Credibility is what Indian Economy Needs.

Indian economy has always been a hot topic in the international forums. It is considered to be one of the economies which are extremely difficult to forecast. Well what is the reason that even the great Economists like Raghuram Rajan who forecast-ed the US financial crises has to first run a policy on trial basis to see the response of the very special Indian people. Raghuram Rajan the RBI governor has always followed a “Wait and Watch “approach.

Well as an economist student I always find one peculiar point in the Indian economy which I don’t know, whether is taken into consideration by the great Indian economists or is neglected. The most important ingredient that is lacking in the recipe of Indian economy is the use Theory of Credibility.

Ok well now I should tell you about the fuel of credibility that can ignite our economy. 

Expectation has always been a research topic among the economists. Expectation is nothing but the future thinking of the people. It is simply what the people think about the future.

Let me take an example and explain you about its role in any economy. For example: If there is a company selling a product for Rs. 100. If the inflation rate in economy is 10% that is every year prices will increase by 20%, next year the price of product will be Rs. 120.  Now if the government announces that inflation at the end of the year will be only 10% inflation.

Now assume that there are two countries, Country A and Country B.

Country A: Government in this country has a very high credibility in the eye of people. It simply means that people in this country have full faith in government that whatever government has announced will be fulfilled. In this country by the end of the year people know that price of the product will be Rs. 110 so they will adjust their demand and supply accordingly. And by the end of the year in prices will be actually Rs. 110. This is a proven fact and not just an expectation.

Country B: In this country government has a very low credibility i.e. people don’t believe in 

government at all, that is they don’t have any faith in the government. People at the end of the year will expect that prices are not going to fall. Since they know prices at the end will be Rs. 120 only. Rather they will believe that prices may rise and actually either prices rises or will remain same. It has been found that the probability of price rise is much higher.

Well now you would have understood about the effect of credibility in any economy.

India belongs to the second category. India is a country where the credibility of the government is very low. Here government make big big promises to people and at the end they all are in vain as they are able to achieve only few of them.  So over time people have made up their mind that whatever government will promise will deliver only a few. So if government says that at the end of the year inflation will be brought down to 6% from 12% then at the end it will fall by only 10%.

So Indian government should promise that only which it can deliver or if promised should deliver them fully. But Indian politics has always fought election on the populous issues and in this race it end up promising too much.

Indian Politicians and economists should give a thought to it as in the long run it is beneficial to them only as their credibility will increase among the people and this in turn will convert into votes…

Akshay Ratnawat