It is now over a month since the new government in Delhi took charge amid high expectation of reform and policy correction. So far, there have been few big-bang announcements. Instead, the new administration has moved cautiously, focusing on calibrated changes. Some of these have worked, while others had to be pared back due to political considerations. More importantly, there hasn’t been a mad rush to prop up growth by any means necessary. Rather, the government has reassuringly attended to bringing inflation down as a priority. These are all positive signs that the new government believes that it is in it for the long haul and intends to focus on lasting reforms.
But this perceived reticence has simply heightened expectations that the government is saving bold policy-reform announcements for the budget, making it a vision document for the next five years. The expectations from the budget have boundlessly increased. Many of them are internally inconsistent, others are not even under the purview of the ministry of finance and several are just bewildering.
One problem has been that the market and analysts alike (including this writer) are basing their policy and reform expectations on what they believe the government’s worldview is. The government hasn’t articulated that. If the dysfunctional decision-making of the previous government was the only reason why the economy has languished, then, by inference, one should expect much of the same of what was dished out during the last decade, except that the policies and reforms would be better executed. The previous government’s specific choices of macroeconomic policies and reforms reflected its worldview. It is not clear whether the electorate rejected that worldview, or just the disappointing outcome of the associated policies because of poor implementation and governance. Equally, it is unclear whether better implementation of those policies and reforms can help India break out of the current low-growth quagmire in a substantial way. More efficient governance can clearly increase productivity and investment, but one wonders whether that is all that India needs to get back on a higher growth path.
For one, the global economy has changed markedly in the last few years. The easy solution of plugging into global trade and riding the globalisation wave to high domestic growth is over. After recovering from the 2008 crisis, global trade has been stagnant for the last three years, reflecting slow-moving structural changes such as ageing populations in developed markets and economic rebalancing in China. continued…