Was It the Policy Paralysis or the Paralysis of Implementation Which Slowed the Growth of Our Country

India's economy grew at about 8.9 per cent in the year ended March 2011. Two years later the growth rate had fallen to under five per cent, the lowest in a decade. Inflation was high, the rupee fell sharply in the summer of 2013, and the current account deficit touched nearly five per cent of national income in 2012 and 2013. Industrialists complained that projects worth lakhs of crores of rupees were stuck. Commentators described the government as suffering from policy paralysis. Others pointed out that many decisions had been taken but not carried out. The topic asks which of these was the true cause of the slowdown.

Policy paralysis means a failure to make decisions. The phrase was used widely from 2011, when the United Progressive Alliance government, in its second term, was beset by allegations of corruption in the allocation of the 2G spectrum, the Commonwealth Games and coal blocks. Ministers and officials feared that decisions might later be questioned by investigators and auditors, and avoided signing files. Reforms were announced and then withdrawn, as when the decision to allow foreign investment in multi brand retail was taken in November 2011 and suspended within days, then approved a year later under conditions. Coalition partners blocked other proposals. A tax law passed after the Vodafone judgment of 2012, which allowed retrospective taxation, unsettled foreign investors. The feeling grew that nobody was in charge.

Paralysis of implementation is a different failure. It refers to the gap between decision and delivery. Large projects in power, roads, mining and steel needed many clearances, from environment and forest authorities, land acquisition, local bodies, state governments and ministries, and each could delay or deny. By 2013 the Cabinet Committee on Investment had been formed to clear stalled projects, and the Project Monitoring Group recorded hundreds of stuck projects. Land acquisition under the old law of 1894 caused conflicts, and the new law of 2013 raised costs and time. Coal produced too little for power plants even when plants were built, because of delays in mines. The best policy on paper is worthless if projects do not move.

The two failures fed each other. When officials do not trust that decisions will be backed, they do not implement them. When projects stall, there is no result to defend, and ministers lose the will to decide. The cancellation of 122 telecom licences by the Supreme Court in February 2012, and the cancellation of 204 coal blocks in September 2014, were judicial responses to irregular decisions, but they added to uncertainty in the short run. Public sector banks, burdened with loans to stalled projects, became reluctant to lend, and the bad loans they carried rose.

The best policy on paper is worthless if projects do not move.

Other explanations deserve a place. The global financial crisis of 2008 and its after effects slowed the world economy. The fiscal stimulus India used in response, with the deficit reaching nearly six per cent of national income in 2011 and 2012, left little room for further support and helped to fuel inflation. High inflation led the Reserve Bank to keep interest rates high, which discouraged investment. Rising oil prices and gold imports widened the external deficit. In 2013, when the American Federal Reserve hinted at reducing its support, capital flowed out of emerging markets and India was among the hardest hit. These were not failures of decision or delivery, but they limited what could be done.

The distinction is perhaps less sharp than it appears. A decision taken without thought for how it will be executed is a weak decision, and a government that cannot deliver is not truly governing. Implementation depends on design. Overlapping jurisdictions, multiple clearances, vague rules and wide discretion for officials create bottlenecks and invite corruption. Policy that leaves out the states, which control land, power distribution and police, cannot succeed. In a federal system, the centre may decide, and states or local bodies may delay, so that the weakest link determines the pace.

Evidence from other countries suggests that credible and consistent institutions matter more than any single reform. East Asian economies grew fast because states could make decisions and also carry them out, with competent bureaucracies and clear rules. Acemoglu and Robinson argue that economic success depends on institutions that protect property and encourage investment. India's problem, in this view, was less a failure of will at a particular moment than a deficit of administrative capacity and clarity built up over decades. The issues of 2011 to 2013 were the acute form of a chronic condition.

What would help? Single window clearances with fixed time limits, as the Foreign Investment Promotion Board and some states have tried, would reduce delay. Digital tracking of project approvals would make bottlenecks visible. A clear, stable tax regime and quick settlement of disputes through reformed courts and tribunals would restore the confidence of investors. Greater accountability can be paired with protection for honest decisions, so that officials are punished for corruption and not for good faith errors. The Goods and Services Tax, long discussed, would unify the national market, though it needs agreement among states. Above all, the political leadership must be ready to take the risk of deciding.

Politics sets the climate for both. In a coalition government with partners who had their own interests, and with a Prime Minister who was seen as reluctant to take on his allies, the cost of any bold decision was high. Opposition parties blocked the work of Parliament for long periods in 2010 and 2012, so that even agreed bills could not be passed. A governing party that does not command the confidence of its allies or the house will find both decision and delivery hard.

After the election of May 2014, the new government made promises of faster decisions, and growth recovered somewhat. That recovery owed something to confidence, and something to a fall in oil prices, and something to a change in the statistical method of measuring output. To separate these is not easy, and it shows that even the facts of the slowdown depend on how they are counted. The questions of whether a government can decide, and whether it can deliver, will be asked again by every government. They have been answered best by those who treated them as one question.