Apart from the usual challenges that might explain our middling performance, the finance minister needs to reflect on four credibility gaps.
In September 2022, Finance Minister Nirmala Sitharaman asked Indian industry why they were not investing, despite tax breaks. In her October 2024 trip to Washington, she expressed surprise at the slow crawl of foreign direct investment. There is some investment coming but, clearly, she was puzzled: What is holding investors back? India is a dynamic and robust economy, the government is doing most things right, the headline growth number of seven per cent looks reassuring. Yet we seem to be struggling to get private domestic investment and FDI up to a level that is reassuring. If you read private equity analysis of the Indian economy over the last decade or so, it is striking how year after year, they speak of “green shoots” in private investment. You would have thought that a decade of green shoots would have at least produced a mini forest by now.
The finance minister’s questions were an oblique but honest admission that there is a serious problem. But acknowledgment of a problem is seldom a path to deeper self-reflection with this government. Either the response is: It must be a communication problem. Or we double down on thinking of the economy as a morality play.
This sense of the economy as a morality play has infected hardcore economic analysis. Here is a sample from the October 2024 RBI Bulletin: “Private investment is showing some encouraging lead indicators, although the slack continues.” But this is the explanation for the slack: “Corporate results for the first quarter of 2024-25 had shown a deceleration in real gross value added by non-government non-finance companies. Real investments in plants and machinery remained subdued while net fixed assets have slowed down. Apparently, the crowding in effect of government capex is lagged. Given the moderation in sales growth, corporates appear to be protecting margins by conserving spending on both raw materials and manpower while delaying an aggressive capex push.”
But having highlighted slow demand and uncertainty over whether capex crowds in investment, we move onto the morality play. The RBI Bulletin says: “There is a view gaining ground that the time for private investment is now; delay risks loss of competitiveness.” It is like saying, there is no demand, something almost every recent report suggests, but “deploy your capital anyway.” One of India’s most eminent economists, who chooses to remain anonymous, joked that this was a version of the RBI doing open mouth operations. Open Mouth Operation, the belief that mere statements can affect outcomes, seems to be a good summation of how we run the economy. These are usually done to effect yield curves. We are trying a novel experiment of seeing if it can work for investment.
But apart from the usual challenges that might explain our middling performance, the finance minister needs to reflect on four credibility gaps. The first, as illustrated above, is epistemic. Recently, Nestle FMCG companies highlighted sluggish demand growth, a consequence of years of systematic overestimation of the size of the Indian middle class. But let us stick with the RBI. Disagreement over setting interest rates is inevitable. Interpreting the economy is an art, not a science. But in the recent Monetary Policy Committee Statements, technically the most important prognosticator into the future, you find this perplexity.
One MPC member says, “The Consumer Confidence Surveys suggest that the general economic conditions have worsened compared to a year ago.” Another says, “RBI surveys show increasing consumer confidence.” Now you may disagree over the implications of a survey but the claim of the survey should be clear: What are we supposed to conclude? Is consumer confidence rising or declining? It will get worse when we come to analytics. Are we comfortable with an entirely investment driven economy a la China (this will be delusional since China could export goods)? Are we giving up on consumption?
The second credibility gap is regulation. The prime minister repeatedly tried to do another open mouth operation by trumpeting India’s success in ease of doing business. But every single India strategy will have a sentence like the one in Australia’s “An India Economic Strategy to 2035”. “Direct Investment in India is challenging due to its business environment and regulatory unpredictability.” The Economic Survey 2024 was admirably honest in asking the government to reduce complexity, compliance burden and uncertainty. It is a scandal that like “green shoots”, sentences like these remain permanent features of any assessment of India’s economy. Contrary to expectations, GST and other tax reforms have made the law more uncertain and onerous, and corruption is back with a vengeance. And can you imagine what regulatory signal we send when we create an economy where thousands of its poorest citizens cannot access their own money because of KYC norms? This may not affect big business, but it is redolent of the regulatory sclerosis that has worsened in the system.
The third credibility gap is a taboo to talk about: Concentration of capital in India. Almost all of India’s recent policies like GST were devastating for small enterprises. But As Viral Acharya powerfully documented, concentration of power in the top-five firms, as measured by both assets and sales, has increased dramatically post-2015. This concentration of power in a few firms has put a question mark on the credibility of Indian regulation and state-capital relations as a whole. As the joke goes, for regulatory purposes, India is a three-company economy: Tata, Ambani and Adani. Their execution capabilities may be high. But this much concentration of capital sends a really adverse signal to investors. First, their disproportionate power in the system, whether in their ability to determine which credit can be accessed, what external commercial borrowing policies should be, and therefore exchange rates, disadvantages other players. But more seriously, if you ask business privately, they will tell you that the risk of outright expropriation — creating conditions where investors are forced to sell or do deals with these companies — is now considerably high.
One of the odd things about credibility is that it comes as a whole. The trustworthiness of a country’s capabilities is not established by an odd scheme or examples of success. It has to be reflected in a wide range of national capabilities, including ordinary governance. The signal of the gleaming highway is dimmed by the sight of waterlogged cities. In the absence of credibility, all we get is Open Mouth Operations, thinking words can affect outcomes. But that only reinforces the sense that those in charge of India’s economy are in the grip of too many delusions to inspire confidence.
The writer is contributing editor, The Indian Express
