Union finance minister Arun Jaitley could not have been more appropriate when he told delegates at the recent World Economic Forum that reforms are not about one sensational big idea.
Reforms, economic reforms to be more precise, are a continuum of policy moves. In economics there is a widely used concept called the grand utility possibility frontier.
It represents a technically plausible ideal best state that a society or economy can attain. In contemporary decision-making, the best examples of this frontier can be found in the allocation of natural resources, tax laws and government regulations over sectors such as finance and telecommunication.
This state of stability, as it were, is what policymakers the world over define as their perfect target to achieve, which also matches everybody’s expectations.
The change of guard at the Centre, following the BJP’s victory, has raised expectations among people and investors that stalled policies will now get a push. Such expectations are based on a few assumptions.
First, the economy was in the boondocks because the UPA government could not push through tough decisions because political risk-management was given priority status. Second, Narendra Modi’s “Acche din aane wale hain” pre-poll campaign promised to usher in good times. Third, the BJP enjoys a majority in the Lok Sabha and that should ensure smoother passage of key Bills in Parliament.
While, there is no gainsaying the fact that the economy is in a much better shape now, experts reckon that there has yet to be a sustained revival in investment. Pressure will build for more major restructuring needed for India to remove possible constraints to growth.
The government will have to move on major issues such as land acquisition, infrastructure deficit, investment in human capital, lack of regulatory consistency across states and the need to develop the manufacturing sector and improve agricultural productivity. With low energy prices, the currency stable and core inflation falling, interest rates are likely to come down.
This favourable climate is creating more room to introduce ‘big-bang reforms’. But the biggest threat to a government that has a clear mandate is sometimes the unrealistic expectations that come with a big victory. It may just be the time to be a little more courageous and to press the foot on the accelerator. The world has got attracted to the energy of the new government.
Managing these expectations and hand-holding transition for an economy like India that has multiple objectives to achieve — from poverty reduction to attracting investment — are critical to reach the next level of equilibrium that has remained elusive over the last few years.