The puzzle of India’s political economy is to reconcile the expectations of “Great Society” welfare with stagnating middle-income productivity.
In evaluating the interim Budget for 2019-20, presented to the lower house of India’s Parliament on Friday, the crucial point to bear in mind is the degree to which India’s political economy has changed since 2014. When P. Chidambaram stood up to deliver the equivalent interim Budget prior to that year’s general elections, it appeared the momentum in the country had shifted away from the welfarism of the United Progressive Alliance. The headline points in that interim Budget are worth noting in this context: a sharp attempt to rein in a runaway fiscal deficit; and some minor attempts at give-always, such as an interest waiver on some education loans and a small tax cut on consumer goods. The UPA, in its last gasp, saw the future, and thought it involved small government and fiscal prudence.
It turns out that this assumption was wrong. India’s political economy was not shifting in the way that conventional wisdom in 2014 had it. This year’s interim Budget, in comparison, has more new expenditure than most regular Budgets of the past. It lays out a vast, welfarist vision for India’s future. Contrary to the convention that interim Budgets do not tie the hands of the next finance minister, whose prerogative it is to set out the spending priorities of a new government with a fresh mandate, this interim Budget includes almost Rs 1 trillion of new spending. The biggest immediate change is income transfers to small farmers who own less than 2 hectares of land. This is 120 million households — perhaps 40 per cent of the country. It is unprecedented in scale and ambition.
Even more long-term — and thus constraining of future governments — is the promise to match contributions to a new pension scheme targeted at workers in the informal sector. The sums involved are currently minimal — the promised pension is only Rs 3,000 a month. Yet it is impossible to believe that this will not be indexed to inflation eventually. If so, we are looking at a budgetary commitment equivalent to several percentage points of GDP — slipped into an interim Budget by a government on its way out, and furthermore one that was elected on the promise of minimum government!
In 2014, it was assumed that a fast-growing India would create a middle class that was more self-reliant and aspirational; that it would not seek government handouts, but instead demand the levers by which it could pull itself up to prosperity. This has not survived the Modi era. A word cloud of various Budget speeches since 2014 is instructive. The first two stressed “infrastructure” and “investment”. But, after two successive droughts, the politicians in power pivoted swiftly. In the Modi government’s third Budget speech, the number-one word was “farmer’. Shortly thereafter, the extraordinary self-harm of demonetisation ensured that livelihoods were lost across the country, sharpening demands that some form of support be provided to those subject to economic fragility.
As a consequence, there has been a shift away from the infrastructure and capital expenditure of the early years to straightforward income transfers. Highways are considered a success story for this government; and yet the outlay on road-building has been increased by only six per cent in this interim Budget. Defence will, in dollar terms, receive even less than it did last year. The money so saved will be spent on farmers, pensions, and on tax cuts to what Modi calls the “neo-middle class.”
It is hard to see this as anything other than a failure of the Modi government; crucial years in which a system that enabled the growth of individual prosperity have been wasted. The question is whether it is now too late. Economics in democracies responds swiftly to political currents. The dozens of agitations for reservations by caste-based groups in recent years, the thousands of overqualified applicants for a handful of low-grade government jobs, all indicate that India’s political economy is firmly in handout mode.
The question is whether India will even be able to afford to meet these demands, in the absence of the sustained increase in productivity and incomes that would have been provided by structural reform. The UPA’s innovation was to marry market-based high growth to a politics-based welfare paradigm. Regardless of what discredited GDP statistics may say, neither investment nor productivity is growing enough now to support the creation of the sort of welfare state that politicians across the board seek to implement.
The warning signs for fiscal responsibility are obvious. There are other stresses that will also become evident soon. After all, what are income transfers? In effect, they are transfers from richer to poorer citizens. This is acceptable when there is social solidarity. However, in an increasingly fractured state, introducing a transfer state is politically fraught. Why should the productive South pay for an unproductive North?
We are left, in India, with a political economy that must lead to far gloomier prognostications than in 2014. Then the economy was on the rebound — after being damaged, essentially, not by internal factors but by a global crisis, high oil prices, and irresponsible monetary policy in the Western world. Today it is an economy that is supposedly growing swiftly — but which has few long-term sources of growth,. The puzzle of India’s political economy is to reconcile the expectations of “Great Society” welfare with stagnating middle-income productivity. Modi once talked of the “ease of doing business”; he now speaks of the “ease of living”. He seems to have forgotten that the second cannot precede the first.
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Mihir Swarup Sharma is the Director Centre for Economy and Growth Programme at the Observer Research Foundation. He was trained as an economist and political scientist ...
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