So, ratios such as bank credit growth to real GDP growth or corporate sales growth to real GDP growth can give extremely wrong signals. The problems may seem less dramatic when nominal GDP is considered as the base. This column has previously pointed out how the sharp drop in nominal GDP growth creates budgeting problems for the government. The notion that nominal prices can be sticky undermined the classical assumption that money was neutral, a mere veil with no impact on real economic activity. The Indian economy is not yet out of the woods but the money illusion is making the situation seem worse than it is.

Source: Mint June 20, 2017 18:11 UTC