Feel the Stones
A saying by Deng Xiaoping , the father of modern economic superpower China, is very popular: “cross the river by feeling the stones” which perfectly describes reforms that led to China becoming an economic superpower. The idea is to feel your way carefully by making sure of your footing for each step before taking the next. A river is fast-flowing like an economy wherein the flow represents internal and external pressures and the floor of the river represents unfamiliar territory that makes every step uncertain.
Post-independence, even after opposition from some economists, the then Prime Minister Jawaharlal Nehru opted for a socialist type planning-based economy over a market-based economy. But over the next couple of decades, India was hit with a number of scandals and by the 90s it was proven to be a failure. By the 1990s, it became imperative to end license-raj and open up the economy. Liberalization reforms were brought by the PV Narsimha Rao government in the first half of the 90s. Subsequently, India’s share in the global economy started to rise and it became one of the fastest-growing countries. Yet the legacy of 5-year planning persisted.
India is known widely for ‘Jugaad‘ and all these years we have been experimenting with our economy by finding temporary solutions. Through regimes like the 5-year plan, we have spent a lot of time to discuss, think, and lay down ambitious reforms. But not implementing them has led to a number of issues like the struggling banking sector, black money, and rise of NPAs which have stalled our economic growth. Some blame the lack of political will and leadership but no one tried to clean the mess by implementing some of the major reforms which have been only discussed for decades.
With a slew of tough economic reforms brought in by the Modi government in recent years; the Indian economy is witnessing a paradigm shift for the first time and is shifting from a patronage-based economy to a rule-based economy. In the last 4 years, reforms like the Goods and Services Tax, Demonetization, and Insolvency and Bankruptcy Code have proved to be a gamechanger and have shown that we are moving towards adaptive policy-making and a feedback-based economy.
For a complex system it is impossible to predict all possible factors and outcomes of the system and as a result any static and rigorous plan is bound to have ever-widening gaps. Contrary to the traditional approach of planning policies to a tee, the new paradigm seems to be ‘adaptive’ policy making:
- Broadly decide the direction where to go.
- Basis certain initial data, theoretical studies and assumptions initiate the first version of policy.
- Actively study the feedback from the market, industries and society and make small, quick course corrections.
- Rinse and repeat. Don’t get stuck on an assumption if reality disproves its bases.
We can see these kinds of systems everywhere in nature as well as in the modern world – lean startups, machine learning algorithms and medical research all work on a similar philosophy. This process of using feedback loops to fine tune the approach to solving a problem becomes easier with massive increase in data collection abilities. Even 2 decades ago, demographic statistics could only be discerened on a decadal basis during the census. Today it can verily be deduced from multiple data points that are updated live – from social media usage to phone usage, human behaviour is being tracked at an unprecedented level in both scale as well as granularity.
Feedback economics fits perfectly with the emerging discipline of behavioral economics. Even if the measures are tough, they will help reap gains in the long term.Sanjeev Sanyal, Principal Economic Adviser
GST was a reform that was discussed for over 2 decades but its challenges could only be identified after its implementation. No amount of planning would have prepared the nation and though GST has been politically criticized for its poor implementation, its continuous upgrades, and modifications based on feedback from the states and taxpayers it is now evolving and achieving its set objectives.
After the end of the socialism approach, the post-1991 era India ended the license-raj but established capitalism without exit which slowly and steadily weakened the banking systems and gave rise to a number of scams and primarily the NPA issue. Rather than opting for a faster solution, the Insolvency and Bankruptcy Code was implemented in 2016 that not only boosted NPA recoveries but also has proven to be a long-term step to strengthen the banks and reduce litigations.
Even the historic step of Demonetisation which has been highly criticized has proved to be effective in getting people to switch from the old styles of business and fall in line with the changing times.
Entrepreneurial Thought Process
Genuine failures in businesses have been seen as a social stigma but to build an entrepreneurial economy a nation needs to take tough steps on a continuous basis focussing on the long-term gains. While going further in this direction it is important to know that we do run the risk of an overreach but the only way ahead for the government is to keep proactively responding to the situations by creating feedback loops and implement flexibility-based economics.
Lean Approach to Dealing with COVID
These recent steps seem to show that feedback and adjustments help navigate chaotic uncertainties better. The COVID-19 pandemic has been a black swan event that is still in progress. Even almost 6 months after its first outbreak in China, the entire world is still learning how to deal with it. When one doesn’t know the exact contours of the problem being tackled, how can one plan a comprehensive long term response strategy for it?
During the present conditions of the COVID-19 pandemic and the subsequent lockdowns, such a conceptual framework for adaptive policy-making has proven useful in dealing with the medical, social and economic concerns of the country. The response of the government has been multi-pronged and tailored to granular situations for different localities. As situations have developed, the government machinery, from the national level down to the municipal level, has kept doing course corrections and relaying short term measures to keep up with the evolving situation.
This has helped ramp up testing and PPE production to monumental scales, after starting from scratch in March, has helped contain the death toll, fatality rate and transmission rate and has helped increase the disease doubling time from 3 days in March, to almost 3 weeks as of today. Every locality is dealing with COVID in a tailor-made, evolving way depending on the ground reality of that locality. The government seems to have imbibed a lean startup approach to dealing with a pandemic and has done well.
Following the COVID-19, the government’s push for self-reliance with the Atma Nirbhar Package, seems to be aimed at leveraging the changing geopolitical contours to help build a net-export economy in the long term. But in the short term, the intent seems to be to kickstart an economy which has been brought to a standstill due to prioritization of human life over capital. The short term economic measures seem to also be evolving with weekly announcements from the RBI and Finance Ministry as the nation tries to balance between mitigating loss of life and mitigating loss of production.
What’s Over the Horizon?
The government has been criticized for changing rules and regulations too often, leading to disruptions and chaos but it is set to become a new normal as India’s economy adopts an evidence-based framework that may very well bring in revolutionary reforms in the Indian economy. The RBI, NITI Aayog, and the government have time and again reiterated the importance of making a shift, and by 2022 the government targets to set in place all the necessary frameworks and bring about a change in the meta-narrative of the Indian economy.