8 May 2014.
Along with corruption, a stagnant economy and high inflation dominate the concerns of voters in the current general election in India. Like voters elsewhere, Indian voters seem likely to vote the incumbent government out for poor economic performance. On the face of it, the United Progressive Alliance (UPA)’s travails on the economy is surprising, given that economic growth has been the strongest on record during the UPA’s tenure, as compared to previous governments. However, economic growth declined significantly since 2010, and the current rate of growth is not very different to what was observed in the pre-reform period. For voters who have become accustomed to strongly rising incomes for much of the 1990s and 2000s, and especially the young, who are about to enter the labour market in large numbers, stagnant incomes and weak employment prospects were key concerns leading up to the elections, and the UPA government was seen to have presided over such an adverse economic situation.
To what extent can the blame on slowing growth be laid on the door of the UPA government and its inability to manage the economy properly? While external factors such as the global slowdown in growth and the hardening of the monetary policy of the Federal Reserve (which led to capital outflows and a sharp depreciation of the Indian rupee last year) contributed to the decline in the growth rate in India, much of the factors contributing to the current growth slowdown are domestic in nature. In fact, the causes of the current collapse in the growth rate is inextricably linked to the growth model that one observed in the 2000s. As international commodity prices surged with increased demand for minerals originating from China, the mining sector in India became very profitable. Along with this, the high growth of the 1990s led to a real estate bubble as well as profitable deals in infrastructural sectors such as telecommunications, which are more prone to elite capture. In this sense, the growth experience of the 2000s differed from that of the 1990s which was more closely linked to a more dynamic capitalism, with strong new firm entry, especially in modern industries like pharmaceuticals and information technology. The more predatory capitalism phase that one observed in the 2000s was also evident in the deals between political and economic elites in mining, land acquisition and telecommunications. As accountability institutions like the Supreme Court and the CAG pushed back in the second half of the 2000s, investor uncertainty increased with the unravelling of the cosy relationship between business groups and politicians, and investment fell. The process of economic growth unravelled in the process. While shades of predatory or crony capitalism were also present in varying degrees in opposition-ruled states, the sheer scale of the crony capitalist model observed at the Centre made it inevitable that the UPA regime would pick up most of the blame on a growth model gone horribly wrong. This was also exacerbated by the perception that the current political regime was more interested in so-called populist policies rather than building the next set of institutions for a more dynamic capitalism (such as regulatory institutions that could prevent cronyistic and anti-competitive behaviour among large firms, and more transparent ways to allocate valuable government licenses in mining, utilities and other sectors where the state had control of resources) or in fixing the state institutions that were needed for further broad-based economic growth (such as improving the quality of state schools or health clinics).
Along with slow economic growth, high food price inflation has also become a major election issue. That high food price inflation figures so prominently as a concern among voters is not surprising at all, given that the majority of voters in India are either those working in the unorganised sector in urban areas who are not protected against inflation, unlike the organised workers or bureaucrats who benefit from automatic adjustments in wages and salaries, or the landless or small farmers in rural areas who are net buyers of food. What is surprising though is that the UPA government has allowed food price inflation to be as high as it has been in the recent months. Historically, the Indian political elite is particularly sensitive to the presence of high inflation, given its political fall-out, and in the past, successive Indian governments have enacted policies to make sure that inflation remains low, certainly in the period leading up to a general election. Does the current high inflationary phase signal a shift in the stance of the political elite to inflation, and that controlling the latter does not figure in the political calculus of the incumbent party as much as it used to in the past? There are signs that indeed the political sensitivity to high inflation may be less now than it was in the past. This is evident from the significant increases in the minimum support prices for staple food crops in the past six years – while the large farmers of North-West India who benefit from these increases have always been an important political force since the Green Revolution, in the past, governments have been careful to balance the need to obtain the political support of this influential group with the need to moderate the rate of inflation. Also, there has been the growing recognition in the political elite that an emphasis on high growth inevitably implies high inflation in a country like India where supply bottlenecks are endemic, and that inflation may well be the price one pays for high economic growth (literally and figuratively). When economic growth was faltering in the previous years, a petulant Ministry of Finance was admonishing the Reserve Bank of India not to follow an anti-inflationary policy, which could also choke off economic growth (seen as the priority at that time). That neither economic growth revived nor inflation abated in an election year is a sorry state of affairs for the current government, for which it is likely to be punished in the polls. As George H.W. Bush learnt, much to his consternation when standing for re-election in 1992, when the U.S. economy was in the midst of a recession, ‘it’s the economy, stupid’.