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Modi government has made tactical changes, not strategic policy shifts, to restart growth.

There has been one radical change whose impact remains underappreciated. There has been one radical change whose impact remains underappreciated.

This has been a long first 100 days. The government’s sweeping electoral success brought with it high expectations of big changes in the direction of economic policies and reforms. So far, that hasn’t happened. Instead, we have seen a remarkable continuity with the previous government’s policies and worldview. To be sure, such expectations were largely created by us. For its part, the government has consistently argued — both in its election manifesto and in its first budget — that the economic woes of the last three years are a result of the previous government’s dysfunctional decision-making, that they did not stem from a wrong reading of the underlying drivers of the economy and consequently, wrong policies and reforms. In keeping with this belief, the new government has proffered better governance and more efficient decision-making to turn the economy around. We, on the other hand, had presumed that the new administration would decisively break away from the policies of the past to usher in a Margaret Thatcher/ Ronald Reagan moment in India.

Perhaps such a breakaway will happen over time, but restoring faith in government was the need of the hour when the new administration took office. This has been done by controlling government communications to remain on message, centralising decision-making and speeding up implementation. It was the last bit that startled the market, as almost all the policies implemented are those planned either by the previous government or by the NDA when it was in power in the early 2000s. These include liberalising FDI rules in select sectors; carrying on with the same old problematic PPP arrangements in infrastructure; continuing with the extant food security and other subsidy programmes; sticking with the unique identification system for direct cash transfers; pushing for the opening of bank accounts to bring the unbanked into the formal financial system — incidentally, proposed by former Prime Minister Manmohan Singh in the 2012 Independence Day address — and keeping to the previous government’s approach to WTO rules on farm subsidies.

Of course, there have been some differences, such as a more active management of grain reserves to better control food inflation and speeding up environmental clearances for projects. But nothing dramatic: no breaking up of PSUs, no mass-scale privatisation, no unfettered liberalisation of labour laws. Instead, the government seems focused on trying to restructure PSUs, turning these into efficient organisations and weaning them off the budget. Much like what the prime minister did when he was in charge of Gujarat. Ironically, this belief in the power of the public sector is a strong reminder that the legacy of Nehruvian socialism is alive and cuts across political affiliations. Disbanding the Planning Commission, whose wings had already been clipped — there was widespread consensus that the institution had outlived its role — isn’t really a sign of a strategic shift in policymaking; it is just good decision-making.

Central to the Thatcher/ Reagan regime change was a forceful articulation of its then radical departure from mainstream economic ideology. Many in the market had expected the new Indian government to do the same, which it hasn’t so far. Instead, it would appear from the actions of the first 100 days that the government believes in small tactical changes rather than big strategic policy shifts to help restart India’s long-languishing investment cycle and sustain it to deliver higher growth. In other words, the real difference isn’t going to be in directional shifts in policies and reforms but in better implementation, prompter decision-making, and improved governance. To be sure, the UPA government also continued with many of the reforms and policies of the previous NDA administration and such continuity reinforces the irreversibility of India’s reform process.

A cynic, however, may well argue that all this only goes to underscore what someone much wiser than me once observed: in India, there is only “strong consensus for weak reforms”. On a more serious note, India’s woes may not be the result of dysfunctional decision-making or a wrong analysis of the economy, leading to flawed policies, as one is wont to believe, depending on which side of the debate one is on. Rather, all these collectively reflect a far deeper malaise — a severely depleted state capacity, as Pratap Bhanu Mehta often reminds us. It is this depletion of state capacity that has tripped up the old growth model ever since the easy option of camouflaging the weakness by plugging into the global economy and riding the globalisation wave became unavailable in the aftermath of the 2008 crisis, as global trade has flatlined. One needs new institutions, new policy frameworks and radical changes in India’s underlying household-corporate-government relationship to forge forward.


There has been, however, one radical change whose impact remains underappreciated. In the government’s first full-year budget, about which a lot has been written, there was an almost throwaway line that argued that the RBI needed a “modern monetary policy framework”. One had hoped that it was an euphemism for moving to an inflation-targeting framework. Although such a framework is far from being formalised (it requires a new central banking act, as proposed by the Srikrishna panel constituted by the previous government), it was a pleasant surprise that the RBI, in its first policy review after the budget, accepted this for all practical purposes.

The implication of this change is likely to be far-reaching. History teaches us that chronic high inflation is broken either by moving to a fixed exchange rate regime or by formalising macroeconomic stability as the sole objective of monetary policy. Inflation targeting is very different from just having price stability as an objective of monetary policy. The RBI has almost always had the latter as an objective but the monetary policy framework was essentially reactive: if the inflation print surprised on the upside, policy was tightened; on downside surprises, it was eased. All this meant was that inflationary expectations in India were never anchored. Whenever inflation dipped, the clamour for rate cuts swelled, and the RBI reluctantly or willingly obliged, which ended up reigniting inflation a few months later. But the last review’s rhetoric was very different. For the first time, the RBI implied that monthly inflation data prints by themselves would not sway interest rate policy unless these altered the institution’s view of India’s medium-term inflation. Policy interest rates would be anchored by the objective of reaching 6 per cent inflation by January 2016 and not by monthly price volatility.

Finally, there is a real possibility that India’s chronic inflation will be conquered. And this is true reform. Ironically, by eschewing growth adventurism and focusing on stability, the new government has offered a real chance for a sustained economic recovery to take hold. By how much is a separate question. For growth to go back to the 8-9 per cent levels, bigger shifts in policy are needed than the tactical changes we have seen so far.

The writer is chief Asia economist, J.P. Morgan. Views are personal

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