There has been continuity in reforms under different governments since the early nineties. The Narasimha Rao government initiated liberalising reforms in many dimensions, NDA I carried it forward. Its special impetus on road building and competition in telecommunications led to rapid growth in mobile penetration. UPA II had valuable initiatives such as RTI and Aadhaar.
However, many legislative initiatives remained stuck. The NDA II government brought to fruition the IBC, GST, inflation targeting, and DBT with Aadhaar, demonstrating a mature and valuable continuity. Reforms have transformed India putting it on a catch-up growth path. Whatever the poll outcomes, broad continuity on this path is likely, provided a stable majority government comes to power.
Indian voters have shown remarkable maturity and thoughtfulness, delivering stable governments in the Centre, while maintaining essential political competition in the States. Forecasts of political and therefore economic instability in 2014, when the macroeconomy was vulnerable, proved incorrect.
This is all the more remarkable given India’s tremendous heterogeneity that in the past encouraged caste and community-based vote banks. Politicians have the choice to either implement populist transfers to specific groups that may harm growth and the country as a whole, or design schemes that sustain growth while enabling more to participate in and benefit from growth. In the days of growth stagnation, it was rational for voters and therefore for politicians to stick with the first category, but with higher growth there are many ways to further inclusive growth by equipping laggards to do better.
Future choices depend on voters being able to identify which category a scheme falls in and reward politicians that offer and implement more of the latter. Their signals will determine if the country is able to decisively break out of stagnation.
Populism vs inclusive growth
Politicians can be tempted to appeal to the worst aspects of human nature including narrow group identities. For example, jealousies are easily aroused by telling one group ‘others are doing better than you’. A winning campaign the Congress ran in the early 2000s showed a sad old lady with the blurb, ‘What have you gained from growth?’. Today youth joblessness and farmer distress are emphasised.
UPA II had announced a farm loan waiver in 2007 and other sops after the global financial crisis that raised fiscal deficits by 4 per cent, added to inflation and created macroeconomic vulnerabilities. Moreover, it did not benefit poor farmers and hurt credit growth to farmers, and led to a swing away from UPA II towards the development platform NDA II offered. But since development takes time voters may still swing between sops and development.
NDA II has offered reservations to almost all Indians, seeking to appeal to groups that feel left out of creeping reservations. The policy will only increase administrative procedures and add a cumbersome rationing process at the expense of merit and job expansion. It may be a result of electoral success in State elections after populist promises.
The history of India’s long stagnation is littered with such failed promises and the collateral damage they create. Since State governments face budget constraints populist promises are either delayed and made ineffective or achieved by cutting other more productive expenditures hurting future prospects.
The deviation is a pity, because otherwise NDA II has an exemplary record in favouring infrastructure and capacity building. If land and labour reforms remain inadequate even 30 years after liberalising reforms began and governance is mired in multiple agencies with poor accountability, there are probably intractable political hurdles complicated by India’s federal structure and division of responsibilities.
Then the government’s strategy of finding triggers to induce feasible change at the margin is the correct one. Use of the ease of doing business index and a special logistics cell improves coordination among government departments. NITI indices encourage convergence and competition among States, while the GST Council revives genuine inter-State dialogue and consensus building.
There are also major innovations in giving social security in ways that increase capabilities and economise on government funding, turning the Centre-State division of responsibilities into an advantage. Swachh and better sanitation can reduce the cost of Ayushman Bharat, while improved coordination between Centre and States and a better incentive structure, can deliver more from existing funds.
Roads are being built faster at reduced costs, while ready assets are sold to build new infrastructure. The problem of improving agricultural income is being tackled at the roots. Improved rural infrastructure and marketing with the new export policy that allows assured exports of organic and processed foods will enable better price realisation. Farmer dissatisfaction is more due to perceptions and a price crash following higher productivity. Tractor and consumer goods sales show compensation from rising non-farm incomes.
Provision of gas cylinders and electricity infrastructure that improve the capabilities and health of the poor are better than price-based subsidies that distort resource allocation. Replacing leaky subsidies or distorting subsidies with well-targeted DBT is also good. Thus limited income support for poor farmers in the Budget is better than debt loan waivers. More pass through of oil prices shocks reduced large oil subsidies that hurt other public goods provision.
On all parameters macroeconomic stability has improved, while growth rates remain the highest in the world although they are below India’s potential and need. Fiscal consolidation continued despite major tax reform and implementation of the Finance Commission and Pay Commission awards, with a shift towards more infrastructure spending.
If the NDA II erred it was on the side of over-strictness. Just as voters swung away from UPA II, NDA also over-reacted to the extreme populism and macroeconomic laxity of the UPA II years and to corruption in large forced public sector bank loans for infrastructure. However, it was nimble enough to adjust polices promptly in response to public feedback as in GST implementation.
That is the way to understand the demonetisation initiative. It was probably seen as a means to gather information on the corrupt, increase the tax base, build on international information sharing initiatives, and increase formalisation of the economy that could use new developments in fintech and data availability. But large costs were imposed on the public.
In addition, NDA II accepted an inflation targeting regime that had been in the making, but an independent monetary policy committee implemented it too rigidly. Even so, strengthening institutions is a worthwhile goal. Openness also increased RBI independence (because they could use the threat of foreign outflows) but too much strictness led to a democratic backlash.
These tensions played out in many of the conflicts between the RBI and the government last year. Industrial growth has been lower by 3 per cent since 2011 and is the major reason for slow job growth.
Some correction was required. Moderation of the over-tight macroeconomic policy stance should not, however, be interpreted as macroeconomic laxity, but as achieving the better balance between financial conservatism and domestic welfare that the country needs.
Voter signals this time will determine whether policy makers move towards populism and potential stagnation or deliver on inclusive growth. They are sure to think carefully and then vote.
The writer is Professor at IGIDR, and Member EAC-PM
via Voters’ dilemma: Populism or inclusive growth? – The Hindu BusinessLine