Every action has its equal and opposite reaction, but that is as far as Physics goes; in Economics every action has many intended and unintended consequences. It is so because multiple agents respond in many different ways and the original intent could be lost against a tide of unknown reactions.
Think of a tax regime with incentives and you make a change. Not every agent would be benefited equally, there will be a reallocation and adjustment, some actors would have to reconfigure. Now, could you predict every outcome? Perhaps not.
Think of GST and you would have remembered experts talking of a smooth sailing. It is never that easy as tax revenues have shown that collections have dwindled in August. The solution to this, if again made in haste, could lead to unknown consequences.
Economists therefore recommend a measured progress with testing of hypothesis. This is as opposed to shock therapy, which had succeeded in some extreme cases but is fraught with risks.
As a strategy, measure for measure is a far more prudent one. The case in point is the implementation of GST. Every country faced the initial doze of challenge as from one regime to the other it takes time for respondents to make the crucial adjustments. Japan for example went into recession when the VAT got introduced and China faced a soft landing.
For India we have a twin problem, one that GST followed a far more difficult tryst, demonetization. Second that public finances and bank NPAs do not bode well to stretch the fiscal deficits beyond a point. This point around 4% of GDP (which is my estimate we are heading to) may not be the worst that India has seen, in fact far more worse days have passed in this last decade itself, but the current timing is ominous.
Revenues have not fared well in the post GST months. With some more sops being announced, this could be even more stretched. The fiscal deficit would be an additional problem to have, raising the inflation & the interest rates, which India can ill afford.
Whether or not this initiates a cascade would depend on how quickly the business confidence returns.
That is at its nadir, as the supply side has shown, we are still grappling with the basics of supply chain challenges in a country.
One of the essentials of business confidence is continuity and absence of uncertainty; both seem to be in short supply. Take GST for example and you will notice that quick fixes are on the anvil.
Some quick fixes do work, but provided they last long and are built on solid ground. Let us hope that the government sees through these changes with equipoise, which is a hallmark of good governance.