Monday, March 7, 2016

The march of the "market perception" fairy

Amid all the discussion surrounding the build-up to India's recent Union Budget, the big struggle was between those advocating staying the course with fiscal consolidation and those arguing for deviating to revive the investment cycle by raising public spending. 

The former argued that any deviation from the pre-defined fiscal consolidation path would raise questions about the government's commitment to reforms and alarm the financial markets. Foreign investors will hesitate and private investments will not be forthcoming. The latter opposed this view arguing that given the strained corporate and banking sector balance sheets, public spending was the only economic engine with the firepower necessary to trigger investment revival. The small fiscal cost would be more than offset by the potential gains from revival of growth.  

The government stayed the course with fiscal consolidation and markets have been expectedly euphoric. It is now reasonable to presume that the market reaction could have been extremely adverse if the government choose to abandon fiscal consolidation. So the fiscal hawks won this round. And have been winning for sometime now. But these may be Pyrrhic victories and not be in the best interests of the country.  

This episode is illustrative of the shift that has taken place in India's economy policy narrative in recent years. I have written about it earlier here. Courting and satisfying the "market perception" fairy has become the guiding principle of economic policy making. Apart from fiscal consolidation, this fairy likes lower taxes, deregulation, reduction in subsidies, and PPPs in infrastructure. The followers claim that any policy initiative that goes contrary to these, howsoever objective and prudent, and expedient for the circumstances, runs the risk of antagonizing the fairy and bodes ill for the economy. 

It is a reflection of the extent of ideological capture and resultant social internalization of the elites representing corporate India that their idea of reform equates with only such policies. Any thing to the contrary is "socialist" and all else, including in areas as important and health and education, are of marginal value and therefore best consigned to footnotes.

Unfortunately, this capture of the policy making narrative is as much corrosive and distortionary as the pre-nineties socialist orientation of the Indian economy. It is as much disturbing a capture of policy making by crony capitalists and corporates, as was the case in the bygone socialist era with the neta-babu nexus. The Budget tussle is only another reminder that capitalism needs to be saved from capitalists.

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