Competitive populism could hurt the Indian economy
4 min read 23 May 2023, 11:02 PM ISTThe economy did not play a big role in the Bharatiya Janata Party (BJP) forming a government in Karnataka, but may have in its defeat
PremiumThe economy did not play a big role in the Bharatiya Janata Party (BJP) forming a government in Karnataka, but may have in its defeat. High levels of corruption and inflation and shifting preferences of rural voters were among the reasons listed by political analysts to explain the Karnataka state assembly poll results.
The BJP’s national leadership isn’t taking chances, going by apparent responses that officialdom has scrambled: Tax authorities had a go at credit-card spending outside the country and the Reserve Bank of India pretty much sentenced the ₹2,000 note to death.
These hurriedly-announced decisions—a call for notes to be returned to banks during peak summer months takes an uncommon deficiency of empathy—aim at burnishing the government’s credentials for reducing corruption and soaking the rich. They might seem like minor inconveniences eventually.
For, if political analysts have got it right, then the bigger worry for the economy is the rural Karnataka voters’ snub to the BJP’s brand of welfarism. The party claims to have created a “labharthi" class of beneficiaries. Dissatisfaction in this self-aware vote bank can set off competitive populism among political parties. A game of catch-up could be on the cards.
We have seen this play out before. In the run-up to the 2019 Lok Sabha elections, the Odisha and Telangana state governments tried to relieve rural distress and improve agriculture’s viability by giving money to farmers. The central government felt challenged, and started doing the same through the PM-Kisan scheme. Income supplements for farmers aren’t bad economics. Minimum support prices distort market signals to farmers on what to produce and how much, but direct transfers don’t do that. However, the failure was that the government missed an opportunity to convert distortionary farm subsidies, such as on water and power, into income supplements. The merits of this reform are difficult to explain in a noisy political environment. It is pending and likely to remain so. Meanwhile, income supplements for other vote banks—minus necessary accompanying reforms—began to look like a distinct possibility.
Taking a lead in the run-up to the upcoming 2024 Lok Sabha elections, the Congress party has turned up the knob on populism. It successfully restarted a debate on pensions, forcing several state governments to go back to the old pension scheme (OPS) for their employees, unmindful of the burden this will put on their exchequers. Rajasthan, Chhattisgarh and Jharkhand have announced a return to OPS and Himachal Pradesh is also expected to do so. Punjab is reviewing it.
The Narendra Modi government at the Centre has not been able to resist this challenge of populism. It has constituted a panel to look into improving pensions for government employees, a class of voters that isn’t in distress.
Among others, Montek Singh Ahluwalia, deputy chairman of the erstwhile Planning Commission chaired by then prime minister Manmohan Singh, has cautioned that going back to the OPS will bankrupt governments. The OPS was stopped by the A.B. Vajpayee government in December 2003 because it was not sustainable.
In Karnataka, the Congress government decided on its first day in office to implement its campaign promises: 200 units free electricity per month to every household, ₹2,000 every month to every women head of a family, 10kg of rice every month to every member of below-poverty-line families, ₹3,000 to all unemployed graduates, ₹1,500 to all 18-25 year-old unemployed diploma holders every month for two years and free travel for women in public transport buses. In its 2019 Lok Sabha campaign, the Congress had promised income support under its Nyuntam Aay Yojana (NYAY) of ₹72,000 a year to India’s poorest families. It will probably reissue that promise for the polls next year.
The danger then would be that the Centre, under pressure to respond with a big-buck scheme of its own, would go ahead even though it has not created the fiscal space necessary to make such spending feasible. Blame a failure to improve India’s tax-to-GDP ratio from the under-12% level it has been for years, trailing most comparable economies.
Fiscal unaffordability is a worry, but not the chief one. Karnataka may be in a position to afford sops. The trouble is India is responding to economic pain with populism and appeasement—the sort of political giveaways that offer no sure path out of economic difficulties. Only sustainable livelihoods can deliver economic security and also expand our consumption market by enhancing people’s ability to spend, a must for our economy to grow sustainably.
It is widely agreed that India’s economy isn’t generating the number of jobs required by millions of low-skill youngsters. Governments have been under the impression that ‘welfare’ spending can compensate for these failures. Money—even speedy, leakage-proof digital transfers—cannot substitute for quality livelihoods.
Our economic model isn’t delivering for all Indians. Repairing it requires sound policy advice from economists and technocrats, which governments seem allergic to. Good bureaucrats often have reserves of bad ideas for when the political temperature heats up. Political conviction in reforms appears to be on the wane. Both the Congress and BJP seem ready to tear down the progressive economic policies of their earlier PMs. That can’t be good for the economy.
Puja Mehra is consulting editor, Mint, and the author of ‘The Lost Decade (2008-18): How India’s Growth Story Devolved into Growth Without a Story’
