Question

Economic policy certainty is critical because both domestic and foreign investment is strongly deterred by increases in domestic economic policy uncertainty. In this context, suggest some steps to reduce domestic economic policy uncertainty.

Answer 1

Approach:

• Try to start by highlighting why policy certainty is important for an economy.
• Address the main question; suggest some measures which can improve Economic policy certainty.

Economic Certainty is crucial for both domestic and foreign investment. While economic uncertainty stemming from uncontrollable factors remains beyond the control of policymakers, they can control economic policy uncertainty.

Following are the measures that can promote Economic policy certainty:

• Make it Predictable: 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 investor can be provided the assurance about future policy certainty. While this will generate some constraints in policy making, such voluntary tying of policymakers’ hands is undertaken in several cases including the Fiscal Responsibility and Budget Management Act, the Monetary Policy Framework of the Reserve Bank of India. A similar constraint placed on ensuring no changes in policy for a specified horizon would go a long way to ensuring policy certainty.
• Track the trends effectively: Following the adage that “what gets measured gets acted upon”, economic policy uncertainty index must become an important index that policymakers at the highest level monitor on a quarterly basis. Government must encourage 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.
• Quality assurance of processes in policymaking: It reflects the adage of “Document what you do, but more critically do what you document!” must be implemented in the government. The actual implementation of policy occurs at the lower levels, where ambiguity gets created and exacerbates economic policy uncertainty. As organizations in the private sector compete and seek the highest level of quality certifications, Government departments must be mandated to similarly seek quality certifications. This process of certification will require training of personnel in following quality assurance processes and will significantly reduce economic policy uncertainty.
• Include Stakeholders: Before deciding the policy, the government should talk to each and every stakeholder and listen to their concerns and suggestions. The government should try to formulate the policy keeping the feedbacks of the stakeholders in mind. As it will help in avoiding conflicts later.

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 still need to double down on reducing domestic economic policy uncertainty.