One of the most important ideas in economics of the last century that we owe to John Maynard Keynes is that expectations play a central role in shaping the animal spirits of enterprise and decisions about investment and consumption by households and firms. Expectations are often shaped more by sentiment than by hard facts. Herd mentality, a phenomenon with which investors are all too familiar, is nothing more than shared sentiment, but it has tangible consequences for the economy. The sentiment in and on India at the moment is more bearish than bullish, and is being shaped by the view that in the realm of economic policy the Union government is rudderless and leaderless. It is, therefore, reassuring that Finance Minister Pranab Mukherjee chose to take the bull by the horns and respond to such a perception by engaging financial journalists. Mr Mukherjee may well have a good case to assert that there is, in fact, no “policy paralysis”, as he put it, and that the government has been proactive on both economic policy and fiscal management. Even if the facts are on Mr Mukherjee’s side, and even if one doesn’t make much of a muchness about whether the glass is half full or half empty, it is reassuring that Mr Mukherjee recognises the “fact” that there is pervasive cynicism and scepticism about the government’s management of the economy and the fisc. Therefore, rather than asserting that there is no policy “paralysis”, he must convince investors and markets with action.
Part of the problem for Mr Mukherjee is that the second term of the United Progressive Alliance government (UPA-II) began on a note of high expectations and the ruling Congress party has not been able to explain why it has delivered below expectations. Large part of the “cynicism” to which Mr Mukherjee referred is of recent origin and a result of a mix of sins of omission and commission on the part of UPA-II. Besides, UPA-II has been weak and wayward in its political communication. Sentiment, after all, is shaped by experience as well as hearsay. Even if the experience has not been as bad as the government’s critics claim, and on this assertion Mr Mukherjee can make a reasonable case, the hearsay has been terrible and is getting worse. Clearly, even after forming a group of ministers on media relations, UPA-II has not been able to win the perception battle. Finally, UPA-II’s economic policy team is no longer convincing. It speaks in many voices, many of the senior officials who have recently joined the team do not inspire much confidence and the finance ministry has ceased to be the epicentre of anything — policy, ideas, long-term fiscal management and suchlike. The tentativeness and non-transparency that have come to mark so much of economic policy making in New Delhi were best captured by Mr Mukherjee’s remark that while the incumbent governor of the Reserve Bank of India was a “good man”, the government has not yet taken a decision on the extension of his term, even though just six weeks are left of his present term! How many modern economies are run like this in times like these?
