To see a V or U shape recovery, the government should act a lot more and in a big way, now.
Keynesian economics is an economic theory of total spending in the economy. This was developed by the British economist John Maynard Keynes during the 1930s to address the great depression. It is a demand-side economic theory, and this is what is needed to be implemented by the Indian government and policymakers in the current situation.
A classical economic theory which is another school of thought believes that natural economic forces and incentives would be sufficient to help the economy recover, but this, in our view doesn’t hold true in the current context. This is because classic
economic theory assumes the swings in employment and economic output are cyclical, modest and so self-adjusting.
Keynes Theory rejects the idea that the economy would return to a natural state of equilibrium on its own. Instead, it argues that once an economic downturn sets in, for whatever reason, the fear and gloom that it engenders among businesses and investors tends to become self-fulfilling and leads to a sustained period of depressed economic activity and unemployment. In response to this, Keynes theory advocates a counter-cyclical fiscal policy in which, during periods of economic woe, the government undertakes deficit spending to make up for the decline in investment and boost consumer spending in order to stabilize aggregate demand.
Keynes Theory also criticizes the idea of excessive saving. It says excessive savings is very dangerous for the economy because the more money sitting stagnant, the less money in the economy to stimulate the growth.
A case in point to what everyone is doing today by liquidating debt funds and parking money in bank fixed deposits. And, banks are further depositing the same with RBI. The perceptual risk aversion needs government ownership to spend on the public good, infrastructure to absorb unemployment and create demand.
We believe, in an unprecedented situation like today, Implementation of Keynesian economic theory is needed.