“All (real) economies are in (perpetual) transitions,” says Barun Mitra, Founder of Liberty Institute in Delhi.

The fundamentals of any economy will constantly change in the short, medium and the long term. So, what did Finance Minister Arun Jaitley mean when he made a distinction, a few days ago, between the “real economy” and “transient” issues that impact an economy?

What did Jaitley mean when he said that issues like the devaluation of the Chinese and Indian currencies, and volatility in Indian stock markets were “transient” and his government’s priority was to strengthen the “real (domestic) economy”?
“At this stage, one needs to distinguish between the real economy and the impact of (China’s) currency devaluation on stock market and domestic currency. Eventually, when this transient phase blows over, it is the real economy that is going to matter.”

Is there a difference between real and transient economies? Aren’t they inextricably interlinked? Is there a difference between real and transient reforms? Aren’t all reforms both real and transient, and constantly so over different periods of time?

It’s the sentiments, really.

Recently, Jim Rogers, the legendary global investor, exited from India because he said he couldn’t invest on only hope, and was frustrated with the pace of reforms in the country. South Korean steel giant, Posco, decided to give up its mega plans in Odisha, when the Centre refused to help it and instead advised the firm to opt for a joint venture with the state-owned SAIL.

Indian businessmen like Rahul Bajaj and Deepak Parekh have criticized this government for not walking its talk over the past 15 months. These are not isolated instances. Business sentiments, which surged within months after Narendra Modi romped to power, have taken a huge dip. At the end of the day, it’s not about real or transient economy, it’s all about sentiments.

What’s real about the economy?

In the past few months, Jaitley and his loyalists have harped that growth is back on track, current account deficit is dramatically down, fiscal deficit is under control, and inflation is not an issue anymore. In fact, Indian officials have lobbied with global credit agencies to upgrade the country’s status, which is currently just above "junk"’ status.

Economists view the situation differently. They contend that the government has done nothing to curb the current account deficit. It has reduced, they point out, because of huge fall in global crude and commodity prices. In fact, the regime hasn’t taken advantage of this windfall. Inflation still threatens to raise its ugly head, and all calculations related to fiscal deficit may go haywire in 2015-16.

The best indicator of what’s right or wrong about the Indian economy can be gauged by the growth numbers. Most agencies have reduced their estimates for 2015-16 to 7%, although Jaitley talks of 7.5%-8%. Most experts are confused by the growth figures.

According to a recent blog in the Wall Street Journal, India’s manufacturing sector grew by 7.2% in the April-June 2015 quarter as per the Gross Domestic Product data. “But, industrial production data (IIP) between April and June show that the manufacturing sector rose just 3.6%,” it added.

Two real indicators

Let’s take Jaitley at his words, and not look at recent numbers, which were obviously influenced by global volatility and the Chinese cold. So, let’s look at the data over the past 15 months, or ever since Narendra Modi was sworn in as the Prime Minister on May 26, 2014.

On that day, the Bombay Stock Exchange index, Sensex, closed at just above 24,700 points. On September 10, 2015, it closed at just above 25,600, or a rise of nearly 900 points or 3.64%. During the period, the index peaked at almost 29,700 on January 29, 2015, and has witnessed a largely downward curve in the past over seven months.

On May 26, 2014, the rupee-dollar exchange rate was Rs 58.59 to a dollar. Despite several ups and downs – the ups generally lasted for a shorter period – the rupee has consistently fallen against the dollar. The fall accentuated since January 2015, and stood at Rs 66.58 on September 10, 2015.

Real or regressive reforms?

The industry is baffled by the government’s reform measures. Let’s look at the slew of policies announced in the past few days. The decisions to phase out tax exemptions over the next few years and allow spectrum trading are progressive. However, the moves to impose anti-dumping duty on steel imports and shy away from bilateral free trade agreements are regressive.

Mitra feels that even the removal of tax exemptions in its fourth year may be a red herring. “Given the excellent news on CAD, the government needed to accelerate reforms in its first two years. From now on, the impact of the political economy will kick in. Can the regime initiate strong measures as it prepares for the assembly elections in several states over the next 2-3 years?”