by Paranjoy Guha Thakurta
(June 29, New Delhi, Sri Lanka Guardian) There are some people who hold politicians responsible for all of India’s economic problems. It is often claimed that bad politics is responsible for the slow pace of progress of economic reforms. To such an observation, it is worth recounting a favourite remark of the good doctor who is perhaps spending his last few months at Race Course Road. He has said time and again that there is there is no difference between good economics and good politics. These words will perhaps come to haunt him for many years.
Is the nuclear deal with the United States good economics and bad politics? Is the government’s inability to control inflation bad economics and even worse politics? Is it just a terrible coincidence that a phase of political upheaval has overlapped with a period of economic stress? These questions are certain to be avidly debated in the weeks and months ahead.
Be that as it may, it would be worthwhile to further examine the relationship, if any, between political uncertainty and economic policies. It seems logical that uncertainty of any kind, including political uncertainty, is not good for economic development. Yet it can be argued that a period of economic adversity spurs the political leadership to take tough decisions that it may not otherwise take.
In a paper entitled Electoral cycles and economic policies of governments of India by Kaushik Chaudhuri and Sugato Dasgupta ("India Development Report 2002", Indira Gandhi Institute of Development Research, Oxford University Press), it was indicated that more investments take place when coalition governments are in power. One reason why this happens is because various regional interests are held together by "generous distribution of infrastructure projects".
Economist Surjit S. Bhalla wrote the following words in an article in the week before Yashwant Sinha presented the second budget of the NDA government in February 1999: "Political instability does not matter. The conventional wisdom is that political wisdom is bad for the economy... There is a different, more compelling view. Political instability is actually good for economic reform. The contention is that lack of political dominance means that politicians in power will make the extra reform in order to fight for marginal votes in a future election. And if political stability is present, the politicians are unlikely to make an effort because of their inherent ‘short-sightedness’, or complacency."
These views can be countered since at the heart of the issue is what constitutes "real" economic reforms. Bhalla’s praise for the BJP’s heightened concern for high government borrowings or high deficits in the same article turned out to be premature. No politician would agree entirely with his thesis that governments act only when pushed to the corner, that political instability would invariably lead to economic reforms. Some amount of instability may be good for keeping those in power on their toes and preventing them from becoming complacent.
Over the past 12 years, as the "coalition dharma" to run governments in India got entrenched, there has been considerable political uncertainty. But it is far from clear whether this political instability has been bad for the economy. The gross domestic product grew by more than seven per cent a year two years in a row for the first time during a period of considerable political instability: the GDP went up by 7.3 per cent in 1995-96 and by 8 per cent in 1996-97. Between April 2005 and March 2008, for the first time in the more than six-decade-long history of independent India, the country’s GDP grew by an average of over nine per cent each year three years in succession.
The main point that needs to be made in this context relates to economic growth itself. An economy can grow fast but the fruits of this growth can be unevenly distributed and benefit only a small section. Economic growth has to be inclusive if it is to bring political returns to incumbents. Growth without creation of employment opportunities is akin to committing political suicide. This is what the BJP realised after its "India Shining" slogan backfired. This is the dilemma the UPA currently faces. What is the use of boasting about the GDP growth rate when double-digit inflation has further impoverished the poor, not to mention the middle classes? And who does not know that the poor vote in larger numbers than the privileged?
India is currently going through a phase of political uncertainty that is accompanied by an economic slowdown. Is there a connection between the two? The answer is "no". Prime Minister Manmohan Singh wants to go ahead with the nuclear deal even if it shortens his government’s term. Record international prices of crude oil are being held largely responsible for the current surge in inflation. While this is beyond the government’s control, the incumbent regime will still have to suffer the consequences. More on this subject next week.
Paranjoy Guha Thakurta is an educator and a commentator based in New Delhi
- Sri Lanka Guardian
(June 29, New Delhi, Sri Lanka Guardian) There are some people who hold politicians responsible for all of India’s economic problems. It is often claimed that bad politics is responsible for the slow pace of progress of economic reforms. To such an observation, it is worth recounting a favourite remark of the good doctor who is perhaps spending his last few months at Race Course Road. He has said time and again that there is there is no difference between good economics and good politics. These words will perhaps come to haunt him for many years.
Is the nuclear deal with the United States good economics and bad politics? Is the government’s inability to control inflation bad economics and even worse politics? Is it just a terrible coincidence that a phase of political upheaval has overlapped with a period of economic stress? These questions are certain to be avidly debated in the weeks and months ahead.
Be that as it may, it would be worthwhile to further examine the relationship, if any, between political uncertainty and economic policies. It seems logical that uncertainty of any kind, including political uncertainty, is not good for economic development. Yet it can be argued that a period of economic adversity spurs the political leadership to take tough decisions that it may not otherwise take.
In a paper entitled Electoral cycles and economic policies of governments of India by Kaushik Chaudhuri and Sugato Dasgupta ("India Development Report 2002", Indira Gandhi Institute of Development Research, Oxford University Press), it was indicated that more investments take place when coalition governments are in power. One reason why this happens is because various regional interests are held together by "generous distribution of infrastructure projects".
Economist Surjit S. Bhalla wrote the following words in an article in the week before Yashwant Sinha presented the second budget of the NDA government in February 1999: "Political instability does not matter. The conventional wisdom is that political wisdom is bad for the economy... There is a different, more compelling view. Political instability is actually good for economic reform. The contention is that lack of political dominance means that politicians in power will make the extra reform in order to fight for marginal votes in a future election. And if political stability is present, the politicians are unlikely to make an effort because of their inherent ‘short-sightedness’, or complacency."
These views can be countered since at the heart of the issue is what constitutes "real" economic reforms. Bhalla’s praise for the BJP’s heightened concern for high government borrowings or high deficits in the same article turned out to be premature. No politician would agree entirely with his thesis that governments act only when pushed to the corner, that political instability would invariably lead to economic reforms. Some amount of instability may be good for keeping those in power on their toes and preventing them from becoming complacent.
Over the past 12 years, as the "coalition dharma" to run governments in India got entrenched, there has been considerable political uncertainty. But it is far from clear whether this political instability has been bad for the economy. The gross domestic product grew by more than seven per cent a year two years in a row for the first time during a period of considerable political instability: the GDP went up by 7.3 per cent in 1995-96 and by 8 per cent in 1996-97. Between April 2005 and March 2008, for the first time in the more than six-decade-long history of independent India, the country’s GDP grew by an average of over nine per cent each year three years in succession.
The main point that needs to be made in this context relates to economic growth itself. An economy can grow fast but the fruits of this growth can be unevenly distributed and benefit only a small section. Economic growth has to be inclusive if it is to bring political returns to incumbents. Growth without creation of employment opportunities is akin to committing political suicide. This is what the BJP realised after its "India Shining" slogan backfired. This is the dilemma the UPA currently faces. What is the use of boasting about the GDP growth rate when double-digit inflation has further impoverished the poor, not to mention the middle classes? And who does not know that the poor vote in larger numbers than the privileged?
India is currently going through a phase of political uncertainty that is accompanied by an economic slowdown. Is there a connection between the two? The answer is "no". Prime Minister Manmohan Singh wants to go ahead with the nuclear deal even if it shortens his government’s term. Record international prices of crude oil are being held largely responsible for the current surge in inflation. While this is beyond the government’s control, the incumbent regime will still have to suffer the consequences. More on this subject next week.
Paranjoy Guha Thakurta is an educator and a commentator based in New Delhi
- Sri Lanka Guardian
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