Terms of Trade: The great Indian political economy drama in six acts
India’s growth prospects are likely to remain bullish in the future but bearish compared to the past; nobody talks about double digit growth rates anymore
Indian democracy and nation-building, in the eyes of many western observers, was supposed to be a stillborn project. There were far too many contradictions; linguistic, ethnic, religious, social and of course class-based, in the newly independent country for it to succeed. Many of these contradictions continue to exist even eight decades after this project was started. However, there is absolutely nothing to suggest that Indian democracy or the nation-state at large is at the brink of collapse, or the threat of this happening is more pertinent than it has ever been in the past. None of this is to absolve India’s democracy or the state at large of its problems. But it would be unfair if one were to overlook its resilience.
At the root of this resilience is an evolving political economy from the dialectic of democracy, society and capitalism. These dialectics have been facilitated by interdependencies both within and outside the country. This week’s edition of the column intends to draw a brief snapshot of this journey.
Act I
The formative years were the most difficult for the nation despite its polity being perhaps the most stable because of the Congress party’s absolute electoral dominance. India went through a violent communal rupture and massive displacement of people in the form of partition. It had inherited an almost non-existent industrial base and an agrarian sector which was deeply exploitative in exchange relations and unreliable in fulfilling the food requirements of the country. The nascent Indian state spent a lot of its time trying to control communal violence within and outside the borders of the newly created Indian nation. It did away with the de-jure basis of most exploitative land relations by abolishing zamindari and recognized the rights of the most socially oppressed in the new constitution. De facto change on both these fronts would of course come much later and continues to be a work in progress even today.
On the economic front, it tried to borrow the socialist planning method of government leading the charge for building a modern economic base without having socialism on the ground. The result was the proverbial equivalent of the planning coat always needing more than what the revenue cloth could offer. The constraints were tested not just in bread and butter needs but also guns, especially during the Chinese war. The limitations of this project in meeting the stated goals notwithstanding, its contribution to nation-building, via direct and indirect effects, has been more than significant. Those who disagree should ask themselves how India managed a moon landing.
Act II
Once the protagonist of the first-generation leadership, namely, Jawaharlal Nehru, was gone from the scene, things took a turn. Politics became more competitive for the Congress, largely a result of proliferation of democratic competition in the rural areas, which had its roots in weakening feudal dominance. The economic utopia of planning being able to achieve meaningful economic transformation started being recognised as exactly that, a misplaced utopia. The central character of this phase of politics did a lot of things which have attracted the attention, both negative and positive, of historians, political scientists and economists.
However, former Prime Minister Indira Gandhi’s seminal and lasting contribution, once she had consolidated political power, was to shift the political economy focus of the state from mobilising resources for growth and economic transformation to what can only be described as palliative welfare captured in the slogan of “Garibi Hatao”. The political economy trick was achieved by the state significantly expanding its fiscal fire power on a de facto basis by controlling financial sector deposits via nationalising banks. A detailed explanation of this argument can be found in this lecture by historian Srinath Raghavan which gives a sneak preview of his book; it is due next year, on India in the 1970s.
Act III
As irony would have it, Gandhi was consumed, not just physically but also politically, by the contradictions she ignited while trying to cement her political hold. What awaited the Congress was an extremely fractured, sectarian, and, in many places, violent polity in the post-Indira period. What made matters worse was the fact that a political greenhorn was in charge at this fraught moment. Rajiv Gandhi’s political economy outlook was consumed by firefighting sectarian tendencies, some localised, some widely prevalent, sometimes by persuasion, and sometimes by appeasement of all and sundry.
The biggest legacy of this mishandling of contradictions by Rajiv Gandhi is the rise of the BJP on the back of the Ram Temple mobilisation. In the three and a half decades of its existence, the BJP has replaced the Congress as the dominant national party in the country. The economy was almost sleepwalking towards a disaster during this period with the external balance worsening sharply throughout the 1980s.
Act IV
Rajiv Gandhi’s life and politics were cut short before things precipitated on the economic front in 1991. It was left to the first non-Gandhi prime minister of the Congress (who completed a full term) and his lieutenant in the finance ministry to stabilise the economy by opening it up both domestically and internationally.
Fortunately, for India, this happened just in time for us to be able to harness the tailwinds of massive rise in IT-enabled services. This brought much needed foreign exchange for the country and even more importantly catalysed the rise of a large middle-class consumer base in the country, creating new mega cities and completely transforming a bunch of others. As far as the sheer optics of it are concerned, India underwent perhaps the most drastic transformation in the late 1990s and early 2000s. Cars, electronics, highways, mobile phones, and not having to wait to spend your own money, whether on a telephone, car or a foreign holiday, everything changed for good.
The feel good was contagious and infected the political regime as well which made the cardinal sin of believing that the new economy had become the nerve centre of India’s political economy too. The 2004 elections provided the wake-up call to the political class.
Act V
In the defeat of Vajpayee government which went to the polls with a slogan of India Shining, politicians realised that shining infrastructure and well-stocked shopping destinations serving a handful of million meant nothing to the significantly bigger cohort of people who were still dependent on the old economy and living a life of great economic precarity.
The lesson from the bursting of India-Shining bubble of 2004 took politicians back to the lesson Indira Gandhi had taught them: give something tangible to the poor in return for votes. The only difference in the post-2004 deployment of this strategy was that the funds to do this came from higher growth and revenue rather than a usurping of funds from deposits in the financial sector in the first instance. This also meant that the strategy was as good as the growth performance of the economy, barring which, there would be no revenue to expand or even sustain the welfare net.
The strategy lasted as long as growth did, ending with a trifecta of high inflation, high fiscal deficit and high external deficit in the aftermath of the 2008 financial crisis. That the Congress had very few non-economic tricks or a leader of mass standing -- the two are often linked -- in its political arsenal only made things more difficult for it while facing the economic storm. It all culminated in a humiliating loss in 2014.
Act VI
When Narendra Modi took over the South Block in 2014, many read it as the heralding of a new era in Indian political economy. Such beliefs were largely based on extrapolating what was known as the Gujarat model. We did see signs of a new political economy arrangement being attempted. It was one where barriers to formal sector’s expansion in the economy were to be dismantled (even at the cost of emaciating the informal sector) and welfare was to shift from meagre income support programmes to first-generation asset transfer schemes.
By 2019 general elections, the Modi regime realised that course correction was needed to make this model politically marketable. What we had was a roll-out of cash transfers for farmers. Everyone else took the cue from the political dividend of the strategy and what we have had is a proliferation of cash-transfer programmes across the country across ideological persuasions. The post-2014 period is nothing but the post-2004 political economy on steroids.
To be sure, there is a crucial difference between the Congress’s and the BJP’s palliative welfare strategies. While both of them are secular in their economic populism, the latter complements it with a sectarian but majoritarian social outlook. However, as the 2024 elections have taught the BJP, they cannot be treated as substitutes.
What will come after this phase?
It is wise to look into history and hubristic to predict the future. However, three things can be flagged as being potentially defining for the future trajectory of Indian political economy.
One, as the rural fades in importance as a site of wealth creation and growth in the larger economy – it is more a source of reserve army of migrant labour right now – caste is likely to become a less important driver of macro political narratives and fortunes. This is not to say caste will not matter. But what we are likely to see is its reduction from being the first order variable to a second order one, employed more in rhetoric and political representation than in primary mobilisation strategies which worked on the premise of building macro solidarities big enough to influence political outcomes.
Two, India’s growth prospects are likely to remain relatively bullish in the future but bearish when compared to the past. Nobody even talks about double digit growth rates anymore. This is partly a result of weakened animal spirits at home and the global markets pivoting away from the free trade arrangement which offered the export led growth route to emerging markets. This will generate headwinds for market driven upward mobility and therefore only increase the political imperative for economic palliatives.
The third will be a byproduct of the first two. The middle class, which has largely built its fortunes in the post-reform period and has weak links with its rural or social origins, is likely to see the rise in welfare spending as an extortion act by the state.
To be sure, one could argue that it is this welfare push, which has ensured that economic inequality and precarity in India does not take a violent or lawless turn seen in other emerging market democracies such as South Africa where the rich are doomed to live in fortified enclaves. But then, stability is always less appreciated while it exists than once it is lost.
This class of the new aspirational elite will develop an increasing alienation to democratic processes at large because the political economy bargain will be seen as one, which is always taking away from the rich (psychologically middle class) to give to the poor. The beginnings of this democratic dissonance can already be seen in city states such as Delhi where electoral considerations have rendered even genuine grievances of the economically well-off irrelevant.
India’s most defining political fault line in the next couple of decades could be between the poor who are cynically grateful for the palliatives which democracy offers them, and an elite which is cynically contemptuous of a democracy which does not reward their enterprise and wealth creation enough. We are very far from democratic weakening but really close to democratic dissonance.
Roshan Kishore, HT’s Data and Political Economy Editor, writes a weekly column on the state of the country’s economy and its political fall out, and vice-versa