THE Common Minimum Programme of the Congress-led United Progressive Alliance has become one of the most troubling documents of recent times. No other declaration of policy by an Indian government has aroused such conflicting emotions, part alarm and part hope. And no other document has threatened to split the country between the ‘haves’ and ‘have-nots’ quite as sharply as this one has done.

But why should it have done so? Isn’t it just another hastily drafted and vaguely worded compromise document put together by political parties with little in common but their quest for power? And if election manifestoes are best forgotten after the elections are over, as Manmohan Singh once said in a light-hearted moment in 1991, why should the CMP not have been treated the same way once it had served its purpose?

The answer is that while the CMP may have been conceived in haste, the issue it has sought to address is one that capitalist societies have been forced to confront ever since the birth of capitalism. Put simply, it is the need to reconcile the interests of the winners and losers in a society whose organizing principle is competition. Failure to do this has in the past led to anarchy, rebellion and war. In India this issue emerged with a new vigour in 1991when the country abandoned the command economy of the previous decades and opted to become a market-driven economy instead. The conflict has become acute during the past six years of slow growth.

That is why the government has no intention of allowing the CMP to be forgotten. President Abdul Kalam’s inaugural address to Parliament was only a slightly more elaborate and marginally modified repetition of its contents. Prime Minister Manmohan Singh followed it with a letter urging his ministers to observe the CMP in letter and spirit. And Finance Minister P. Chidambaram described the contents of his budget as the first steps towards its implementation. For better or for worse, the CMP has become the United Progressive Alliance’s tablet of fire.

 

 

The CMP has aroused alarm in corporate India because although it has shown ritual obeisances towards secularism, communal harmony, womens’ rights and opportunities, dalits, Other Backward Classes and tribals, in its essence it is a powerful statement of economic policy. It has come at a critical moment for the country. The economy is poised at the edge of a boom, but it would take very little to make it falter. That is the last thing India needs. The stagnation that had gripped it ever since 1997 ended in June 2003. In the next nine months the share price index had risen from below 3,000 to a peak of over 6,100. Industrial growth had risen from 5.2% a year earlier to 6.9% for 2003-4, scaling 9.6% in April. This had come on top of the best harvest in living memory.

As a result private investment has come back to life after a gap of seven years. Since the last quarter of 2003, there had been a public offer of new shares virtually every fortnight, and nearly all issues had been heavily oversubscribed. All of India therefore breathed a sigh of relief and was looking forward to years of high GDP growth and an increase in the availability of employment. All that the government needed to do was to sustain the gathering impetus of growth.

 

 

But instead of simply endorsing the quest for growth (and by implication economic reforms) without qualification, the CMP has raised a second objective, that of social justice through redistribution. Given India’s past experience with a ‘socialist pattern of society’ in which the government for decades curbed industrial growth in the name of equity through industrial licensing, and given the large body of ‘alternative’ literature on economic growth – ranging from the works of Paul Streeten, Mahbub-ul-Haq and Dudley Seers in the seventies to the later work of Amartya Sen and Jean Dreze – that explicitly gives a higher priority to improving the quality of life and generating employment than to GDP growth per se, corporate India could not be blamed for fearing that the two goals were incompatible and that if it came to a choice, the government would give priority to redistribution over growth. When it was released, the Common Minimum Programme did very little to resolve the conflict. Its central goals were:

* To preserve, protect and promote social harmony and to enforce the law without fear or favour to deal with all obscurantist and fundamentalist elements who seek to disturb social amity and peace.

* To ensure that the economy grows at least 7-8% per year in a sustained way and in a manner that generates employment so that each family is assured of a safe and viable livelihood.

* To enhance the welfare and well being of farmers and farm labour and assure a secure future for their families in every respect.

* To fully empower women politically, educationally, economically and legally.

* To provide for full equality of opportunity particularly in education and employment for dalits, tribals, OBCs and religious minorities.

* To unleash the creative energies of our entrepreneurs, businessmen, scientists, engineers and all other professionals and productive forces of society.

 

 

Not only was unleashing the creative potential of India’s scientists and entrepreneurs, i.e. encouraging the growth of the modern sector of the economy, placed last on the list, but the substance of the document was even more alarming. For although it promised to raise the growth rate from the last five years’ average of 5% to between 7 and 8%, it said very little about how it would do so. In sharp contrast, two-thirds of it was devoted to describing programmes designed to alleviate poverty and guarantee jobs under public programmes. In particular, it made precise commitments to double loans to agriculture, double expenditure on health and education and create an all-India rural employment guarantee scheme that would cost Rs 68,000 crore over five years, but made only a vague commitment to raising investment in infrastructure.

The most serious lacuna in the CMP was a lack of balance between expenditure and revenue. While the promises of added expenditure on health and education alone amounted to 3% of GDP, and the added expenditure on agriculture and employment to another 2%, there was no hint in the CMP as to how the government would increase the rate of savings in the economy by this amount to facilitate the necessary investment. Everyone knew that the only sure way was to cut subsidies, but there was barely a mention of the subject in the CMP, other than a promise to submit a road map for cutting unproductive government expenditure within 90 days.

But even if the road map was successfully implemented and succeeded in raising the rate of saving, it had already earmarked virtually the entire extra money for redistribution. So where would the added investment in the public sector and the infrastructure come from?

 

 

The other alarming feature of the CMP was its apparent readiness to ignore the dismal experience of five decades of spending on health, education and rural development. Rajiv Gandhi had warned the country in 1985 that eighty-five paise in the rupee was ending up in the pockets of inter-mediaries as a result of graft and fraud. Today, according to some estimates, the ratio has risen to 95%. But the CMP did not make administrative reform a precondition to larger entitlements. Instead, all of the additional money seemed to be earmarked for the same discredited state government agencies that literally had swallowed millions of crores of plan funds in the past five decades without leaving a trace. No mention anywhere of giving a more prominent role to the private sector or of encouraging private initiatives backed by public funds.

The common minimum programme also conveyed an impression that after ten years of loosening its stranglehold on the economy the Indian state was about to reverse direction towards a command economy, once again. It promised not only to make privatisation of public enterprises the exception rather than the rule, but also to set up or revamp no fewer than nine government agencies and programmes to oversee the government’s redistributive spending.

 

 

The apprehensions raised by this seeming change of direction made the Sensex, the Bombay Stock Exchange’s share price index, drop by a thousand points, a drop of 17% between mid-May and the beginning of June. Bond prices also crashed, causing interest rates to rise. The volume of shares traded daily on the stock exchanges went down in June to barely two-thirds of what it had been in early May. All over the country investors began to turn some of their assets into cash, and waited to see whether the budget would redress the balance in favour of growth once again.

Corporate India’s impatience with the Congress and the CMP was therefore understandable. But its assumption that the latter was the product of an opportunistic political compromise could not have been more unfounded. The elections had come at a crucial moment in India’s economic development for quite another reason: In November 1996, industrial growth had collapsed from a four years sustained average of 10% per year to a mere 3% and remained at 5% or less for the next six years. This slow growth in industry and the GDP virtually stopped the growth of employment in the organised sector. And that had happened even while a revolution of rising expectations was occurring in the countryside, which could only be met by creating many more jobs in the non-farm sector than ever before.

The statistics were alarming. Between 1996 and 2003, employment in the organised sector had declined by 1.3 million, whereas in a similar period in the seventies and eighties it had risen by over four million. At the same time, farm labourers and small landholders had withdrawn eight million children between 1994 and 2003 from the fields and sent them to school instead. The majority had sent them to private schools and were somehow paying Rs 50 to 250 a month to ensure that they got an education that included knowledge of English. They were raising the resources by deliberately having fewer children. Independent studies by demographers had shown that as much as two thirds of the decline in fertility in the nineties had occurred among illiterate women. When questioned, this was the answer that they gave to the surveyors.

 

 

All over the country, desperation was taking hold of the poor. The growing presure of jobseekers was relentlessly lowering entry-point wages even for the fortunate few who were able to find jobs in the organised sector. For the rest, the struggle to survive had reached a critical point. This was reflected, at its extremes in the rising spate of suicides among farmers. For at the same time that industry got locked in the grip of stagnation, the rains began to play truant with the farmers year after year. Agricultural growth, which had averaged 4.2% a year from 1992-3 to 1996-7, fell to 1.2% in the next five years. Betrayed by a succession of droughts and a falling water tables, farmers who had sunk all they owned into a gamble with new seeds, new crops and an endless search for sub-soil water, began to commit suicide in growing numbers.

Very little of this came out in what was now an entirely urban and middle class oriented press and television. All that the media could see was the rising income in the cities, the newly affluent professional classes, and the bounding profits of the new sectors of the economy. That was how the BJP was misled into launching its Shining India campaign. What it saw was the glittering new malls and multiplex cinemas, and the plethora of new models of cars and other consumer durables on the market. These hid the growing misery of the poor in both town and country.

 

 

The Shining India campaign tore the scab off rural India’s wound, and greatly magnified the anti-incumbency vote against the NDA in the states where it was in power. For the Congress, which had steadily become the party of choice for the poor, there was no going back to the belief that growth and economic liberalisation would by themselves solve all of the problems of equity in the country. Henceforth, economic reform would have to go hand in hand with measures to ensure that the benefits of growth reached the poor. The Common Minimum Programme was born out of this understanding.

With its enshrining India has crossed a watershed. The greatest virtue of its corrupt but highly sensitive democracy is that it has given early warning, time and again, of emerging challenges and crises. That is what the surprise results of 14 May did. The clock cannot therefore be turned back. The minimum challenge before any future government will be to find an economic strategy that ensures greater equity even while it ensures growth.

Prime Minister Manmohan Singh’s government is fully aware of the challenge it faces. On 8 July, in his budget speech, the Finance Minister P. Chidambaram gave the country its first inkling of how it intended to reconcile the two objectives. Chidamabaram left no one in doubt that this was a stopgap budget. By the time Parliament passed it, almost half of the fiscal year would be over. He, therefore, used it to make a statement of how the government intended to achieve its twin, and seemingly irreconcilable, objectives.

By far its most important feature was that the budget did nothing to dampen the spontaneous recovery that is taking place in industry. By April, industrial growth had risen to 9.6%. With a large amount of private investment in the pipeline, there was every reason to expect industrial growth to average between 8 and 9% at the very least. Chidambaram did nothing to put a brake on the momentum of growth.

 

 

On the contrary, he lowered import duties, lowered peak rates of domestic indirect tax making them converge on the VAT rate of 16%, raised the minimum exemption limit for the income tax to take account of inflation, closed a few loopholes in taxation and marginally increased the tax rate on services. None of this was either unexpected or destabilising. ‘We had already discounted all of this in our calculations before the budget was presented,’ said industrialist Subodh Bhargava, a former president of the Confederation of Indian Industry.

Where Chidambaram broke new ground was in the plans he unveiled for the future. He made it clear that while being committed to the United Progressive Alliance’s promises to provide water sanitation, education and health for all and to repair the neglect of agriculture, he would not be throwing money at the schemes and agencies that were entrusted with these goals. He was fully aware that the problem in these areas was not a lack of money but neglect, a lack of accountability, and corruption. Thus nearly all the schemes he announced involved merging several existing schemes to find the money and targeting them better at the intended beneficiaries.

The reform of administration that is needed to achieve this consolidation and improve the targeting of social services presents a daunting task, especially as most of the subjects – education, health and agriculture – fall within the purview of the state governments. Chidambaram therefore made it clear that his government does not intend doing anything in a hurry. Achieving these goals, he said, would take the full five years of the UPA’s term in office. His decision not to rush into the Employment Guarantee Scheme till its past weaknesses had been thoroughly understood, and to merge the added investment in education with an enlarged midday meal programme, were examples of his innate fiscal conservatism.

 

 

Finally, Chidambaram left no one in any doubt that the goal of generating sufficient employment could not be achieved without stepping up the rate of industrial and agricultural growth. This required a sharp increase in investment to sustain the growth of demand in the economy. Chidambaram made it clear that the government would step up public investment sharply, and would do so by reducing infructuous government expenditure, i.e., the revenue (current account) deficit.

He paved the way for this by notifying, and thereby turning into law, an act of Parliament passed by the previous government that requires the central government to reduce the revenue deficit to zero by 2008-2009. This, he said, would create ‘fiscal space’ amounting to 3% of GDP – the permissible fiscal deficit under the new law, to increase investment under the five-year plans. The lion’s share of this would be devoted to upgrading and breaking bottlenecks in India’s antiquated infrastructure.

A close look at the budget estimates shows that thanks in part to reforms made by the previous government, both the revenue and fiscal deficits have come down by 1%. The latter came down from 4.4% of the GDP for the central government in 2002-2003 to 3.6% last year. Chidambaram had vowed to bring it down to 2.5% this year and a close look at the revenue and expenditure forecasts shows that were it not for the drought that now threatens the country, Chidambaram would have been well on track to fulfil his promise. Drought has made his task much more difficult, but if he can bring down the revenue deficit as he plans to, it will release around Rs 30,000 crore for investment in infrastructure next year.

 

 

In the coming years, success or failure in the attempt to combine growth with equity will depend on whether or not the economy can generate enough new jobs. It is here that the team that Manmohan Singh has put together will face its greatest challenge. The challenge will lie in persuading its allies on the left that it is only rapid growth that can create the required number of jobs. The clash between capitalist growth and equity that the left is so fond of citing exists largely in its imagination. The controversy over this issue should have ended in 1991, but so far only a handful of economists have grasped the full implications of the data for labour productivity in the OECD countries from 1820 to 1970 published by the world famous statistician, Angus Maddison, in 1991.

Correctly interpreted, they explain why the industrialised countries never suffered from permanent (as opposed to trade cycle) unemployment throughout their entire histories till the late seventies. They also lay to rest the controversy over how to generate employment – whether through ‘gung ho’ growth or a ‘direct attack on poverty’ – that has bedevilled developing countries since 1971. Maddison’s data shows that the major industrialised countries suffered from constant, long-term, labour shortages and had to import vast numbers of immigrants because labour productivity in industry and agriculture always grew by two-and-a-half to three times the productivity in the service industries. As a result, the ‘distribution and servicing’ of the output of the same number of workers in industry required the employment of many more workers in the services sector.

 

 

The policy prescription that follows is to ‘go hell for leather growth in industry and agriculture; employment will take care of itself.’ That is exactly what happened between 1992 and 1996. Although overall employment growth in the organised sector fell from over 2% per annum in the seventies and eighties to just 0.98% in 1993 to 2000, during the period 1992 to 1997 there was, surprisingly, no increase in the number of job-seekers on the live register of unemployed. The explanation of the mystery was a 2% annual growth of employment in the organised private sector. Unlike sarkari jobs which are already service sector jobs, private sector employment growth in the organised sector is fully matched by employment growth in the unorganised sector, responsible for most of the output of the service sector.

Not long after he took charge, Manmohan Sigh remarked that ‘there can be no equity without growth.’ Taken together, the Common Minimum Programme and the budget show that the UPA will try to turn this perception into policy. One can only hope that the left will join in the endeavour and allow it to succeed.