What are Virtuous  & Vicious Cycle in an Economy?

Why in News ? As per the RBI’s State of Economy Article , the fiscal, monetary, and regulatory measures undertaken so far this year should pave the way for a virtuous cycle of higher private investment.

What does it Mean ?

Policy Actions (Causes): The government (fiscal), RBI (monetary), and financial sector bodies (regulatory) have taken specific steps this year (like tax cuts, stable interest rates, and improved bank rules).

Virtuous Cycle (Mechanism): These actions are expected to create a positive, self-reinforcing loop where higher private investment leads to increased productivity, which in turn drives stronger economic growth.Outcome: This continuous cycle will build long-term economic resilience for the Indian economy.Virtuous Cycle in an Economy :

• A situation where positive things feed each other and the economy grows stronger on its own.

Simple example of a virtuous cycle:

1. Government/RBI cut interest rates and spend on roads, ports, etc.
2. Borrowing becomes cheap → companies invest more (new factories, offices, etc.)
3. More investment → more jobs → people earn more money
4. People spend more → companies sell more → make higher profits
5. Higher profits + strong sales → companies invest even more
6. Banks see good loans being repaid → they lend even more confidently
7. Economy grows faster → tax collections rise → government can spend more again

→ Everything keeps pushing everything else upward. This is what the RBI is talking about when it says “virtuous cycle of higher private investment.”

About Vicious Cycle in an Economy :

The opposite: negative things reinforce each other and drag the economy down.

Simple example of a vicious cycle:

1. Growth slows down → companies are scared → they stop investing
2. No investment → fewer jobs → people lose income or fear losing jobs
3. People spend less → companies sell less → profits fall
4. Companies cut more jobs or salaries → even less spending
5. Banks see many loans turning bad → they stop lending (credit crunch)
6. Without credit, even healthy companies can’t expand → more slowdown
7. Government collects less tax → has to cut spending or raise taxes → hurts growth further

→ Everything keeps pulling everything else downward.

Real-life examples of vicious cycles India has seen in the past:

• 2011–2013: High inflation → very high interest rates → low investment → slow growth → bad loans → banks stopped lending → even slower growth.
• 2019–2020 (pre-COVID): Corporate debt crisis → low investment → jobless growth → low consumption → more stress on companies.