950 2009is 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
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DATING OF BUSINESS CYCLES
A number of methods have been developed to identifycycles and turning points. The focus of these methods isto forecast the beginning of a recession or expansion inthe economy.
National Bureau of Economic Researchs (NBER)approach, the most popular among these has a longhistory of research on U.S business cycles.
The NBER selects the peaks and trough dates by lookingfor clear changes in both the trend and level of economicactivity.
A number of data series, which seem to be coincidentalwith the aggregate economy are analyzed and clusteringof turning points are used to set the reference cycledates.
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CONCLUSION
Indian economy has experienced cycles that can betracked by changes in annual GDP. Studies ofbusiness cycles in India show slowdown prior to thenineties, GDP growth fell in 1957-8, 1965-66, 1972-
73 and 1979-80. However, before the nineties,fluctuations in economic activity in India wereprimarily on account of the monsoon.
In the 1990s there has not been an actual fall inoutput. Cycles, that did occur, can be defined more
accurately as "growth cycles" in which there is aperiodic fluctuation in the growth rate of output, ratherthan in the output.
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