Neutral Gear

Why India's politics is a curse for its economy

For decades, we have had a system that is 'naturally populist, seldom liberal'.

 |  Neutral Gear  |  9-minute read |   25-11-2019
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India, a US$ 2.7 trillion economy, is fast moving towards becoming the world's fifth largest economy. With a population of over 1.3 billion, India is one of the largest consumer markets globally.

Consumption alone fuels about 70 per cent of India's total GDP. We have a strong demographic asset with 65 per cent people under the age of 35 and a society full of 'first' timers. We all know of someone buying their 'first' house, 'first' car, 'first' airline ticket and so on. There seems to be consumption all around us. Then what exactly is ailing India's economic health? Why are we in the middle of a slowdown? How grave is the situation? Do we have a way out?

poverty-690_112519065411.jpgSuccessive Indian governments have focused on a politics of populism as a result of which everyone has suffered. (Photo: Reuters)

The answers to these concerns are to be found inside our political set-up. Political vision and execution of plans are the principal inputs into a nation's economy. Stock index and GDP figures are mere symptom indicators; the roots lie within the economic approach of the elected leadership.

Political model that runs India's economy

The Indian political economy can be broadly termed as 'naturally populist, seldom liberal'. It is a system where liberal ideas and reform agendas are seldom implemented, but major public policy and spending is driven towards popular schemes. The term socialist is part of India's constitutional preamble and it is a general understanding that as a society, we like a pro-poor and anti-rich approach, in which the rich are perceived as evil.

Our political leadership caters to our socialistic traits and often harps on philosophies like 'gareeb ke saath' and 'aam aadmi' to strike resonance with the common man. If a government in India is unable to build a perception that it will do all it takes for the masses, subsidise LPG cylinders, give free lentils and waive farm loans, then it is booed as 'suit boot ki sarkar' (government for only the rich).

Compulsions of modern-day politics require the incumbents to win the next election at all costs, and hence prioritise populism over structural long-term reforms.

We have witnessed a few types of government models in the recent past that are worth comparing.

Since the UPA was a coalition government, the PMO did not operate with a defined economic vision. It did not exercise control over the ministries either. The government was akin to a kitchen with a hundred cooks with no one sticking to the menu. In fact, the kitchen had no menu and resulted in a conundrum of scams and deadlocks.

The UPA regime was forced to create multiple tribunals such as the National Green Tribunal (NGT) and Debt Recovery Tribunal (DRT) to enforce some mechanism to sort things out but ended up adding more bureaucratic layers.

In contrast, the Atal Bihari Vajpayee-led NDA model appeared executing to a clear economic vision, set mutually independent of its political vision for the most part. It ran a fairly strong PMO with empowered ministries and was able to deliver multiple reforms that spun the flywheel for shinning GDP results since 2004.

politics-690_112519065151.jpgThe Atal Bihari Vajpayee-led NDA model appeared executing to a clear economic vision. (Photo: Reuters) 

The Indian economy has seen major reforms kick in only when the government has had its back to the wall. The first came in 1991 with only a few days of foreign reserves left, and then in 2001 under the NDA government, which inherited a slowdown. The NDA had a well-articulated economic approach. Reforms, however, usually come with a lag. They don't produce too many immediate electoral benefits, and the results might take a few years to reflect.

Hence, long-term reforms make for bad tactical politics over populist measures such as free rice for every household. Empirically, the NDA government lost the 2004 election despite executing reforms across tax tariffs, land and disinvestment.

In the current times, we have a PMO which is in control of execution. The ability to broadcast projects, follow up, ensure public distribution and a prime PR mechanism are among its core competencies. The PMO runs a 24*7 top down model, working more via the bureaucracy rendering the individual ministries with limited room in the play.

Such a strong pointed approach is very effective when you run a state or a region. This model allows you to fire-fight tactical issues and stay on top of execution. But it has limited capacity. It does not necessarily set a framework to run a diverse, complex and large nation, especially when the political vision of the government seems to be at loggerheads with its vision for the economy.

We don't know what is the economic roadmap and ideology at the top. Are we more liberal, ready for more investments and exports? Or are we more protectionists and Swadeshi? Though Prime Minister Narendra Modi manages ample photo opportunities with global business leaders, his government appears soft towards those routing for Swadeshi.

Doing both at the same time confuses both sides. The government markets 'Make in India' but tariffs are lowered on exports, it wants to make 'Digital India' but forces laws against e-commerce to appease the trader community. Mudra is another example of a scheme that has left the people confused. It is a commercial intervention scheme but since the PMO is strong on follow up and wants to hit a target goal for Mudra lending, bankers are forced to make half-baked commercial lending decisions. So, though Prime Minister's Office manages each individual event well, the contradictions and lack of clarity in positioning is clear to the global business community. There is a lack of consistency in position, approach and hence a lack of cohesion in actions. The intent is often paradoxical, lacks connect with an overall plan and is further interrupted by election-based policy making every few months.

The current health

There are three major engines which economies run on - exports, investments and consumption. Due to lack of sustained and structured reforms, our economy is forced to run like a single-engine aircraft. It thrives on 'consumption' of goods and services as the sole driver for survival. Basic reforms to enable industrialisation such as land and labour have been rarely looked at, fearing electoral impacts. The banking sector, two-thirds of which is owned by the government, is crippled with non-performing loans worth over Rs 8 lakh crore.

Since the GDP figures and the methodology used to calculate them is a matter of debate, the leaked data from the National Sample Survey, the primary and official indicator for consumer spending in India, shows poverty could be rising. This implies lower disposable income, hence, lower consumption and thus slowing down of the engine.

Income inequality coupled with slower growth further adds to poverty. In order to appease the middle-class voters, the government focuses on keeping prices of food items low, resulting in a lower payout to farming and associated industry, further reducing purchasing power of a sizeable population.

Let's put the GDP numbers in perspective. Why do the current projections at 5.6 per cent raise a red flag? One per cent drop in GDP results in loss of nearly 30 lakh jobs and vice versa. For India, to keep its working population of over 40 crore employed, a growth rate of 7 per cent-plus is a necessity.

At the macro level, exports and investments are down and consumption is quickly slowing down. Lack of access to quality labour, land, power and credit is holding back investment, reducing jobs and income growth. Household savings (as a per cent of GDP) are falling and household debt is at its highest levels. Trying to hold up consumption in this slow growth environment requires households to borrow more or just reduce consumption. Debt is going into consumption instead of building assets, about 16 per cent of consumer spending is now based upon debt in comparison to under 8 per cent about a decade ago. Investor confidence index is lower than 2017, industrial growth is negative and unemployment rate is at a 50-year high.

It is a crisis!

How to recover

There are 100-plus countries with the emerging markets tag, but a handful of them are interesting case studies. Developing nations that graduated from low-income to middle/high income club, have successfully leveraged exports, investments and consumption all together to run a multi-faceted economic model. As a reference, China spends about 45 per cent on investment projects versus India spending a similar amount on funding countless populism schemes. Thriving East Asian economies have displayed the success story of consumption suppression and investment-driven growth. At the same time, comparable Latin American economies give us lessons on how to lose the plot after riding a healthy economic decade by choosing populism and nationalism-based politics over reform.

In order to recover, we need to first find some breathing space to be able to plan long term. We have a government with immense control on communication, perception and deep reserves of political capital to drive the economy to the next level.

Demand

In the immediate run, we need to stimulate demand and have consumption pick up, especially in rural India. This might require certain public investment and lax approach towards inflation, but must be done strictly for the short-term.

Long-term roadmap

We need to set the right long-term plan by acting fast. We need a formal approach with political will to drive clear of usual conflicting positions and commitment to a critical path for achieving middle-income status. Dubai, for instance, took a decisive approach at the top to formally move away from an oil-based economy and has been successful in doing so. China opted for manufacturing as its path to prosperity, but again with a conscious choice at the leadership level.

We need to define whether we are going to export our way to success. If yes, then what mechanism and processes do we need in order to nudge the economy in that direction; how do we not let political decisions influence us in doing so? The government needs to revitalise growth relying on market forces and have a plan which goes beyond fiddling with consumption.

Reforms and landing

We need more reforms. Stimulus-based old-style reform (like interest rate cuts) will not work now since the financial system is stressed.

The previous reforms that India has seen, were about removing rudimentary constraints in the system which created the growth story, but now these alone won't work.

We need to structurally de-stress the banking system, using more robust new generation reforms like the insolvency code. Recent initiatives like insolvency code and disinvestment of BPCL are steps in the right direction of reforms. We need reforms to rationalise the ease of doing business and deliver economic freedom to our politically free society. And finally, set true expectations.

Economic slowdown is not just a golden hour to seed growth, but also the right time to right expectations with regards the eventual growth rate and our expected landing plan.

Do things differently, look beyond the usual levers and commit to a long-term plan with political backing. Else, the electoral gains and losses will continue to be the prime focus and defeat the economy.

Also read: Will the government's big real estate revival plan help the cash-strapped sector?

Writer

Pratik Sharma Pratik Sharma @pratiksharma019

The author works on expansion of e-commerce in emerging countries, writes on global economics and politics.

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