by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Wall Street Journal
April 17, 2009
© Wall Street Journal
In India's first election in 1952, as legend has it, one election booth was visited by an elephant and two panthers but no voters. Over the next few weeks, more than 700 million voters, many of them poor and uneducated, will mark their ballots in India's 15th parliamentary poll. There will even be one polling station to cater to just one voter, a priest tucked away in a remote forest. The big question is what kind of government will that voter base elect, and what will that mean for economic policy?
Indian politics resembles a kind of electoral E-bay. Every vote, every candidate, and every alliance is up for sale. The current government is an amalgamation of several parties, lead by Sonia Gandhi's Congress Party. Over the past five years, Congress's alliances have changed as its policy priorities have changed. To pass last year's nuclear deal with the United States, for instance, Congress dropped its Communist allies and picked up a partner, the Samajwadi Party, based in India's largest state. This is part of a larger trend of "politics-as-promiscuity," where almost any party is willing to partner with almost any other at any stage of the election cycle—before, during, and after polls.
The greatest influence on the composition of the next coalition government will be India's poor, illiterate, and backward classes. This is the enduring romance of Indian democracy; despite all its disappointments and fractious infighting, everyone truly does have a say. But the variety of voices also entrenches coalition politics and makes it hard, if not impossible, to enact truly sweeping economic reform.
Both the ruling Congress Party and opposition Bharatiya Janata Party have to appeal to this voting majority. But India is not in danger of reverting back to protectionism or statism. No new government, whatever the coalition, is likely to go down that path because the costs of doing so are widely accepted. That explains why despite the financial crisis, which has reduced India's growth rate from a torrid 9 percent to about 5 percent, there are no calls to revert to sweeping trade controls and a renationalization of the economy.
Fiscal populism, however, is another story. In the run-up to this election, the Congress-led government opened up the fiscal spigots, running up spending indiscriminately. Over the past five years, the fiscal deficit has risen to more than 10 percent of GDP from less than 6 percent. Public debt is now around 80 percent of GDP. In their election manifestos, both Congress and the BJP have promised to provide further freebies, from infrastructure to loan guarantees to tax breaks, if elected.
The gravest danger from this election is the intensification of this populism. If the two major parties and their respective allies fall well short of the required majority to govern, there is a chance that they may partner with Kumari Mayawati, the charismatic leader of the Uttar Pradesh–based Bahujan Samaj Party. Ms. Mayawati's party largely represents India's Dalits, or former untouchables. And her power is growing to a point where she could demand the right to take power as prime minister.
That would be a Barack Obama–like moment of high symbolism for Indian politics—the elevation of a woman and one representing India's historically oppressed class to the highest political office. But the downside of that symbolism might be the expansion of India's already gigantic affirmative action program, known as "reservations." At present, reservations are confined to public-sector employment and publicly funded educational institutions.
Ms. Mayawati wants to do even more. It is no secret that she will seek to extend reservations to the private sector. This would effectively be a huge tax on private-sector activity, as companies would be forced to radically change their hiring practices, having to accept underqualified employees and pay them high wages. This is the nightmare that the next elections could bequeath to India. It is also the logical culmination to identity politics, where citizens vote for politicians who represent their caste, rather than for a person who represents policies that affect all Indians, rich or poor.
The sad reality is that if Ms. Mayawati as a future Indian prime minister, or even a significant powerbroker, were to seriously push for private-sector reservations, there would be little resistance. Politicians who oppose reservations are cast as antipoor, which in a country of poor people is political suicide. The last legislative initiative that expanded reservations to elite educational institutions in 2005 actually commanded bipartisan support.
There is reason for hope. Since independence, many Indian voters have reflexively ejected politicians from office even when they had compiled decent records in power. (One major exception was the rejection of Mrs. Gandhi in 1977 after the Emergency.) Anti-incumbency can be healthy, but it can also create perverse incentives. If electoral failure is guaranteed, politicians have little incentive to deliver essential services and enact lasting reforms.
Recently, though, Indian voters have started to reward good performance, especially in state-level politics. Narendra Modi in Gujarat, Sheila Dixit in Delhi, and Naveen Patnaik in Orissa have been reelected for their perceived good governance. In this election, the competent Nitish Kumar, who runs Bihar—one of India's poorest and most difficult states to govern—may even be returned to power. The Communist Party in West Bengal, which mucked up business deals and land issues related to special economic zones, could lose ground.
If that responsiveness endures, India's so-called democracy tax—the price to be paid in the form of costly economic populism, slow decision-making, inability to implement key reforms, and corruption—can be reduced. In a politically decentralized India, political leaders don't have to be responsive everywhere at the same time, anyway. A few visibly successful experiments can have widespread demonstration effects. In the long run, competition between states can serve as a key to India's economic development.
So, will the risk of more damaging populism be countered by a more responsive politics and hence better economic policies? Time, and India's 700 million voters, including that solitary priest, will soon tell.
Book: Reintegrating India with the World Economy March 2003
Op-ed: India's Weak State Will Not Overhaul China August 16, 2010
Policy Brief 09-15: India-Pakistan Trade: A Roadmap for Enhancing Economic Relations July 2009
Working Paper 09-11: The Impact of the Financial Crisis on Emerging Asia November 2009
Op-ed: The Growth Future—India and China August 19, 2008
Speech: Some Perspectives on the Indian Economy October 17, 2007