By Jatin Bavishi
Can good economics be good politics? Most experts think it’s akin to catching a tiger by its tail. The Indian economy has gone through various phases-from being dominated by the all-pervasive Congress to an era of stitching complex coalitions and ultimately paving way to BJP led NDA after 2014. On 27th September, former RBI Governor YV Reddy mooted to a Washington audience that coalition governments have produced better economic growth than a strong majority government in the last three decades. Making an unsullied comparison may not have been his intention, but the witty and quick humoured Central Banker is known for his acerbic comments and calls for a brisk analysis.
This time it’s different
One must concede at the beginning that the periods of comparison are qualitatively heterogeneous. Not only is the international situation drastically altered, there has also been a change in technology, institutions and entire zeitgeist (defining spirit of a time). On the other hand, the report card post-2014 is less due to constraints by time. Historians with the benefit of hindsight may be in a better position to justify the claim, but let us firstly look at some data.
From cycle to cycle
Professor Raj Krishna had infamously called the low growth from1950-80 as ‘Hindu Rate of Growth’, and 1991 market-oriented reforms loosened the strings for future growth (although the foundations were laid in the earlier period). The highest growth rate was achieved during 2003-08 with annual growth close to 9% (R. Nagaraj, 2013). An important component of this growth was the liberal credit regime at low-interest rates. In other words, the growth was ‘debt-led’ tapping benign world trade and capital inflows. This feature, in principle at least, has little connection to coalitions.
Politics, however, did make its contribution in other ways. The biggest challenge under coalitions is building a consensus, often at the cost of compromising sagacity. To prevent the coalition from falling asunder, governments were compelled to spend larger portions of its budget. Since late 1980’s, fiscal stimulus has been a recurring feature. In 1991, the fiscal deficit was hovering at around 7% which came down to sub 5% in 2012, still high by conservative measures. Although very often this expenditure was directed towards consumption (satisfying current wants) rather than creating capital (used for further production), it is true that whenever the stimuli have been tapered off, growth has faltered. The current government has made its intentions with regard to fiscal deficit clear- it will commit to fiscal responsibility and budget management and bring down the deficit to 3% by 2018. Hence, in the absence of weakened private enterprise and poor global trade, a slowdown is anything but imperative.
A good Keynesian macroeconomist would suggest fiscal stimulus is an important tool to boost the economy. However, according to Jahangir Aziz, an economist at JP Morgan, India has a history of not managing stimulus properly and is akin to squandering for growth. The question whether fiscal spending is better vis-à-vis a conservative approach involves a value judgement.
Is high growth enough?
Growth rate slumped to 5.7% in the quarter ending June 2017, which is the slowest in the last three years and way below the Dream Run of 2003-08. The Indian economy is struggling to recover from a shock demonetisation; a move which would have been difficult to realise under coalitions owing to the blow it inflicted to the informal economy. Growth is, however, not the one shop stop to evaluate the performance of an economy. Other indicators, like Current Account Deficit (CAD) and Inflation (measured by CPI) were relatively high in the previous period compared to present (serendipitously due to falling crude oil prices), which is a positive sign, but on the other hand, domestic savings as a percentage of GDP at 28% was at its lowest in the last 15 years. A strong centre with limited room for coalition compulsions has controlled uncertainties, but investor sentiments are yet to pick up.
Alas, none of these measures consider important aspects of development. Thomas Piketty and Lucas Chancel in a recent paper ‘India Income Inequality, 1922-2014: From British Raj to Billionaire Raj?’ say that income inequality in India at its highest level since 1922. Interestingly, this ratio has shot up over the past three decades, both within and without coalitions. Our record in quality health, education and other social indicators are also deplorable for the masses. Hence, while both forms of governance can beat their chests and boast their achievements, the fact remains that there is no room for complacency.
Featured Image Source: Visual Hunt
Photo credit: International Monetary Fund via Visualhunt.com / CC BY-NC-ND
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