The United Progressive Alliance (UPA) has followed a two-track strategy ever since it unexpectedly captured power in 2004. That clever strategy is now showing some early signs of fraying at the edges.
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On the one hand, the ruling alliance has not aggressively pushed economic reforms but seems to have decided to ride the growth wave unleashed by a higher savings rate, demographic power and the benefits of the reforms done by the Narasimha Rao, United Front and Atal Bihari Vajpayee governments since 1991. The underlying assumption is that economic growth is on auto pilot, so there is no pressing need to go in for contentious policies such as cutting subsidies or changing labour laws. No reforms have been rolled back and economic policy is nowhere as interventionist as it was during the Indira Gandhi years, but it is quite clear that the UPA political leadership does not have a deep commitment to economic reforms despite having some outstanding economic liberals in government.
Yet, there has also been a firm belief within the Congress party that the benefits of growth have not been distributed equally, a fear that was articulated recently by Rahul Gandhi when he used the irresponsible rhetoric about the existence of two Indias. The second prong of the UPA strategy has been to provide voters with entitlements to employment, food and education in the name of inclusive growth—and win votes in the bargain.
The impact of reforms on the lives of the poor continues to be a contentious issue among economists, policymakers and activists. The UPA leadership implicitly believes that growth has not benefited the poor, despite so many indicators to the contrary. In a hard-hitting speech given to parliamentarians in December, economist Jagdish Bhagwati cited research by several economists to show that high economic growth has pulled 200 million Indians out of poverty and helped disadvantaged groups such as the Dalits.
The UPA could balance between its economic and political strategies as long as they were not in direct conflict. But as economic growth slows and inflation moves up, this two-track strategy seems to be coming under pressure.
First, Prime Minister Manmohan Singh put his foot down and rejected the ridiculous suggestion by the influential National Advisory Council (NAC) that wages paid for work on the Mahatma Gandhi National Rural Employment Guarantee Scheme should be on a par with the minimum wages in each state, a move that would raise rural wages without any commensurate increase in productivity as well as put an immense strain on government finances. Second, a committee on food security set up by the Prime Minister and headed by economist C. Rangarajan rejected the NAC proposal that three out of every four families should be covered by the proposed right to food law.
Neither of the two responses amount to an outright rejection of the proposals of Sonia Gandhi’s advisers; the proposed alternatives are very modest. The government has eventually agreed to link wages in the job guarantee scheme to inflation in a bid to protect real earnings of the beneficiaries. The Rangarajan panel has said that the assured supply of subsidized foodgrain be limited to the genuinely needy. So what has been suggested is a watered-down variant of the two pet projects of Sonia Gandhi and her NAC advisers. But the very fact that these mild objections have been raised is significant.
The quest for inclusive growth through entitlements can be seen as a reaction to the failure to address tough issues that would ensure genuine inclusive growth: job creation and the provision of quality public services by the state. Economic development took place in most Asian countries after governments there built schools and public health systems to improve the lives of citizens (or the quality of human capital, if you want to be politically incorrect) on the one hand, and created jobs in labour-intensive manufacturing, on the other. India has a mediocre record on both fronts. The inability to reform labour laws and build state capacity has meant that the UPA has taken the convenient way out —promising entitlements that cannot be sustained on our narrow tax base.
The national jobs scheme has lifted rural demand without increasing rural productivity, a sure recipe for high inflation. The huge grain purchases that the government agencies will have to make to meet the requirements of the proposed food security scheme will add further pressure on prices. High food inflation will reduce the real incomes of the poorest, who spend most of their incomes to buy food.
The motives behind the schemes to provide guaranteed jobs and food cannot be questioned. But the road to hell is often paved with good intentions. These schemes will push up food prices and also harm public finances. We have already seen that happening in recent years.
Unfashionable though this has become, the better and more sustainable alternative is economic reforms to accelerate job creation and governance reforms to build state capacity.
Niranjan Rajadhyaksha is managing editor of Mint.
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