In the past two months, many readers have asked
about my expectations of the outcome of the ongoing general elections and the
likely impact of it on the Indian economy and financial markets. I am glad to
offer my opinion, with the rider that I am an independent observer of Indian
politics and have no affiliation or inclination towards any particular
political party or group thereof.
I believe that in India economic policies, and
therefore financial markets, are politics agnostic. I do not see the outcome of
general elections impacting the Indian economy in any significant manner.
A study of the history of Indian politics would
suggest that, unlike the Western democracies, only an abysmal minority of
Indian voters are strongly committed to a political or socio-economic ideology.
Contemporary issues, personalities, and election promises usually dominate the
political discourse in India. Economic issues raised during elections are
mostly confined to the slogan of poverty alleviation and handouts to the voters.
Unfortunately, no political party has taken the issue of poverty alleviation
seriously. Therefore, no one has bothered even to outline a conceptual or
ideological framework for solving this problem.
Ideologically, in the early days, the Congress
Party abandoned the most acceptable and perhaps most suitable Gandhian
Socialism in favor of Nehruvian Socialism - a poorly mixed concoction of
Leninist central planning (central ownership and management of resources and
businesses) and British colonial legacy (discretionary patronage to the
faithful and loyal). The model was certainly at cross-purpose with the constitutional
federal structure. Poverty, poor governance, and corruption were natural
off-springs of this system.
BJP started with Deen Dayal Updhaya's Integral
Humanism. However, in the 1990s it briefly adopted Gandhian Socialism (which is
not too far moved from Integral Humanism) as the principal doctrine. The
present leadership has, however, mostly followed a poorly mixed concoction of Leninist
socialism and the Laissez-faire model used by some developed economies
principally the USA.
Politically leadership preaches "Human
Being" as the fulcrum of policy making. Whereas the executive is more
focused on "Business" and "Macroeconomics" as the central
theme. The conflict is for everyone to see. The consequence is slower and
inequitable growth.
Until the mid-1980s, the people at the left end
of the spectrum exercised significant sway at the bottom of the pyramid in
Indian society since independence. They controlled most of the labor unions.
Though divided between Marx, Lenin, and Mao they still were the preferred
choice of landless, oppressed, and intelligentsia. There was a time when being
poor, intelligent (economist, thinker, poet), or rebellious meant being
communist.
Things however began to change in the late
1980s, after dismantling of the USSR and the German wall. The Lenin and Marx
were relegated to the history lessons. The economic reforms initiated by Deng Xiaoping
in China further pushed back the traditional Marxists.
Insofar as the socialist parties occupying the
left of the center space in Indian politics are concerned, they deserted both
Lohia and his ideologue Gandhi as soon as they came into power. Degenerated
into motley feudal, they show little commitment or preference to any specific
economic idea.
As I have been reiterating rather frequently,
that the governments in the past 40 years have mostly adopted similar
socio-economic policies consistently irrespective of their form or
constitution.
The Ctrl C + Ctrl V has been the most preferred
practice in the formulation of most government policies and programs, with some
semantic changes to give it a different hue.
For example, consider the following:
1.
The process of meaningful tax
reforms was started by the then finance minister V. P. Singh (Congress 1984-89)
by rationalizing the tax slabs, lowering maximum marginal tax rates
substantially, rationalizing wealth tax and introducing CENVAT. The recommendations
of Raja J. Chelliah Committee (1991-93) on tax reforms constituted by the
government (Congress 1991-96) have since formed the basis of tax reforms in
India. All successive governments have implemented these recommendations. No
government has sought to reverse or alter the process started by the Congress
government (1984-89). These recommendations formed the core of the much awaited
Direct Tax Code. The origin of the tax proposal like lower tax rate with lesser
exemptions and no wealth tax could also be traced to that.
Committees formed under the chairmanship of
other members of the Raja Chelliah Committee like Govinda Rao, Partha Shome and
Vijay Kelkar, etc. subsequently updated the recommendations to provide further
impetus to the entire process of tax reforms in the country.
It was the Finance Minister of H. D. Devegoda
led United Front government who presented the most talked about "dream
budget".
2. The
recommendations of the Narsimhan Committee (1991-92) appointed by Dr. Manmohan
Singh, the then finance minister in the Congress government, have largely
formed the basis of financial and banking sector reforms in the country. Most
successive governments have implemented the recommendations consistently. P.
Chidambram, the then finance minister in the United Front government (1998) had
re-appointed the Narsimham Committee to make recommendations about the second-generation
banking sector reforms. The report was submitted in 1999 to the NDA government
which accepted the recommendations. However, almost all governments have failed
to build a wider consensus on these recommendations and have only partially implemented
them. But acceptance and rejection have been very consistent irrespective of the
form and constitution of govt.
3. The
BJP led NDA government enacted the Fiscal Responsibility and Budget Management
Act (FRBMA) in 2003. The arch-rival Congress led UPA-I government implemented
the same in 2004 in letter and spirit. This still forms the basis of fiscal
discipline at central and state levels, though implementation was suspended in
2009 in the wake of the global crisis and again in 2020 due to COVID-19
stimulus. The incumbent govt. has committed to achieving the targets in the next
two years.
4. The
minority government of Chandrashekhar introduced a disinvestment policy in
1991. Every successive government since then has accepted the policy in
principle. They have tried to incorporate disinvestment policy into the
evolving economic model. However, they have consistently failed to implement
the policy in the right spirit. None has achieved the disinvestment targets set
in the respective budgets.
Prime Minister A. B. Vajpayee took it further
by divesting many government monopolies like coal, power, roads, ports,
airports, telecommunication, insurance, etc. Subsequent governments added to it
by allowing private players in sectors like pension, defense production, etc.
No government has sought to reverse the decisions of the earlier governments.
5. A
single national market (GST), as a desirable idea, was conceived long ago. Many
governments deliberated and developed the idea. The incumbent government
finally implemented it in 2017, when the infrastructure and logistics
considered necessary for rolling out GST reached a reasonable stage.
6. Programs
such as cleaning the holy rivers of Ganga & Yamuna and provision of toilets
in every home have been accorded priority by all successive governments.
7. One
of the key areas of corruption in public life has been the executive's right to
allocate natural resources for commercial exploitation. The Supreme Court
effectively curbed that right in its judgment in the allotment of 2G spectrum
case.
An auction-based transparent regime is the outcome
of the court-directed process, which is mostly irreversible and therefore party
agnostic.
8. The
UPA government created enabling infrastructure for the digitalization of the
economy through UIDAI, NPCI, etc. The subsequent NDA governments used this
enabling infrastructure for the massive development of the digital transaction
ecosystem.
9. The
NDA-1 government started the ambitious National High Development Program (NHDP)
in 1998. The UPA government removed the obstacles in the implementation of this
program through a remunerative and widely acceptable compensation and execution
policy. The NDA-2 used it for accelerated construction of roads and highways,
without seeking to change anything in UPA policy.
10. The
UPA government started a new practice of lateral appointment of professionals
by appointing Nandan Nilekani to head UIDAI. The later governments continued
with this practice and appointed many professionals to head the NITI Aayog.
From the above-cited example, it is evident
that the direction of policy-making has been mostly the same on most
accounts during the past three decades. The difference lies in the execution.
It is pertinent to note that the governments
led by P. V. Narasimha Rao’s and Atal Bihari Vajpayee made many historic
departures from the past and took many new policy initiatives.
The end of the Nehru era's license, quota &
permit raj, abolition of capital controls and introduction of LERMS, entry of
private players in civil aviation, opening of the financial sector, etc. were
some major path-breaking reforms introduced by P. V. Narasimha Rao government.
Divestment of major government monopolies like
power, roads, wireless communication, ports, airports, insurance &
hydrocarbons, focus on rural connectivity, deregulation of fuel pricing, and
liberal FDI regime, etc., were the key new policy initiatives during the
Vajpayee led NDA regime.
The 10 years of the UPA regime introduced a new
paradigm in the Indian socio-economic milieu, viz., the Right-based
Socio-Economic regime. Right to Work, Right to Food, Right to Education, Right
to Information, Right to Health, etc. some of the ideas propagated in their
regime.
Implementation of right-based entitlement has
been patchy and questionable, but no one has so far challenged the approach. The
incumbent government has sought to partly implement the Right to Health that
was promised by UPA in the last few weeks of its regime, through a universal
health insurance scheme in the union budget for FY19. The current government
has also enhanced the Right to Food program.
The UPA government signed a civil nuclear deal
with the US. This started a new era of India’s strategic partnerships with developed
countries like the US, France, Germany, Japan, and Australia, etc. The
incumbent NDA government has taken this further through multiple bilateral agreements
for Free Trade and movement of capital and labor with many of these countries.
The change that we have seen in the past ten
years of the incumbent government's regime is the dominance of market
economists (against development & social economists before) in the
consultative bodies of the incumbent government. This change in my view is the
outcome of the change in the global positioning of the Indian economy and
markets. There is nothing to suggest that a change in the government at the
center would materially change this position in the near-term, unless international
developments completely change the global balance of power and global market
paradigm.
In short, the economic policy of India is
still a work in progress. all governments in India in the past 40 years have made
incremental improvements in the policy framework to make it congruent with the scale
of economic development and changes in India's position in the global economic
and strategic order.
…to continue tomorrow
What if? Part 1