For a calibrated approach to reforms—सविस्तर माहितीसाठी Business Line [ The Hindu ] मधील बातमी वाचावी.

The inexplicable delays in policy formulation and implementation make it seem that the bureaucracy is the biggest stumbling block for policy-driven progress.

It is indeed tempting to suggest that policy makers should hit the reforms accelerator and watch the dust in the rear mirror. But the reality can be more complex. In hindsight, India’s calibrated, less hurried approach to opening up the economy in certain sectors might have seemed contrary to the conventional wisdom of the time, but it was validated later. A policy of circumspection can do no harm.

Do no harm
Prudent policy making should steer clear of groupthink about popular policy choices and evaluate them on the merits of the arguments. This may appear as delay mongering to some, but given that policymaking is both an art and a science, the policy maker should take it in her stride.

As economist Dani Rodrik argued “When knowledge is limited, the rule for policy makers should be, first, do no harm”. To put this thesis in context following are a few examples from the past.

In August 1991, India approached the IMF for loans to tide over its balance of payments crisis. With these loans came conditionalities wherein IMF called for liberalisation of India’s current and capital accounts. While India could move towards current account convertibility, convertibility on capital accounts was staggered.

At that time, it appeared to be against conventional wisdom to have a closed capital account when the current account was open, as an open current account could be used to bypass capital controls through mechanisms such as trade misinvoicing. While India was recovering from her 1991 financial crisis, another crisis was in the making in the East Asian Countries which had already embraced full capital account convertibility. The fixed exchange rate regimes in these countries coupled with heavy capital inflow led to an asset bubble that burst in July 1997, precipitating the crisis.

Post-crisis, there was new policy understanding about the difference between the theory and practice of capital account liberalisation and how free movement of short-term capital flows had destabilising effect on individual economies. On the other hand in India, Tarapore committee report proposed a staggered capital account liberalisation. Now post-crisis thinking also veered towards India’s approach of gradual lifting of capital controls.

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