Noting that policy uncertainty in India had declined over the last few years, the Economic Survey 2019-20 has called for predictable actions from policy-makers and use of labels such as “Standstill” versus “Ratchet up” to categorize various policies, among other steps, to ensure a stable investment climate.
It said that reducing economic policy uncertainty is critical because both domestic investment and foreign investment are strongly deterred by increases in domestic economic policy uncertainty.
India has secularly decreased domestic economic policy uncertainty since 2012 and has been exceptional in reducing this uncertainty since 2015 amidst a global environment of increases in the same. “However, policymakers need to double down on reducing domestic economic policy uncertainty,” the Survey said.
As per a global analysis, the global uncertainty index increased from 112 to 341 in 2018 whereas that of India remained below 100. Economic policy uncertainty, when measured using EPU index, was the highest in 2011-12, coinciding with the “years of policy paralysis”.
Economic policy uncertainty has reduced significantly over the last decade in India.
The survey suggested that top-level policymakers must ensure that their policy actions are predictable, provide forward guidance on the stance of policy, maintain broad consistency in actual policy with the forward guidance, and reduce ambiguity/arbitrariness in policy implementation.
“To ensure predictability, the horizon over which policies will not be changed must be mandatorily specified so that the investor can be provided the assurance about future policy certainty,” the annual document said.
After various coalition governments at the Centre, the Narendra Modi-led BJP crossed the majority mark on its own to form the government in 2014. It came back to power in May this year again after winning a landslide victory adding to stability and continuity in policies.
The Economic Survey, first of the new Modi government, has proposed construction of economic policy uncertainty sub-indices to capture economic policy uncertainty stemming from fiscal policy, tax policy, monetary policy, trade policy and banking policy.
“Tracking these sub-indices would enable monitoring and control over economic policy uncertainty,” the survey said.