Reversals, risk and investment

Policy reversals make little difference to the problem of private investment

Does an environment with more policy reversals fuel policy risk and inhibit private investment? The flourishing of the market economy does not require autocratic control with a strong government that periodically releases irreversible decisions. The important thing is getting to good policies, and dispersion of power is a means to that end. There are pathways to do policy in ways which induce less policy risk. While there will always be the tactical detail of day-to-day policy decisions, policy coherence, and strategic thinking in policy help reduce policy risk. The animal spirits of the private sector matter and these are shaped by the strategic view of improvements in the Indian state.

Economic growth is forged in conventional private investment in physical capacity (eg increase in the fixed assets as seen in annual reports) and in private investment in obtaining higher productivity. Such investment is risky and is greatly influenced by the stance of the state. Do the recent policy reversals have an adverse impact on perceived policy risk and thus on private investment? It is unlikely.

Difficult negotiations between multiple political parties, which lead to twists and turns in policy, are not inconsistent with economic success. The advanced economies of the world are vastly successful in economic terms (eg US per capita gross domestic product is about 10 times bigger than that in India), and all advanced economies are liberal democracies where power is vigorously contested, and there is a day-to-day evolution of policy decisions reflecting the tug and pull of rival interests and views.