What are Animal Spirits?

animal spirits / ˈa-nə-məl-ˈspir-əts / plural noun.

1. obsolete : the nervous energy that is the source of physical sensation and movement

2. vivacity arising from physical health and energy

3. in Keynesian economic theory : emotional feelings and desires (such as an optimistic willingness to take positive action) that influence the economic behavior of consumers and investors — “We need the Indian government to help us bring back animal spirits.”

Based on the data released by the government, the country’s GDP grew at a rate of 5% in the first quarter of FY20—a 6-year low in the April-June quarter. This was followed by interviews with executives from across all major sectors—banking, manufacturing, textile, and real-estate.

Each industry with its own problems. The banking sector was struggling from a bad-debt/NPA crisis. The manufacturing sector was struggling from low consumer demand (which was because of declining rural wages). The textile industry—practically out of business—from the influx of cheap imports. And the real-estate sector struggling from a liquidity crunch (for which read “they built a lot of houses which nobody wants to buy”).

But there was one statement made during all interviews, one problem common to all industries—lack of animal spirits. Everybody wanted it to return, but nobody knew how. “Stop tax-terrorism to bring back animal spirits… Relax the environmental laws to bring back animal spirits… Reduce tariffs to bring back animal spirits… Increase tariffs to bring back animal spirits… Yes, the tax break will help, but the government needs to do more if they want to, bring-back-animal-spirits.”

In his book The Billionaire Raj, James Crabtree talks about how businesses acquired huge loans (debt) based on their political connections. Then bribed their way into purchasing—mining blocs, spectrum licenses, highway and infrastructure projects—anything that required a babu to sign a piece of paper.

Companies seeking public contracts in competitive tenders often entered unrealistically low bids, for instance, in the expectation that their connections would allow the contract to be renegotiated later for a much higher fee. On other occasions contracts would be gifted without bidding, or through a process so clearly fixed in advance that other serious bidders were discouraged from entering the fray. Then overbidding was the preferred method: a company would make an unusually large offer and siphon away the difference between that figure and what the work actually cost.

If one is to believe everything written in the book (and there is no reason for me to believe otherwise). It would seem that most businesses that have operated in sectors tied closely to the government have done so by relying on some form of favoritism, in order to grow.

Coming back to animal spirits, and where has it gone?

It looks like Indian businesses had gotten too used to the government and politicians holding their hand and helping them crawl past the finish line (and in some cases, as seen above, redefine what the finish line means). They’ve never had to innovate, modernize, or compete because the rules were always skewed in their favor. They won even if their performance was mediocre.

Indian businessmen come across as that cranky toddler at the supermarket aisle—mummy, I want animal spirits. Grown men, running million dollar companies, whose old methods of doing business have run out of steam, unable to cope with reality. One could say that most of these people crying “we need to bring back animal spirits” never had any to begin with.