The fear of early elections is haunting India right now. Among others, several corporate leaders have been voicing the worry that political instability will harm investment and economic growth. We feel these fears are overblown.
There are two types of political instability. First, there is the type you see in failed states such as Sudan or near-failed states such as Pakistan, where governments lose control in the face of violence and chaos. Second, there is the political change that comes when one government replaces another within the same democratic political system. What India may experience in the coming months is the second variant, in case the Left continues its shrill campaign against the Manmohan Singh government or if Sonia Gandhi independently decides to push for a mid-term election.
Should we really worry about it? No, we shouldn’t.
As democracies mature and economies develop, rules become (as they should) more important than the whims of individual leaders. That provides companies with the sort of stability they need to take long-term investment decisions. If this were not the case, we would have seen corporate investments drop as elections approached. Would we have seen huge investments in projects with payback periods stretching to more than 10 years if companies were not sure of the direction of long-term economic governance in India? The fact that no such thing happens is proof that investments and growth are not linked to politics.
True, there will be changes in the pace of reform under different governments. The current government has done far less than expected as far as promoting economic reforms goes, when compared to its predecessor. The next group in the driver’s seat will either step on the accelerator or the brakes. It is also possible that the Congress may win more seats in the next election and give Manmohan Singh or his successor a free hand.
But all this is a matter of detail. The bigger issue is that there is an overarching consensus about how India’s economy should be managed.
This is partly because we have moved from a dependence on individuals to a dependence on institutions, both domestic as well as global. Consider a few examples. Fiscal reform is now bound by the requirements of the Fiscal Responsibility and Budget Management Act.
Trade policy is within the rules agreed upon in the WTO. Quasi-independent regulators oversee individual sectors such as telecom and ports. Developments such as these have helped ensure that the Indian economy is no longer a hostage of politics, at least not to the extent it once was.
Political stability is overrated, unless we are talking about economic chaos and the collapse of civil society in failed states. In India, it is perhaps no coincidence that the years when governments have had crushing majorities in the Parliament have also been the ones when economic progress has been minimal. The Indira Gandhi years saw leaden political stability, combined with institutional decline and anaemic economic growth.
It was only after rapid changes of political power in the states in the 1980s and the rise of coalition politics at the Centre in the 1990s that political power declined and economic power became more important in India.
There is no sign right now that this is being reversed, which is why the fear that mid-term elections are a threat to economic growth is exaggerated.
Remember: The two countries that now face a complete breakdown in their economies have been “politically stable”—the insane dictatorship of Robert Mugabe in Zimbabwe and the hereditary communist monarchy in North Korea. Perhaps Prakash Karat and his comrades can tell us more about them.
Do you think mid-term elections will harm India’s economic prospects? Write to us at email@example.com