Growing out of this banking crisis is harder

Banks are no longer able to benefit from the combination of high inflation and low interest rates in the way they did earlier

In post-1991 history, we in India have gone through two cycles of boom and bust. The investment boom of 1994 gave way to the woes of the late 1990s, and the investment boom of 2008 gave way to difficulties after 2011. The interesting question is: Why has this downturn proven more difficult to get out of? One element of the explanation is the 4 percentage point decline in inflation.

Let's start at the first boom and bust. Gross fixed assets of private non-financial firms (in the CMIE database) grew by 27.2 per cent in 1994-95. After this, we had six adverse