Eminent economists have criticized many of the policy decisions of the present NDA government spearheaded by the prime minister Narendra Modi. Be it demonetization or goods and services tax (GST); the government has faced several flaks from the prominent personalities across the globe. In recent times, the government has also been at loggerheads with the Reserve Bank of India (RBI) on several policy issues. The other major development that did draw some attention is data related to economic growth, measured by Gross Domestic Product (GDP). After coming to power, the government changed the base year of calculating GDP, and the number from the previous regime looked impressive. However, with the new data on the back-series being released now, it seems that the previous UPA regime had a slower growth compared to the present NDA government. According to the revised data, Indian economy grew by an average of 6.67 percent in the nine years ending on 31 March 2014 when UPA was in power. The average growth rate during the four years of NDA ending at 31 March 2018 was 7.35 percent.
Irrespective of the GDP data, many agree that policy paralysis plagued the previous government, especially in the last few years. The government seemed too weak to take any significant decision. The indecisiveness created the impression that the government was not serious with its business and that impacted the economic growth negatively. Empirically, this is contentious as no yardstick can measure or capture such policy uncertainties. However, thanks to an index created by economists Scott Baker (Northwestern University), Nick Bloom (Stanford University) and Steven Davis (University of Chicago), there is a quantifiable way to gauge the impact of economic policy uncertainty (EPU). The uncertain policy index is a news-based index that captures the uncertainty related to economic policies. The measure tries to gauge policy uncertainty based on the number of articles appearing in seven India newspaper and contains terms related to uncertainty in economic policy such as 'Regulation', 'Central Bank', 'Monetary Policy', 'Policymakers', 'Deficit' Financing, 'Legislation', and 'Fiscal Policy'.
Recent evidence shows that the level of policy uncertainty in India has remained muted when compared to the levels prevailing around the world. For most of the present government, EPU for India has remained below the global EPU (Chart 1). There is a significant level of uncertainty prevailing at the global level with Trump's domestic policies, trade war with China and others, and Brexit. All these have propelled EPU to a very high level. Despite global headwinds and domestic challenges, India, on the other hand, has been able to manage its policy decisions quite well. Monthly EPU for the US has remained at elevated levels since Trump was elected as President two years ago. On the contrary, monthly EPU for India has remained lower since Modi took over as the Prime Minister of India more than four years ago.
Chart 1. Global Economic Policy Uncertainty & Indian Economic Policy Uncertainty
So why is EPU relevant for the economy? Economic agents (we) do not like uncertainty; it makes it difficult for both consumers and investors to make optimal decisions. In times of high uncertainty, people tend to hold on to their decision to purchase, produce and sell. Thus, in times of heightened uncertainty, economic activity comes to a halt. Some economists attributed the last economic recession to the increased level of EPU. Since then EPU has attracted considerable academic and media attention.
A simple plot (Chart 2) of monthly EPU index and the Index of Industrial Production (IIP) for India reveals some interesting observations. There is a close association between EPU and IIP. In times with high EPU, IIP has shown a decline. Our estimates reveal that a one percent increase in EPU can potentially decline IIP by close to 0.5 percent. The finding is consistent with some of the other findings across the world. Hence, the steady growth in economic activities in the recent past could be somewhat attributed to the lower levels of EPU.
Chart 2: Economic Policy Uncertainty and Index of Industrial Production
Thus even though, the present government has faced criticism for its policies, but one thing is clear that this government has been able to make some decisive moves when it comes to policies. We can argue about the merits of the several economic policies, but at least this government has so far been able to avoid policy paralysis. In a time when there is an increasing level of uncertainty across several economies including the US, China, and the UK, India is undoubtedly a bright spot. The present government certainly deserves credit at least on this aspect. It remains to be seen that given the recent political setback in the state elections and impending general elections whether the government can maintain its stance.
- Prof. Debasis Rooj, Faculty, FLAME University
*Opinions expressed in this article are personal.