It is unfashionable to talk of depression in the days of soaring sensex. Yet, talk we must, for there is a precedent. Much the same conditions existed in 1929 in the United States before the onset of the Great Depression, as they do in today's dream world.

This is not to say that we are headed for a similar crash for there are important saving features. At the same time, the present buoyancy in the stock market may be more like the fulfillment of a death wish rather than harbinger of a new era.

John Kenneth Galbraith has analysed the Great Crash in detail. At that time, money supply was easy. The fiscal mantra was that of the balanced budget. The US was running a trade surplus with its partners in excess of a billion dollars in 1928. The stock market was booming. It was a dream economy.Yet, production stagnated.

The Federal Reserve's index of factory production had peaked in June 1929 at 126 and had declined to 117 by October while the stock market was going up, up and up. Then came the crash on October 29. Most of the shares lost one-third to one-half of their value in one single trading session. Goldman Sachs, for example, dropped from 60 to 35 on that fateful day. And then followed a long period of depression that lasted full ten years.

Why was it that the economy went bust despite easy credit, balanced budget, trade surplus and a booming stock market? Galbraith points out two crucial factors. One, the distribution of income was bad. The wages of the common people were stagnating and the underlying real demand in the economy was weak. That, ultimately, meant lower profits for the corporates. Two, American enterprise in those times had ``opened its hospitable arms to an exceptional number of promoters, grafters, swindlers, imposters, and frauds.'' Thus resulted one fraud after the other and that weakened the faith of the common man in the stock markets.

The result was that nothing could stop the slide once it started. President Hoover announced a cut in taxes in November. An announcement was also made that the Secretary of Treasury Andrew Mellon, who had overseen the prosperity of the decade gone, would remain in the cabinet at least until 1933. To no avail, though. The boom in the stock market failed to bail out the economy.

So what does it mean for us? Let us examine the parallels. Money supply is easy today. SLR and CRR have been regularly cut for the last many years. Rates of interest have fallen. The mantra of balanced budget has been reincarnated in terms of containing the fiscal deficit. Exports have been buoyant over the last 5 years even though there has been a lull lately. Taxes have been cut in the dream budget much like Hoover did in November 1929. The return of P. Chidambaram as Finance Minister after the Deve Gowda crisis was taken as a signal that India Inc was on course. Yet industrial production has been stagnating and share market booming.

The scenario is strikingly similar to that which prevailed before the Crash in October 1929 easy money, balanced budget, buoyant exports, tax cuts and continuation of reforms. But so are the fragile fundamentals bad distribution of income and swindlers galore, the latest being the CRB affair.The million dollar question is whether the present industrial stagnation is but a hiccup that will soon go away or a danger siren of the crash that is appearing on the horizon? No one knows for sure. The fundamental fragility of the Indian economy is there loud and clear and the boom in the stock market does not mean anything substantial as it is restricted to the A scripts. Thus, one would have predicted a recession. That is where Chidambaram's policies take us. But there are important points of differences which may save us. One, internal liberalisation has given a breather to an otherwise chained business community. Two, favourable monsoons and foreign investment continue to generate some real demand. Therefore, in all probability, we will not crash. But neither will we fly.It is high time that we started looking at the fundamentals for, as Galbraith said, ultimately they determine the fate. The full potential of our economy and our people will only be unleashed when we deal firmly with the fundamentals of bad distribution of income and frauds.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.