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Monitoring the Indian stock market (INDRANIL MUKHERJEE/AFP/Getty Images)
Chapter 6 of the Economic Survey 2019 talks about the impact of policy uncertainty on the investment. We should remember that in chapter 1, the Survey had talked about investment-led growth pushing the economy into a virtuous cycle. The Survey stated that private investment was key to this.
The Survey states that policy uncertainty results in lower investment especially due to the following:
While general economic uncertainty hard to be controlled, policy uncertainty can be.
Differences between risk and uncertainty
Both affect the investment fundamentally, yet are different.
Measuring economic policy uncertainty
With the help of data analytics, economic policy uncertainty can be measured. The Survey gives example of the Economic Policy Uncertainty (EPU) index developed by Baker et al. This index perfectly captures the taper tantrum of 2013 when policy uncertainty was high coinciding with years of policy paralysis. There is a strong negative relationship between EPU index and investment growth, both domestic and foreign.
The EPU index for India is affected by the following.
Way forward
This completes the chapter 6 of the Economic Survey. We shall continue with the remaining chapters in next parts of the series. The previous parts can be found here.
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