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Thursday, February 13, 2014

Empty Economics 02-14

Empty Economics

Unfortunately for Congress and the BJP, Sloganeering 
Won't Bring Economic Growth

As India heads into a critical election season, the country seems adrift. In its foreign relations, it is on its back foot both in South Asia and with China and the United States. At home, citizens and visitors are increasingly concerned about law and order after several highly publicized attacks on women. But one challenge stands above all else: the economy. India’s growth rate has fallen by nearly half since 2010; inflation remains high; corruption is rampant; and the investment cycle has collapsed. When voters are asked to identify what issues will decide their vote when they go to the polls this April, they consistently place economic development, inflation, and corruption at the top of their list.
Unfortunately for voters, none of the leading parties have presented a coherent economic strategy. Instead, their economic policy messages can be summed up as a series of bumper sticker slogans: “Trust us” for the Hindu-nationalist Bharatiya Janata Party (BJP); “Who, us?” for the ruling Congress Party; “Anyone but them” for various regional parties; and “You, not us” (AAP) for the Aam Aadmi Party, an anti-corruption and populist newcomer that scored an upset victory in the December 2013 Delhi elections.
The BJP, led by Gujarat chief minister Narendra Modi, is widely seen as the front-runner. That is mostly thanks to the Congress government’s intellectual bankruptcy when it comes to reviving the economy and Modi’s accomplished track record in Gujarat. But scratch the surface and neither the BJP nor its competitors have delivered on a growth strategy for the long run.
Three major pre-election polls suggest that the BJP is on track for its best-ever performance on Election Day. It could potentially even surpass the 182 seats it obtained in both 1998 and 1999, when the public opted for its Hindu nationalist ideology and good governance rhetoric. But despite the public’s apparent enthusiasm, the BJP has failed to articulate a cogent economic vision. Instead, as elections loom, BJP officials’ strategy has been to point to either its last stint in power or to Modi’s economic success in Gujarat and say, “Trust us.”
It is true that the BJP’s last administration -- from 1999 to 2004, when the BJP-led National Democratic Alliance government headed by Prime Minister Atal Bihari Vajpayee ruled Delhi -- is now remembered as the halcyon days of economic reform. Vajpayee’s government did jump-start growth by privatizing public sector companies, introducing competition in the state-dominated telecommunications sector, and ramping up spending on public infrastructure such as roads and highways. That track record, the BJP claims, offers proof that it would fix what ails India’s economy in 2014.
But the BJP’s claims should give Indians pause. In the decade that the party has served in the opposition, it has shamelessly blocked several economic reforms offered by the ruling party. On issues ranging from increasing foreign direct investment in the insurance and retail sectors to reducing the government’s discretionary powers over natural resources and eliminating wasteful subsidies, the once pro-business BJP has flip-flopped. It is easy to dismiss such behavior as politics as usual -- after all, opposition parties are supposed to oppose. Yet even in several states in which the BJP does hold power, it has given up its earlier ideological leanings in favor of economic populism.
Here, Modi’s experience in Gujarat is instructive. On the campaign trail, Modi has suggested that he would take nationwide the free-market economic model he installed in Gujarat. The pledge has been met with skepticism for two reasons. First, Modi faces pressure from some constituencies within the BJP to soften his market-driven dogma. Despite its pro-business tag, the BJP has always been an unusual mix of free-marketers and Hindu conservatives espousing swadeshi (self-reliance). The tensions came to the fore at the party’s January 2014 national council meeting, when Rajnath Singh, president of the BJP, promised a slew of policies indistinguishable from those typical of the incumbent Congress Party, such as a “right to health” and guaranteed employment for one member of every farming family. Second, while campaigning, Modi himself has often carved out policy positions at odds with his record in Gujarat. For instance, his criticism of the Congress government’s large-scale expansion of food subsidies in 2013 was not that it should be scrapped but that it did not go far enough.
Simply put, voters cannot be sure whether they will get the reformist BJP of yesterday or the retrograde one of today. In that sense, trusting the BJP’s reform policies would take quite a leap of faith.
For its part, the incumbent Congress Party flatly rejects any insinuation that it deserves the blame for India’s economic doldrums. After all, the party maintains, it was the Congress Prime Minister Manmohan Singh who was the architect of the landmark 1991 economic reforms that rejected the old License Raj in favor of free-market competition. Furthermore, as Congress stalwarts are quick to point out, India -- like many emerging markets -- has been badly hurt by recent global economic volatility.
The global economic turmoil has no doubt affected India’s fortunes, yet it was those emerging markets whose finances were in greatest disarray that were the worst hit. According to the economists Barry Eichengreen and Poonam Gupta, among others, U.S. Federal Reserve Chairman Ben Bernanke’s May 2013 announcement that the Fed would gradually withdraw (or “taper”) its monetary stimulus package caused emerging market currencies to tumble the furthest in those countries with the largest deficits, such as India.
When it comes to the health of the economy, moreover, Congress leaders omit the damage that their own eye-popping corruption scandals, missteps on foreign investment and tax policy, and ineffectual executive leadership have inflicted. In addition, in its tenure, the party has only halfheartedly nudged India in a more market-friendly direction -- and only then when its back has been against the wall. For example, when India’s once vaunted growth rate slipped below five percent in September 2012, the Congress Party responded by scaling back fuel subsidies and lifting caps on foreign direct investment in sectors such as retail and civil aviation. Even these moves, however, have since been watered down. For instance, the government initially announced that it would restrict the supply of heavily subsidized domestic gas cylinders to six per household. Under political pressure, it later raised the quota to nine and, in January 2014, with elections in view, to 12.
Beyond the Congress Party and BJP, there is a motley crew of regional players seeking to head the next government as a “third front” coalition. These aspirants range from the unpredictable Mamata Banerjee in West Bengal to the unreformed socialist Mulayam Singh Yadav of Uttar Pradesh to the (usually) pro-growth Jayalalithaa Jayaram of Tamil Nadu, known as Jayalalithaa. Aside from their antipathy toward the two national parties, there is little that holds this ragtag group together. Their most powerful selling point is the fact they do not belong to either of the two national parties.
Unfortunately, India’s major regional parties have no clear prescription for how to get India’s economic groove back. In national politics, such unruly, regional party-led coalitions tend to be short-lived and, because of the complex calculations that they must make to please their fractious bases, they are typically profligate spenders, unmoved by long-term considerations. For instance, in 1997 the unwieldy United Front government led by Prime Minister I. K. Gujral, implemented massive increases in the salaries and pensions of government workers without offsetting the costs with cuts elsewhere, as a government-appointed commission had recommended. This led to a sharp rise in the deficit and the deterioration of public finances.
Although the prospects of a non-Congress, non-BJP-led government appear to be weakening as the BJP’s popularity increases, it is a certainty that any government formed in 2014 will have to include some key regional players. This puts them, in turn, in prime position to extract concessions that could dampen any push for reform.
Finally, there’s the new party on the block, the Aam Aadmi Party, whose economic vision seems to be in sync with its acronym -- aap means “you” in Hindi -- and with its apparent economic slogan, “You, not us.” On economic matters, activist-turned-Chief Minister of Delhi Arvind Kejriwal has been more than willing to give the people what they want -- generous subsidies for public services -- without worrying too much about sustainability. The AAP government in Delhi has, in just one month, cut electricity tariffs in half and guaranteed generous free water quotas for all. The beneficiaries of these schemes are not necessarily the have-nots (after all, if a household does not have a water connection, it cannot receive free water).
In the end, AAP’s greatest impact on India may be in the realm of ideas, rather than electoral politics. The party’s obsession with cleansing the government forced the established parties to finally legislate the creation of a federal anti-corruption ombudsman (a task that they had long delayed) and to articulate their own anti-corruption platforms. Although it is too soon to tell whether corruption has decreased, it is no coincidence that the Congress Party’s first campaign advertisements featured the image of party scion Rahul Gandhi next to a list of six anti-corruption bills that his party had long ago introduced but only recently rediscovered.
But AAP’s ideas, particularly its populism, aren’t all good. Its recent moves in Delhi may have triggered a competitive race to the bottom: the Congress government in Maharashtra, the second most populous state, slashed power tariffs by 20 percent and some BJP leaders are touting a proposal to eliminate India’s income tax. Just when politicians in India were finally getting accustomed to the notion that good economics can make for good politics, AAP’s agenda could undo everything.
None of the contenders in India’s upcoming election provide much real reassurance that they can revive India’s long-run economic growth rate. To do that, they would have to grapple with India’s institutional malaise. What the country so badly requires, but does not yet have, is an election manifesto pledging to invest in building up India’s woefully inadequate state institutions.
Such a manifesto would focus on rebalancing an Indian state that is grossly over-bureaucratized but also severely understaffed. On average, according to the World Bank, it takes 168 days and 35 applications, licenses, and certificates to obtain a construction permit in India. And India’s inability to deliver services is linked to endemic manpower shortages. In 2012, the judiciary’s vacancy rate topped 20 percent. It comes as little surprise that the courts face a backlog of 32 million cases. When private firms must spend years to enforce simple contract terms thanks to a clogged judiciary, investment inevitably suffers.
A sensible, long-term economic vision would also be motivated by a desire to attract new forms of human capital and skills into public service. Regulatory agencies, for instance, should no longer provide sinecures for retiring bureaucrats or judges; they should become magnets for specialized experts. When regulatory agencies are largely staffed by former public servants, officials are less likely to rock the boat while in the final years of the tenure for fear of losing their golden parachutes.
The BJP hopes that the Modi’s “Gujarat model,” in which a CEO-style executive can discipline the bureaucracy and offer investors personal attention to their demands, can be scaled up. But that model is heavily reliant on one man’s charisma. The Congress Party has tried to expand the reach of the state through a new set of rights-based entitlements -- access to education, employment, and food -- without investing in a corresponding increase in state capacity. Regional parties are more concerned with consolidating their power than with building lasting institutions. And AAP has reduced the issue of state capacity to rooting out venality. India badly needs the government to hold bureaucrats to account. But renovating its institutions requires building up competence as well.
Confronting India’s institutional challenges will be a long, unglamorous slog. Indeed, the very mention of reforming civil administration can make even the most hardened Delhi policy wonk’s eyes glaze over. In the short run, India can enjoy a rebound in its economic fortunes with “good enough” governance. For instance, the next government will likely enjoy a modest economic rebound as the global economy strengthens, India’s economy bottoms out, and investors cheer the demise of a rudderless incumbent Congress Party. But in order to materially improve long-term growth, “good enough” governance is simply not good enough. 

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