Ajit Ranade
The Reserve Bank of India recently gave a small but revealing lesson in economic policymaking. On 5 August, Governor Sanjay Malhotra was asked whether the special FCNR(B) scheme, designed to attract foreign currency deposits from non-resident Indians, might be closed before its scheduled 30 September deadline. He said there was no proposal to do so.
Nine days later, the RBI abruptly advanced the closing date to 31 August. There may have been perfectly good economic reasons. The scheme had worked almost too well. Dollar inflows were strong, while the subsidy cost of providing assured protection against depreciation was mounting. There was the mounting headache of liquidity management and future foreign-exchange liabilities. The issue is not whether the RBI was entitled to change course. It is why a categorical assurance was given when the possibility of an early exit was already being discussed. Economic policy is full of such U-turns. Some are evidence of agility and learning. Others reflect poor preparation, political pressure or simple unpredictability. How do we tell the difference? US President Donald Trump’s tariff policy offers the most glaring example of the latter.
Since the “Liberation Day” tariff announcements of April 2025, duties have been imposed, paused, modified, negotiated down, threatened again and sometimes re-imposed. Firms managing their supply chains have to brace for a tariff now, and also pay for uncertainty about what the tariff will be six months later. Policy volatility itself becomes a tax on investment. India has its own examples of U-turns. The three farm reform laws were enacted with much conviction and then repealed after prolonged political agitation. The ethanol blending programme, pushed rapidly towards E20, is confronting concerns about vehicles, feedstock, water use and consumer choice, and may yet require recalibration. Pension reform is another example.
NPS moved government pensions away from an unfunded defined-benefit promise towards a funded contribution-based system. Political pressure for restoration of the Old Pension Scheme then produced the Unified Pension Scheme, which restores an assured pension element while retaining contributions. Yet by March 2026 only about 1.24 lakh of 24.14 lakh eligible Central government employees had opted for UPS. These are not all the same kind of reversal. Sometimes politics changes. Sometimes evidence changes. Sometimes the original policy was inadequately thought through. And sometimes the policy question itself is badly framed. Consider the question: “Does industrial policy work?” There can hardly be a universal yes or no. Which industry? What instrument? For how long? Under what governance arrangements?
Is support conditional on performance? Is there competition, or merely protection of incumbents? Is India’s Production Linked Incentive Scheme uniformly good policy? In general, economics cannot give watertight answers to many policy questions because economic behaviour is not governed by fixed parameters. A policy changes behaviour, and changed behaviour alters the environment in which the policy operates. A farm reform changes incentives but also political mobilisation. A production subsidy can create an industry, but that industry then becomes a constituency for continuation of the subsidy. Even the most hallowed international institutions have had to learn this lesson.
During the Asian financial crisis of 1997-98, IMF-supported programmes in Thailand, Indonesia and Korea initially emphasised tight macroeconomic policies alongside sweeping structural reform. Malaysia did not enter an IMF programme. It eventually imposed capital controls, pegged the ringgit and subsequently staged a strong recovery. Was IMF policy wrong? Malaysia became an important counter-example to the then prevailing IMF hostility towards capital controls. The euro-area sovereign debt crisis of 2011 produced another awkward episode. Greek debt was judged to be unsustainable. But the IMF changed its own exceptional-access framework. It did not impose immediate debt restructuring but gave generous aid to Greece. This was because European institutions and governments were firmly opposed to restructuring Greek sovereign debt. The contrast with the rigidity shown towards Asian borrowers in 1997 inevitably fed accusations of “double standards”.
Or was this a U-turn due to fresh thinking about fiscal austerity? The World Bank provides an even more striking intellectual U-turn. Its influential 1993 East Asian Miracle report concluded that promotion of particular industries had generally not worked. It helped entrench the Washington Consensus that not industrial policy but liberalisation and market-friendly policies mattered more. Three decades later, its 2026 report says industrial policy is back and offers governments an evidence-based toolkit for using it. That is good news for India’s PLI, but is it not a U-turn? For years the World Bank published its Doing Business rankings, which acquired enormous influence over how “business friendly” a country was thought to be. Yet ironically, in Doing Business 2010, India was 133rd, Brazil 129th and Russia 120th out of 183 economies; China was 89th.
Clearly, the WB indicators were unable to explain why these poorly ranked BRIC economies were growing so rapidly. Subsequently, following a mini-scandal of sorts, the Bank discontinued Doing Business rankings in 2021 altogether. It has been replaced by another metric. None of this means economists or policymakers should be condemned for changing their minds. Refusal to revise a view after contrary evidence is dogma, not consistency. The problem arises when institutions speak with greater certainty than the underlying economics warrants, or when reversals driven primarily by political convenience are presented as economic necessity.
Credibility therefore cannot mean never changing course. It means being clear about the conditions under which the course may change. The RBI could have said that the FCNR(B) window would remain open until 30 September unless inflows crossed a specified threshold or financial-stability concerns arose. Indeed, one critique of the episode makes precisely this point: pre-specified triggers could have preserved flexibility without sacrificing predictability. Good policymaking requires qualities which can pull in opposite directions: humility, transparency, accountability and decisiveness. Humility means accepting that forecasts and models can be wrong. Transparency means explaining what changed. Accountability means acknowledging the consequences of a reversal. Decisiveness means uncertainty cannot become an excuse for paralysis. U-turns, therefore, are not necessarily signs of weakness. Sometimes they show that policy is learning and is agile. But there is a difference between changing direction because the evidence changed and changing direction because the political wind changed. Institutions preserve credibility not by pretending that they are never wrong, but by explaining why they changed their minds, what has changed on the ground, and why the new course deserves greater confidence.
The writer is a noted economist.
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