The state of the Indian economy has been described in rather depressing terms lately. There are debates over whether India is experiencing a structural slowdown, a cyclical slowdown, a U-shaped or V-shaped recession, or no slowdown at all and simply a bump in the road. It is difficult to be objective when the numbers are suspect, and Indian growth numbers hardly inspire confidence. But there is another way to describe the state of the economy—that it is in limbo. It feels like everyone is waiting for something to happen, for the other shoe to drop, or for the government to unshackle India’s potential.

What is odd about this limbo is that it is caused by a peculiar kind of regime uncertainty. Other countries are currently experiencing some form of that phenomenon—like the possibility of a presidential impeachment in the US, or a far more severe version caused by an endlessly prolonged Brexit in the UK. India is not experiencing any of the usual causes of regime uncertainty in terms of elections, treaty negotiations, possibility of war etc., but the consequences of the lack of a clear economic vision.

This limbo has been induced by a gap between the state narrative and actual action. Prime Minister Narendra Modi left no stone unturned in going to various Indian and foreign platforms, declaring India open for business and encouraging investors to invest in India. Yet, the rhetoric has not been followed by meaningful reforms. One would think that such grandstanding was relatively harmless even if followed by inaction. This would be true for most leaders. But Modi is a master at creating narratives and instilling faith because of his personal integrity and discipline. This leads individuals and firms to form expectations not just of his intent, but also his governance. When those expectations are unmet, however, they revise their beliefs and wait for credible signals of actual reforms.

Why is limbo a bad thing? For two reasons. First, it makes individuals and firms wait and put off decisions for a later time. They are waiting to understand the nature of reforms, especially in factor markets, before they make investments. For example, an expectation that the government will systematically reform labour regulations to reduce the relative cost of capital to labour would cause firms to invest in projects that are labour intensive. Alternatively, if the government was expected to tighten labour regulations, then firms might choose capital-intensive, labour-replacing equipment. In the absence of clear expectations and a good understanding of the government’s vision, businesses would simply postpone investments.

A second consequence is that while waiting for certainty on the broad economic situation, firms may engage in rent-seeking. The recent turn of the government towards providing sectoral relief during the economic downturn encourages many firms waiting for clarity to take their chances in the political churn to seek temporary benefits in the form of sops, tax breaks and subsidies. Sectoral-policy tinkering by the government leads to rent-seeking behaviour among businesses, but cannot unleash growth and innovation.

In either case, whether it is firms waiting for reforms or tiding over the downturn with all the help they can get, they are waiting for the government’s next move.

But, oddly, it is not just businesses that are waiting for the government’s signals. Even the bureaucracy seems paralyzed into inaction in the absence of a clear economic vision. Files seem to be piling up, and businesses complain that orders and clearances are just not moving along. This could be because bureaucrats are unsure which moves will be rewarded and which ones punished. And with the government coming down hard on corruption, they would face complicated decisions.

Almost every economist has called for the second stage of economic reforms, echoed almost daily by intellectuals and columnists in India, and also the foreign press. While they might disagree on the exact nature of reforms, everyone agrees that a strong and credible signal from the government is urgently required .

Since 2014, Modi had styled himself as a nationalistic economic reformer. But after his 2014 victory, at the first and slightest hint of trouble with a reform of India’s land acquisition process, the government developed cold feet and called the whole thing off. The one major reform that the government did push through was the botched-up goods and services tax (GST), which may have had the opposite effect of what was intended. In this year’s general election campaign, Modi may have presented himself as more of a nationalist than an economic reformer, but that does not leave reforms off the agenda.

Acts of commission such as demonetization and faulty GST implementation have hurt the economy. But what is less known and appreciated is how acts of omission, in terms of liberalizing the economy, are being picked up and punished by market.

No single individual or government can be blamed for the state of an entire economy. But the economy may not have found itself in limbo had the reality been in line with the government’s rhetoric on reforms. Narrative-building alone cannot change our economic circumstances.

Only big, bold and market-embracing reforms—especially liberalizing the markets for land and labour, and streamlining GST—will help.

Shruti Rajagopalan is a senior research fellow with the Mercatus Center at George Mason University, US

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