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Business News/ Opinion / Views/  Our political economy works like a multi-player game

Our political economy works like a multi-player game

Competing interests try to shape policy but that does not mean sound economics cannot prevail

The non-farming poor have legitimate grievances about being dealt a weak hand in life and deserve sympathy and munificence. Premium
The non-farming poor have legitimate grievances about being dealt a weak hand in life and deserve sympathy and munificence.

There are four main schools of political economy: The normative school with a benevolent policymaker at its centre trying to maximize a social welfare function; public choice theory with its focus on rule making; the Chicago school where policymakers redistribute wealth to maximize a support base; and the transaction cost school where each policy is a ‘play’ in a game where multiple principals try to influence an agent (policymaker) to maximize their own utility.

Given our sub-optimal policy making history in the first four decades after 1947, the Indian political economy cannot be said to conform with the normative school model. One is tempted to shoehorn India into the public choice theory mould, but frequent government failures make this too ambitious. The Chicago school vision, with resources redistributed among hungry factions to shore up political support, perhaps appeals most to our tax-paying bourgeoisie. This model though ignores institutional features of a country and is not rich enough to capture the dynamics of policymaking in our complex democracy. A more apt characterization of our political economy can be achieved through the lens of Avinash Dixit’s transactions cost model. While all of us, irrespective of socio-economic group, claim to be victims of poor policymaking, in reality, we usually abet exactly that, since all socio-economic groups view policy as a chance to maximize benefits for themselves. This lends itself to game theoretic analysis.

Large farmers brand themselves as ‘annadatas’ (food providers), pay no taxes, consume big subsidies on input costs, lobby for higher support prices, pressure the government for loan waivers and engage in rent seeking by torpedoing transformative farm reforms by means of agitational politics, claiming victimhood at the hands of a ‘unjust’ regime allegedly controlled by conglomerates. Farm subsidies are consumed in large individual amounts by a small group of politically well-organized principals, while taxes that fund these subsidies are borne in small amounts by a widely dispersed and politically unorganized group of taxpayers, and hence can’t be pushed back.

The second group of principals who try to exert vocal influence on policymaking are corporations. Many have benefited from decades of protected profits under the Licence Raj, have the ability and rolodex to work the bureaucracy to their advantage, have been happy to take the banking sector for a ride, and yet complain about the difficulty of doing business in India. They seek, quite reasonably, lower taxes and labour reform, but are quick to exploit incentive schemes like FAME (for EVs) and unwilling to spend on R&D, take risks and invest in path-breaking moonshots and production abilities, often choosing to replicate well-worn Western ideas or adopt the path of least resistance by using Chinese assembly kits.

The third group of principals playing this game are the non-farming poor. They have legitimate grievances about being dealt a weak hand in life and deserve sympathy and munificence. Yet, they also try using elections to influence policy in favour of more ‘revdis’ (handouts). Some have no qualms about selling their vote to the highest bidder who lets them use electricity illegally and offers other benefits.

The last group of principals playing the game (to which this author also belongs) are bourgeoisie ‘taxpayers’. They frequently point out how their taxes run the country (or in some cases other parts they don’t like) and how little they get in return, without realizing that taxes carry no quid quo. They complain about high personal taxes and GST, ignoring the fact that most rich and newly developed countries had high taxes when they were developing. The top personal tax rate is still 45% in South Korea and 50% in Japan. They complain about TCS deductions on foreign credit card spends and high prices of petrol while driving in thirsty SUVs to sample the latest frappuccino flavour at Starbucks. Some live on a steady diet of Netflix and Instagram, want a social media influencer lifestyle in a country with a per capita GDP of about $2,000, and often see government policy as holding their dreams hostage by not decreasing taxes, raising pay scales and offering Scandinavian standards of work-life balance.

Surprisingly, in the context of this vibrant Indian political economy, the performance of the government on policymaking has been rather commendable. There have been some misses like land and labour reforms, withdrawal of farm laws, a failure to reduce bureaucratic friction for businesses and a belated focus on manufacturing and exports. But overall, the administration has been able to deliver on some big-ticket items: GST, real estate regulation, a banking system clean-up, budget transparency, corporate tax cuts, rationalization of personal tax rates, digitization, leak-proof delivery of public services, an infrastructure upgrade and relative fiscal prudence despite covid. We can also count as positive the rising wealth of the middle-class through rising asset prices.

Many of these achievements were considered difficult in India at one time because policies must pass through a double filter: They must conform with sound economics as well as be Pareto efficient for all influence groups. However, for the last nine years, sitting in the middle of a circus of principals jostling for influence like passengers on a Virar local train in Mumbai, government policymakers seem to have performed a fairly decent job of appeasing most and offending some.

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Published: 02 Aug 2023, 10:01 PM IST
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