The Indian government’s recent reforms to reduce government subsidies and embrace greater foreign direct investment were unexpected and bold. Markets have rewarded them with surging stock prices and a rebound in the value of the rupee. The reforms may yet be reversed or diluted because of the political backlash. Their impact may be more symbolic than substantive. Nevertheless, they are significant in that they reflect changes in the operating assumptions of Indian politics.

For a long time, maximising electoral success required politicians to act as if there were a ceiling of about 5 per cent on inflation and virtually no ceiling on fiscal populism. The new operating assumptions all centre on growth.

It is striking that India’s economy has experienced close to double-digit inflation for more than three years, among the highest in the world, and twice as high as politics was thought to permit. Remarkably, there has been no domestic uproar. This growing indifference to high inflation seems to be the result of the rise in real incomes that has accompanied high growth. Even in rural India, wages have been rising much more rapidly than inflation thanks to government policies, including an extensive employment guarantee scheme. Moreover, a shrinking public sector means that fewer people earn the fixed incomes most vulnerable to being eroded by high inflation.