The problem of private investment due to Policy reversals

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 helps 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 investments in physical capacity (e.g. increases in the fixed assets and in private investments in obtaining higher productivity. These investments are risky and are greatly influenced by the stance of the state.

The plot line in a democracy will always have many twists and turns. There is nothing wrong with reversals; what matters is getting to good outcomes.

Governments are vast organisations where decisions are made at thousands of places. This raises the problem of policy coherence. Left to itself, decisions made in different places lack harmony, or even conflict with each other. When these heterogeneous actions are seen by private sectors, it is confusing and exacerbates policy risk.

The phrase “animal spirits” is applied to the leap of faith that goes into private decisions to invest, and the optimism of the periods of investment booms and high growth. While it is tempting to resort to propaganda in trying to induce animal spirits, this is not effective. Claims of progress and alternative facts do not persuade. Only policy progress helps address the caution of the private sector.

As most of the Indian state is malfunctioning, private sectors repeatedly run into difficulties. They need confidence that they will get access to policy makers and important problems will be solved.

Animal spirits are also shaped by the overall levels of conflict and toxicity in the society. When there is harmony and optimism in the overall culture, this helps foster animal spirits. When the broader culture is infused with anger and violence, it becomes harder for private sectors to make the leap of faith that is required in investing.