India needs to shake up its new political-economy consensus

Handouts have come to be a powerful economic lever to manage political discontent in times of persistently high food prices compounded by a nagging jobs crisis and a decade of stagnant rural wages.

Economist Neelkanth Mishra has estimated that half the states are cumulatively spending ₹2 trillion a year, or 0.6% of national GDP, on these programmes. More may follow as pressure grows on policymakers to resolve food supply bottlenecks or see inflation harden.

Also read: Mass distress: Handouts are no substitute for wage-raising structural reforms

The second big change is in the thinking on pensions. Cutting across party lines, governments are re-introducing assured pensions for employees. In many states, non-BJP governments have decided to revert to the pre-2004 old pension scheme.

The unified pension scheme announced by the Centre ahead of voting in Haryana doesn’t go that far, but it too assures employees of a pension that is half the average salary drawn in the last year before retirement.

The pension bill will rise only slightly, say officials defending the scheme. But once the principle of no assurance is done away with, pension schemes inevitably become unfriendly to taxpayers. A signal has gone out that the government is susceptible to pressure groups. The pension reform reversed was rolled out by the A.B. Vajpayee government and had held for 20 years.

The third issue on which policy positions have converged is privatization. The Union budget of February 2021 had announced a grand sale of all government companies, save a few critical ones.

The policy notified three days later said the Centre would retain bare minimum control over commercial enterprises and close down or privatize the rest. The accompanying public narrative presented the policy change as a reversal of Nehruvian socialism, an ideological rejig of the economy by peeling back the state.

But, in practice, the BJP-led NDA government may have relapsed to the UPA coalition’s policy that disallowed privatization of Maharatna companies. “Why would we divest ourselves of highly successful Maharatnas like BPCL," oil minister Hardeep Puri said in June. BPCL’s top brass has since given Andhra Pradesh Chief Minister N. Chandrababu Naidu a commitment for a petrochemical complex, a project that had been on ice for 10 years.

It has been suggested that the government is finding the going tough in its third term, which is resulting in policy reversals. That small coalition partners forced the rollback of a civil-services advertisement calling for lateral entries for government jobs supports the contention of commentators that reforms are getting reversed. They’re on to something, but they misjudge the cause.

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Policy errors necessitated handouts for women. Had the budget’s capex-welfare spending strategy worked well, these would not have been needed. Growth would have taken care of incomes and bottleneck-free supplies of inflation.

Policy shifts are taking place as the BJP’s economic ideology is fuzzy. A Thatcherite rollback of “the frontiers of the state" was always going to be difficult, given that India’s right, like the left, is anti-privatization.

The government is steadfast in implementing the BJP’s political agenda—Article 370 has been abrogated, a Ram temple has been built in Ayodhya and the Citizen Amendment Act is being implemented. But its economic agenda seems like a work-in-progress.

The political economy of interest groups has not been sorted out. Farm laws had to be taken back for this reason. And the political clout of government employees has prevailed over Vajpayee’s pension reform legacy.

The old consensus was formed by a Congress government in the early 1990s. That policy agenda was well understood by the 1991 reformers but was not publicly debated. Then prime minister P.V. Narasimha Rao sold the reforms as a continuation of Nehruvian policies to the party; their contradictions with traditional political positions were not sorted out.

The consensus could not sustain, and it frayed, as Manmohan Singh said a year after he became PM: “The political consensus that has been the bedrock of the reform process since 1991 has been implicit… successive governments in the last 15 years have broadly followed this policy orientation… [Major] issues of reform, ranging from tax and tariff cuts to changes in FDI ceilings, have been the subject of a discreet consensus [that] … is rarely stated in public, but has often been displayed in the execution of policy… Yet today, it is saddening to see this political consensus weakening."

The BJP’s Arun Jaitley had engaged with his party leadership to define its economic agenda. He introduced our inflation-targeting framework to manage tensions among interest groups on interest rates and inflation. But that reform is being contested.

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Today’s problems need a new consensus, and constructing it would require a coherent resolution of many matters—institutional, social and geopolitical. But the BJP would need someone of Jaitley’s stature, skill and temperament who can engage with the party leadership as well as political opposition for defining the country’s economic agenda by resolving complex trade-offs.

The author is consulting editor, Mint, and the author of ‘The Lost Decade (2008-18): How India’s Growth Story Devolved into Growth Without a Story’