Expert Speak India Matters
Published on Jul 04, 2019
Economic Survey says policy uncertainty has reduced; businesses may not agree

The most counter-intuitive discovery in Economic Survey 2019-20 is that policy uncertainty in India has decoupled from rest of the world in 2018. Using the Economic Policy Uncertainty (EPU) index that tracks the phenomenon for 20 major economies, including India, the Survey shows the divergence between global economic uncertainty and India. As per the index, this journey began in January 2015, strengthened in January 2018 and consolidated by May 2019.

As if this were not enough, the Survey sees “green shoots of turnaround in investment activity”. These, it states, are due to the “continued resolution of the twin balance sheet problem following implementation of Insolvency and Bankruptcy Code (IBC) 2016 and recapitalisation of banks”. It further talks up the business climate through measures taken to improve ease of doing business, clarity in the policy for FDI liberalisation as reasons that may have reduced economic policy uncertainty.

Outside the thick walls of North Block, this may not hold. The flux in the economy due to the twin balance sheet problem of companies and banks remains – companies are not investing, banks are not lending, and talks of recapitalisation of banks is just that: talk. A shroud of fear has fallen on business activity. Entrepreneurs and bankers alike are delaying or red-taping projects and businesses for fear of being pulled out of retirement and thrown into jails. The recent resignation of almost 750 independent directors from boards of listed companies is one data point.

The problem is simple. India is in a transition from one way of doing business to another. The old way of using public funds to fill private pockets politicians, bankers and entrepreneurs is behind us. The reason is the implementation of IBC, the change in indirect taxes infrastructure to a goods and services tax (it still needs cleaning up), and the amendment to the Benami law. These three laws have destroyed the old way of doing business. But the new way is yet to come up. All stakeholders in the system – the entrepreneur, the banker, the regulator and the government – are still figuring this new world. Hence the flux, the uncertainty.

The reason is the implementation of IBC, the change in indirect taxes infrastructure to a goods and services tax (it still needs cleaning up), and the amendment to the Benami law. These three laws have destroyed the old way of doing business

The government needs to lead this change. First, it must come down as hard as it can on government servants and bankers that continue to work in the pre-2016 era (these three laws came around this year). The compulsory retirement of senior tax officials as a start must be followed by hard legal action against them. Second, the government needs to understand that every business failure is not a fraud, every bad loan is not a scam – these are part and parcel of doing business. Third, the convoluted laws meant to control rather than catalyse businesses need to be amended, the consequent rent-seeking bureaucracy withdrawn. And fourth, the primacy of business and enterprises as engines of wealth and job creation and through them economic growth need to be understood, respected and supported visibly by this government, which has nothing to fear – the ‘suit-boot ki sarkar’ slogan is well past its use-by date.

India may have disconnected with the global economic policy uncertainty as the Survey’s data holds. But the transmission of policy certainty and the consequent action by businesses and bankers will come with a lag. If the Survey findings are accurate, by the next quarter we should see new business enthusiasm in the economy. If not, perhaps the index needs to be questioned, and a new edition of the Survey published.

The Survey makes three fine recommendations on delivering policy certainty, all of which are good practices for policymaking:

First, top-level policymakers must ensure that their policy actions are predictable, provide forward guidance on the stance of policy, maintain broad consistency in actual policy with the forward guidance, and reduce ambiguity/arbitrariness in policy implementation. To ensure predictability, the horizon over which policies will not be changed must be mandatorily specified so that investor can be provided the assurance about future policy certainty.”

Second, following the adage that “what gets measured gets acted upon”, economic policy uncertainty index must become an important index that policymakers at the highest level monitor on a quarterly basis. Relatedly, following the evolved academic literature in this area, government must encourage construction of economic policy uncertainty sub-indices to capture economic policy uncertainty stemming from fiscal policy, tax policy, monetary policy, trade policy, and banking policy.”

And third, quality focus: “The actual implementation of policy occurs at the lower levels, where ambiguity gets created and exacerbates economic policy uncertainty. As organizations in the private sector compete and seek the highest level of quality certifications, Government departments must be mandated to similarly seek quality certifications.”

As a $3 trillion going on $5 trillion economy, India’s policy conversations need to evolve; they must befit and reflect a new India, and the Survey has given one stream of thought to pursue.

Stepping back, the Survey has added one year to India’s $5 trillion GDP target. “To achieve the objective of becoming a $5 trillion economy by 2024-25, as laid down by the Prime Minister, India needs to sustain a real GDP growth rate of 8%,” the Survey states. But barely five months ago, in his interim Budget, then Finance Minister Piyush Goyal’s target was by 2024: “We are poised to become a Five Trillion Dollar Economy in the next five years and aspire to become a Ten Trillion Dollar Economy in the next 8 years thereafter.” Less than two months ago, Prime Minister Narendra Modi, whose “vision” the Survey derives its strength from, had also hung the number by 2024.

The mathematical change in the growth number because of one year is significant: if India is to be a $5 trillion economy by 2024 it needs to grow by 10.8%, but if 2025 is the target year, that growth falls to 8.8%. This may seem to be a minor quibble. But the incremental effort that these 2 percentage points make to growth are not minor – they will need more ambitious and bolder policymaking ideas than this Survey offers.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


Gautam Chikermane

Gautam Chikermane

Gautam Chikermane is a Vice President at ORF. His areas of research are economics, politics and foreign policy. A Jefferson Fellow (Fall 2001) at the East-West ...

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Guillermina French

Guillermina French

Guillermina French Fundacin Ambiente y Recursos Naturales (FARN)

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