Look what sentiments can do to an economy!

Sentiments undoubtedly play an important role in an economy. In recent times, we have seen how sentiments can swing consumer and investor behavior, thereby affecting the economy in some manner or the other.

In my view, technology--the Internet, mobile telephony, etc--and globalization (more specifically, the outsourcing boom) have added more wings to sentiments that go around (often from one continent to another in a matter of seconds) and increased the role they play in an economy.

The result: even if the economic fundamentals are strong, low sentiments can bring down consumer spending, investor outlook, etc, and play havoc with the lives of millions of working class people. It probably falls in the realm of some new-age mumbo jumbo, as in, if you "think positive, you'll experience positive events", and visa versa. Or does it?

When I recently left for a holiday May 15, after casting my electoral vote the previous week, India was a very different place. No one knew who would be the next prime minister, the global recession was at its peak (it still is--with General Motors having filed for bankruptcy yesterday) and India was to see the impact of recession for the next two years, we were told.

And when I got back last week, there was a new government in place with the Congress-led United Progressive Alliance (UPA) having garnered a near majority; and with a new Cabinet that has lots of young male and female ministers. The stock markets reacted very positively to this change. Today, many of us find our investment portfolio back in the black (after nearly a year).

Even the newspapers and television channels echo the investor sentiments. In early April, when sentiments were low, the Organization for Economic Co-operation and Development (OECD) had said that India's economic growth may slow to an 18-year low of 4.3 percent in 2009. And post-elections, on May 29, there were reports that the Indian economy grew by an "impressive" 6.7 percent during the year ended Mar. 31, 2009, despite the economic recession.

In his address to the media on May 27, India's newly-appointed finance minister Pranab Mukherjee said he was confident the country would go back to the high gross domestic product (GDP) growth levels seen earlier (read: growth rates of around 9 percent, as posted during 2005-07).

The tech sector, too, is a lot more optimistic today. There are news reports that U.S. President Barack Obama's new tax plan, which reduces tax breaks for U.S. companies that ship jobs overseas, will not have much impact on the Indian outsourcing industry. And with the new government in place, India is poised to see 3G, WiMax, unrestricted VoIP (voice over Internet protocol), numbers portability, MVNOs (mobile virtual network operators), and large investments in infrastructure that should augur well for the tech sector in the long run.

While I am still wondering whether or not so much change can take place in an economy over a fortnight, I really think the economists should work around a theorem on the role sentiments play on the economy in this age of the new media, where every bit of news spreads like wild fire. And where one man's optimism/pessimism rubs onto another's.

Is the economic growth rate directly proportional to the (aggregate) consumer/investor sentiment, ceteris paribus?

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Swati Prasad

Swati Prasad is a New Delhi-based freelance business journalist. Over the last 15 years, Swati has worked in both Delhi and Mumbai as a correspondent and editor for India’s leading publications, such as The Economic Times, Business Standard and Business Today. As a freelance journalist, she regularly writes on technology, economy and corporate issues.