The first United Progressive Alliance (UPA-I) government that reigned from 2004 to May 2009 had one distinguishing feature: Obstructionism by its Left allies. From the Indo-US nuclear deal to disinvestment, the Left parties intervened in the running of government, mostly wantonly. Prime Minister Manmohan Singh looked like a powerless spectator, not the head of government.
With UPA-II, all that has changed. The Left parties do not command the same strength in Parliament. Nor are they on a strong wicket outside Parliament. The residue of political opposition, for that is what the Bharatiya Janata Party has been reduced to, is in no position to cause any damage, save the occasional lung-letting.
Yet, the UPA-II has not used this opportunity and freedom from the Left to put India’s strong growth on a sound foundation that will ensure its future sustainability. That requires labour market reforms; a set of carefully calibrated financial sector reforms (such as deepening India’s debt market) and a rule-based fiscal and monetary policy mix. These steps have not been taken for the simple reason that their political benefits are long-term and their costs immediate. By the time high growth translates into more jobs and higher incomes, the UPA would have fought many elections, and it may not even exist in its current form.
Instead, the UPA government has focused on a chimerical chase for political longevity. It is not the first party or coalition to do so, but the steps it has taken to this end are perhaps unprecedented in India’s history since 1947. It is virtually redefining socialism. And the bad news is that it has nearly succeeded.
The traditional concept of socialism is based on state control of the means of production and intervention in pricing and production decisions in product markets. It was this version of socialism that so exercised economists such as Friedrich August Hayek, Ludwig von Mises and other critics of socialism. India never went down the Soviet road, and, as a result, avoided the worst excesses of that system. Instead of total state control, India had state-owned enterprises coupled with pervasive controls over various markets. Even this watered down version of socialism killed growth in India and led to a balance of payments crisis in 1991.
Resultantly, Soviet style socialism (Socialism 1.0) has had a bad name. Much thought has, however, gone since that time to re-think socialist ideals and re-orient them to make them work in a democracy. State ownership of means of production and whittling down of private property won’t work. India, however, offers other possibilities. It has a unique political combination of a middle class that has seen the bulk of income increases in recent decades, a class that is virtually powerless politically. The lion’s share of political power lies with the poor who vote most legislators to the state assemblies and Parliament. So, if the income-rich class is taxed and the proceeds distributed to the poor, there will be no political backlash. At the same time, this has the potential to cement long-term electoral gains to the Congress party and other constituents of the ruling coalition.
This version of socialism (Socialism 2.0) sidesteps the original socialist idea of nationalizing big, politically well-connected, private companies. In India, such companies are “untouchable” as they provide political parties with funds that oil the expensive electoral machinery. Though one has to say the government is trying to force affirmative action on private firms and make them share their profits with the poor. The aim being to get the eggs while not killing the goose. This is another Indian invention: forced socialism on the private sector after the statist variety has failed. Only politically unshielded companies are likely to face these demands.
The result is a neat formula that gels well with Indian democracy. It has the potential to ensure electoral gains for the Congress and other centrist parties and makes the Left irrelevant. At the same time, it creates an illusion in the minds of intellectuals that socialism is a respectable, if not practicable, ideal again.
There are, of course, costs to re-inventing this wheel. While it delivers political majorities, like its original version, it distorts economic incentives, especially in the case of those who are yet to taste the fruits of economic growth. Most social sector spending, the main vehicle of this form of political mobilization, inhibits skill development as the effort is towards “labour intensive” programmes (the Mahatma Gandhi National Rural Employment Guarantee Scheme being key in this effort). Labour market distortions and shortage of labour in key agricultural zones are its other effects. Because the effort is on higher consumption by those with lower incomes, the process fuels inflation, especially that of foodstuff.
Now taxing the middle class does not meet the entire expenditure of this effort. Because this spending is open-ended, the government has to borrow money to fund these programmes. The hope here is that continued higher growth will translate into higher middle-class incomes and ensure a constant stream of rising tax revenues. This could, in theory, plug the gap at some point in the future. Alas, that is not how reality pans out: In democracies, expenditures almost always rise faster than revenue. In recent years, this trend is quite visible. The long-term cost of this politics can only be higher deficits, rising inflation and macroeconomic problems.
Siddharth Singh is Deputy Editor (Views) at Mint
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