1. De- Leveraging: Out of the two, this would be the most painful and the one that would delay the recovery. One prime difference between 2001 and the current crisis in India would primarily in the amount of leverage in the economy during these periods. Leverage as a concept has grown quite strongly in India over the last 3- 4 years. Most of the households in India have used leverage in building up assets(like houses) and buying goods (like cars). Going forward, most employees in the service sector primarily would see either a fall in their incomes or jobs. For this set ,which has been the major beneficiary of the boom of 2003-07 ,current crisis would be the first major crisis which threatens their livelihood. Any de-leveraging being done by this set in terms of curtailed credit spending would mean a delayed recovery for the economy till everyone builds up a sufficient equity base to fund their purchases. For the economy to take this path, the scars left by the crisis should be strong enough on the people. Or the government/ society makes saving a virtue once again.
But are there any economies which have not seen build up of leverage in the last few years. The winners, if the economy takes this path, would be the countries which have high savings and limited debt. They would be able to reverse the process quickly and at minimal pain.
2. Another bubble: If the government wants to increase the growth at any cost, then it may lay the foundations for another bubble. Most of the governments and articles always treat recession as something that has to be avoided at all costs. This might lead to discouragement of the De- leveraging process. In the short term it might be beneficial but it would make it even more difficult to get out of the addiction to leverage, similar to a drug addiction.
Practically the end result should be a mix of these, but do you think is there a third path that I have overlooked?
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