Policy and Analyses

Here, we bring out the key influences, both shocks and policy changes, that account for the performance of the economy brought out in the earlier chapters. Being an analysis of the dynamics of the short run, the focus is on demand and its determinants. Structural policies and changes are covered to the extent that they have a bearing on the demand. We cover both the financial market side (including the global market) and the goods and services market. The emphasis is on the policy though since the Indian economy being small in relation to the rest of the world, there is always a policy response that is possible to keep growth at high rates, given also its emerging character—the availability of idle and underutilized labor. The fiscal stimulus provided to counteract the GFC was what kept growth rates at a high level of 9% in 2008–09 and 2009–10 and part of 2010–11. The near simultaneous withdrawal of the fiscal stimulus and the monetary contraction (to fight largely a supply-side inflation that was also overestimated), c.2011–12 was the immediate reason for the sharp decline in investment and in output. The problems were compounded by the so-called “policy paralysis” brought about by a spate of bans and governance issues in the telecom and mining sectors. However, the suddenness of the monetary squeeze when the rest of the world was still in a situation of ample liquidity braked investments generally and brought many of the investment projects in infrastructure including PPPs to their knees. Many had built in debilities but not all. The feedback effect from problematic design to a high interest rate regime put pressure on the banking system to which the risks had been shifted. The uncompensated demand reduction due to the success of the GST was an issue. Most initiatives of the Modi Government, despite their potentially very large public and social value, did not have the necessary basis in design, organization, policy and law, and as such had little impact. The fiscal side too was conservative with the large reduction in the MGNREGS allocations, and the underspending vis-à-vis budgets in a period when “animal spirits” were down.