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The Great Indian trick

‘Policy paralysis’ is the new buzzword that describes a politically weakened, morale-hit Congress unable to push its agenda with allies or the Left, writes N Chandra Mohan.
Hindustan Times | By N. Chandra Mohan
UPDATED ON JUN 01, 2008 10:25 PM IST

The setback for the Congress, the dominant partner of the UPA, in the Karnataka assembly elections is bound to have repercussions on its policy stance as it enters the home stretch of its five-year term. ‘Policy paralysis’ is the new buzzword that describes a politically weakened, morale-hit Congress unable to push its agenda with allies or the Left. The ruling party’s preference, thus, is for letting things drift and taking important decisions — if at all — with an electoral calculus in mind.

The first casualty has been the India-US civilian nuclear deal. On the economic front as well, the UPA has dilly-dallied on whether to raise fuel prices or not. India’s State-owned oil giants like the Indian Oil Corporation (IOC) are bleeding as domestic prices are subsidised even though global crude oil has touched $129 a barrel. While the economic rationale for substantially hiking petrol and diesel prices is compelling, politics has been in command in limiting them, as the government cannot afford to fuel the raging inflationary fires.

The UPA is also in no tearing hurry to liberalise foreign direct investment norms in retail, although the much-awaited report on the impact of organised retail by the Indian Council for Research on International Economic Relations has been submitted. With the prospect of small kirana shops being initially hurt by the spread of big retail, there is no way that it will allow greater FDI in an election year. Here again, the Left, too, is unlikely to countenance the prospect of job losses as mom’n’pop stores down their shutters.

Sadly, this is true for other economic reforms as well — like in the insurance sector, labour, pension and financial service liberalisation and so on — given the exigencies of fighting important polls in Rajasthan, Madhya Pradesh and Delhi, not to mention a national election early next year. While policy paralysis is increasingly the norm, what most observers overlook is the alacrity with which the UPA also indulges in opportunistic fiscal behaviour (read: populism) in the run-up to these elections.

According to the literature on political macro-economics, the government is hardly a benevolent social planner that works to maximise the welfare of one and all. Far from it, as its policy preferences reflects the balance of class forces in the system, benefiting some and disadvantaging others. As their term comes to an end, most governments desire to be re-elected and loosen the purse strings to further this objective. So huge fiscal deficits are likely, although there is no evidence that they ensure re-election of incumbents.

The UPA signalled such intentions in its last Budget when it announced a waiver of farm loans for small and marginal farmers, among other measures. In the Karnataka elections, the Congress raised the benchmark for rank opportunism by promising colour TVs to below-the-poverty line families, free power to farmers with 10 horse power pumpsets, among others. Yet, it lost heavily. Governments are condemned to make the same mistake, time and again, that the voter is basically uninformed and will respond to giveaways.

The BJP-ruled NDA, which was in power during 1989-2004, also faced similar compulsions for profligacy as its term drew to an end. The turning point was a series of electoral defeats, including the important state of Delhi in April 2002. Sharing the current predicament of the Congress, the BJP then faced state elections in Rajasthan and Madhya Pradesh later that year, including a national one in 2004. Interpreting these setbacks as a negative verdict on reform, the NDA drifted to populism.

Yashwant Sinha made way for Jaswant Singh as Finance Minister, whose single-point agenda was to ensure that the NDA was re-elected. Policy paralysis then meant dumping the radical tax reforms of Vijay Kelkar and strategic sales of public sector undertakings like Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd. Right from the Budget for 2003-04, the NDA’s policy stance was to ensure that ‘food reached the stomachs of the poor’ and housewives had more disposal incomes to spend.

The big question is whether the UPA will meet the same comeuppance as the NDA did. But this much is certain: it will not be for want of trying. Thanks to its drive for big-ticket spending commitments, the biggest casualty has been fiscal reform. The government is living way beyond its means, reflected in high and persistent revenue and fiscal deficits since it came to power. A revenue deficit is incurred when its tax revenues cannot meet expenditures like salaries and other costs of administration. Another word for ‘borrowings’ is the fiscal deficit.

The government, for its part, enacted the Fiscal Responsibility and Budget Management Act, 2004 (FRBM), according to which it has to eliminate the revenue deficit by 2008-09 and reduce the fiscal deficit by 0.3 per cent every year, starting 2004-05. But these targets are unlikely to be met due to compulsions of an election year. The elimination of the revenue deficit has already been postponed to another year while the budgetary target of 2.5 per cent of the GDP for the fiscal deficit will certainly be overshot.

Consider two recent measures taken by the UPA government. The additional liabilities of the Union government on account of the farm waiver (Rs 71,680 crore) and Pay Commission recommendations (Rs 26,035 crore) themselves take the Centre’s fiscal deficit to over 4 per cent of the GDP. Adding in the off-budgetary liabilities on account of oil and fertiliser subsidies plus the borrowings of state governments will easily take the combined fiscal deficit of central and state governments to 10 per cent-plus of GDP.

For a sense of perspective, this was the level of the deficit when the country went bust in 1991. Such high ‘Back to 1991’ deficits pre-empt investible resources and constrain the economy from realising its growth potential. India, no doubt, is one of the fastest growing economies in the world with 9 per cent growth during the last three years. But instead of utilising this favourable conjuncture to set its finances in order and push through necessary reforms to sustain the growth momentum, there is instead policy paralysis.

The point is that the political business cycle is alive and kicking in India and the FRBM is unlikely to serve as a bulwark against election year profligacy of the UPA government.

Although the state of the economy is buoyant, a big problem is that rising food inflation is not showing signs of abating. To be sure, the adverse Karnataka verdict for the ruling party has many explanations. But the price rise is being held as a contributing factor. More opportunistic behaviour, thus, may be expected over the near-term to shore up its electoral fortunes.

The consequences of a ‘Back to 1991’ fiscal scenario, however, will be felt only over the medium term. But for now, the ruling dispensation appears preoccupied with ensuring its re-election. Instead of reining in unproductive expenditures, including those on subsidies while broadening the base of taxation, the policy thrust will be increasingly on so-called aam admi measures. With reforms also on the backburner — thanks to policy paralysis — the consequences of this drift will threaten the sustainability of the current growth momentum.

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