Blaming the Budget? Blame your beliefs

Budget was a disappointment for the market but why despite six previous flop shows, the business community had fervid belief that the seventh time would be any different?

Until Saturday, there seemed to be a consensus among businessmen and financial sector experts that this Union Budget will do something truly innovative and big to put India on the growth path. Riding on this sentiment, the Sensex soared from around 38,000 in October to an all-time high of over 42,000 in the third week of January. The consensus of hope was best captured in a note I received from a business consultant two days before the Budget: “2020 will be remembered for many years for the way things changed quite abruptly in India. That tipping point could be the annual Budget on February 1.” Fund manager Akash Prakash wrote in this newspaper that the “expectations (were) for something more radical, something truly reformist …”

 
After more than two and a half hours of a tortuous exercise in minor rearranging of the pieces of a complex economic chessboard, which passed for the Budget, the Sensex tanked by almost 1,000 points. While I don’t take the market’s instant verdict on everything as the final truth, it certainly proved the point I am making: The massive disappointment over the failure to deliver something momentous to stimulate growth through the Budget.
 
Consensual false belief
 

This leads me to ask, what was such a strong consensus based on? Why did so many thoughtful, accomplished, and successful people get it so wrong? After six previous flop shows, why the fervid belief that the seventh time would be any different? The simple answer is: False belief or wilful blindness. You can have all the facts and make the right diagnosis about the current situation, and then spoil it all by taking a leap of faith, using false beliefs as your stepping stones.

 
Here’s what about the last six years that the smart crowd wilfully ignored: Punitive laws, a series of disastrous economic policies, stronger state interventions, more friction for businesses and citizens, reliance on babus for ideas, disdain for domain experts, imposition of more complex laws and rules (many of them passed through Parliament by sleight of hand), continuous manipulation of economic data, and finally, mistaking governance for slogans, memes, catchphrases and alliterative abbreviations. All this led to a severe economic slowdown. Intelligent and successful people, who are supposed to make real-life decision involving billions of rupees, seem to have ignored all this and decided that this Budget will be different. Why?

 
As Margaret Heffernan wrote in her book Wilful Blindness, “we can’t notice and know everything … we have to filter out or edit what we take in. So what we choose to let through and to leave out is crucial. We mostly admit the information that makes us feel great about ourselves, while conveniently filtering out whatever unsettles our fragile egos and most vital beliefs. Ideology and orthodoxies powerfully mask what, to the uncaptivated mind, is obvious, dangerous or absurd and there’s much about how and even where we live that leaves us in the dark ... and crowds provide friendly alibis for our inertia.”

 
The consultant that I referred to earlier had a hypothesis, which went as follows. We have “reached a point when there is no other choice (NOC). The time for NOC has come”. More false belief followed this sweeping assumption. “Narendra Modi desperately needs to taste success to leave behind a proud legacy. 2020 is the tipping point in his tumultuous second term. Since he matches the profile of a Theory X man (as described by Douglas McGregor in his seminal work), Modi can be expected to personally drive and control the reform agenda through his central team at the PMO, unlike Narasimha Rao who drove it from behind the scenes and orchestrated it through Manmohan Singh, who got the credit.”

 
This was the bedrock of the false belief that was assumed but never articulated: A determined prime minister, hard at work, keen on leaving a stellar legacy, has the drive and ability to pull the economy out of the ditch that six years of dull and centralised “command and control” had pushed it into! Why did many intelligent people believe this? Harvard psychologist Daniel Gilbert wrote: “People are credulous creatures who find it very easy to believe and very difficult to doubt. In fact, believing is so easy, and perhaps so inevitable, that it may be more like involuntary comprehension than it is like rational assessment.” Gilbert and colleagues showed through experiments that our first choice is to believe what we hear and read.

 
If you combine this notion of our inherent credulity with Ms Heffernan’s notion of convenient filtering, it becomes crystal clear how the false consensus was formed. Fund managers, businessmen, consultants, all wanted the Budget to deliver high growth (which is a stupid ask from a Budget) because they have a vested interest in it and because of their belief that the visionary leader will turn things around at last. Hence, irrespective of this regime’s bumbling ways, they developed self-serving hypotheses in the minds.
 
That leaves me with one last point to make. Two of the top US investors of the 1980s and 1990s were George Soros and Michael Steinhardt. Soros was a trader and Steinhardt an investor; both believed that you make big money when you notice the entire market believing in something that is false, and bet against it. Steinhardt called it developing a “variant perception”. Warren Buffet put the same thing differently: You pay a very high price for a cheery consensus. Saturday drove home this point really hard for many bright minds who were hopeful, absolutely without any basis.

 
The writer is the editor of www.moneylife.in. Twitter: @Moneylifers