WHEN the history of the contemporary period is written, 2011 may get marked down as the year in which India decided (or at least demonstrated decisively) that it was not interested in economic reform – defined as market-oriented economic policies within a stable and balanced macro-economic framework. Indeed, that the country’s dominant political ethos was hostile to the idea of any such reform. On almost any major issue of the recent past, the political response has harked back to a preference for the dirigisme of the 1980s, if not the 1970s – price control, subsidies, not opening up the economy, even (on national security grounds) undoing some of the reform that has already happened and thereby putting fresh emphasis on state action rather than private players.

Admittedly, the government bungled in its handling of the retail trade issue and opening it to foreign investment. The BJP with its support in the trading community was bound to oppose it; the Left with its hostility to foreign investment was going to do the same. And among the Congress allies, the Trinamool Congress had expressed its opposition publicly a few days before the Cabinet met. So the government was going to be in a minority on the issue. In that case, why take the plunge with an executive decision when Parliament is in session, with the opposition already on the warpath on a number of other issues?

But even when the government acted more sensibly and tried to de-politicize oil pricing issues, allowing the oil marketing companies to raise the prices of petroleum products in response to market developments, the response from not just the opposition but also from the government’s coalition partners was criticism and a threat to bring down the government. No one had a thought to spare for the ballooning subsidy bill, at a time when the fiscal deficit was already too high.

At its root, political attitudes have (or had) boiled down to an interlocking combination of three beliefs: rapid economic growth is now here to stay; the surpluses it generates should be used to help the aam aadmi (or common man) who has not benefited from either the reforms or rapid growth; and economic reform has no political constituency other than a narrow urban elite which is electorally insignificant.

 

That last view was not Manmohan Singh’s in a previous avatar. Back in 1996, when the Narasimha Rao government was going to the polls and Singh as finance minister was told that the party was not going to tout economic reforms in its poll campaign, Singh’s retort was: What else do they have to talk about? It is also worth recording that when P.V. Narasimha Rao, unnerved by electoral setbacks in two southern states, used his Independence Day broadcast from the Red Fort to announce a slew of spending programmes, Singh sulked in his North Block office and declared that a country cannot spend its way to prosperity (words that are worth recalling as you keep reading).

On the political saleability of reforms, Singh got his answer some years later from Sonia Gandhi, who got a research body under the ambit of the Rajiv Gandhi Foundation to run a research and seminar programme on reforms and the poor. This seems to have convinced her to go by her instinctive assessment, that reforms were not saleable to the electorate, and did not really have anything substantive to offer to the poor. ‘What do the reforms have to do with the cobbler in Amethi,’ she once asked in a conversation. When the response was that the reform programme would have to go much deeper to make a difference at that level of society, she declared that if governments did not take steps specifically designed to help that poor cobbler and people like him, ‘there would be blood on the streets.’

 

This is not to say that Ms Gandhi is anti-reform. If you ask her about the subject, she is likely to deflect the issue by saying that the prime minister is dealing with reform, or offer the bland assertion that she is not against reform, which would be true enough. But nor is she sold on reform as a political message, which is why at the recent Youth Congress rally in New Delhi, an embattled Manmohan Singh defended opening up retail trade to global companies, but neither Sonia nor for that matter Rahul Gandhi mentioned the subject. Congressmen looking for signals would have got them, and also the contrast when it came to the Aadhaar programme (for issuing unique identity numbers), which Sonia Gandhi went out of her way to mention as a positive step taken by the government. Aadhaar is meant, among other things, to enable a more efficient and better targeted way of delivering government handouts to the poor; so this is reform that has a political pay off. Retail FDI does not.

And why so, if the reformers are right that it will squeeze middlemen margins and thereby help combat stubborn inflation? An explanation could lie in the old play off between noisy but organized minorities and diffused and therefore silent majorities. The people who might be affected negatively by any reform measure (like millions of retail traders) are a more focused group than the potential beneficiaries (many more millions of farmers and consumers), who would enjoy the benefits of a more efficient supply chain and therefore a smaller margin for the trade function.

Likewise, the employees of state-owned banks protested vociferously and struck work repeatedly to protest the opening up of the banking sector to private ownership; if the government had listened to them, millions of silent bank customers would have been the losers, though they wouldn’t have known it then. Oil price hikes provide the third example. Those hurt by these are consumers whose pain gets reflected immediately in the media, whereas the alternative of allowing the subsidy bill to get bloated becomes attractive as the problem becomes subsumed in a larger budgeting challenge that has to be faced up to only months later.

 

It could also be the strong political conviction – cutting across political parties – that elections are won by offering freebies to voters, and therefore even a fiscal scorched-earth policy is worth the game. In the old days it was free or heavily subsidized water and power to farmers, but then politicians began to get more adventurous. The DMK in Tamil Nadu set the trend when it offered a rupee a measure of rice (roughly, one kilogramme) in 1967, and swept into power. Later, M.G. Ramachandran of the AIADMK in Tamil Nadu fought a campaign on the promise of free mid-day meals to schoolchildren, and struck the predictable pay dirt.

N.T. Rama Rao in neighbouring Andhra Pradesh was watching, and impressed. So when he launched the Telugu Desam in 1983, he offered rice at Rs 2 per kg, and also free sarees; and he too ran away with the elections of 1984. Meanwhile, Devi Lal in Haryana promised to write off farm loans in the state, and won handsomely in the state elections of 1983. Over the years, the promises got ever more ambitious. The Congress promised free electricity in Andhra Pradesh, so did the Akali Dal in Punjab. More recently, Nitish Kumar in Bihar offered free bicycles, the DMK in Tamil Nadu offered free TV sets, and most recently, Jayalalithaa offered free laptops. Each time, the results were the same – the person or party offering the freebies got the votes.

 

The promises weren’t always delivered. In 1967, C.N. Annadurai led the DMK to victory and became chief minister in what was then Madras. As soon as he settled down in the chief minister’s chair, and summoned officials to implement his main election promise on supplying rice at a rupee a measure, the cold maths was laid out before him. Offering heavily subsidized rice across the state would bankrupt the treasury in no time, he was told. Fresh from the elections, Annadurai was keen to implement his party’s promise, and then a bureaucrat saved the day. He suggested that the government begin with rupee-a-measure rice in Madras city, with the promise that the rest of the state would follow in due course. It never did, of course, but for some reason voters don’t seem to remember such broken promises when the next elections come round.

In Andhra Pradesh, the story was the same – free electricity was offered, but once the elections had been won, the state government qualified the promise severely and therefore did only a very limited roll-out. Ditto with Punjab, where the Akali Dal promised free power, but quickly backtracked from the promise when it became obvious that the state would go bankrupt. Even as committed a reformer as P. Chidambaram defended the DMK’s offer of free TV sets in 2004, arguing that they would cost less than the other freebies offered in the past – which was true enough, but not really the point you would expect him to make.

Populism takes other forms too, of course. Mamata Banerjee ousted the Left Front from power in West Bengal after chasing away the biggest industrial project to come the state’s way in decades, on the issue of forcible land acquisition for the project. Gujarat’s Narendra Modi stepped into the breach. Today, three years later, Modi’s state has already attracted four different car projects (including a new plant by Maruti-Suzuki), and is becoming the country’s fourth automobile manufacturing hub. No one in West Bengal seems to mind the fact that the state has lost a never-again opportunity to become a leading industrialized state all over again, with all that it means in terms of ancillary development, jobs and tax revenue, and therefore overall prosperity.

 

One could argue that these were state level aberrations, and the ability of the states to do fiscal damage was inherently limited. So it did not affect the national meta-narrative of an economy powering ahead to become in due course the third largest in the world. The populist virus, underpinned by the assumption that you could spend your way to prosperity, went national much more recently, though it can be sourced to the general elections of 2004. The ruling BJP/NDA, in a fit of premature triumphalism, had run with the slogan ‘India Shining’. The Congress focused on the ‘aam aadmi’. From this point onwards, two narratives are possible.

The first narrative, which has gained currency and official blessing, has it that the Congress campaign was on the button, whereas the BJP slogan mocked the millions of poor who barely got two meals a day. Once in office, the Congress introduced some big spending ideas, like the national rural unemployment guarantee programme and a government takeover of overdue farm loans given by banks. Alongside, it announced each year massive increases in grain procurement prices. Economic reforms designed to improve productivity and accelerate growth were not priority, and few if any were attempted – the excuse at the time was that the Left parties would not vote for them, and without them no law could be passed.

The ‘aam aadmi’ spending spree paid off, and the Congress came back to power at the head of the UPA in 2009, with many more seats in the House. It now wants to introduce an even bigger ‘aam aadmi’ idea: a right to heavily subsidized food for three-quarters of the population (i.e. 900 million people, of whom 750 million will be in the rural areas). No one knows what will happen in the elections scheduled for 2014, but this big ticket idea and not ‘reforms’ are what the Congress thinks could win it a third consecutive term in office, a record not achieved even by Indira Gandhi – who, for all her faults, never allowed the fiscal deficit to run out of control.

 

There is a counter-narrative, which runs as follows: the BJP dumped the DMK in the last weeks before the 2004 elections, based on a complete misreading of the electoral mood in Tamil Nadu. The DMK switched to the Congress-led alliance, and swept all 39 seats in the state, including a good number claimed by the Congress – which helped it to get ahead of the BJP by 4 seats (141 to 137), and thus have the first claim to power. In addition, the DMK and its fellow-Dravida parties boosted the UPA tally to 218 seats; without the Tamil Nadu seats, the UPA total would have been 179, well short of the majority mark of 272, even with the support of the Left’s 58 MPs. Indeed, the rival NDA would have been in a position to try and cobble together a government, which would have given ‘India Shining’ political cache instead of becoming an embarrassment.

Having got power and attributed its victory to the ‘aam aadmi’ programme, the Congress in the run-up to the 2009 elections took its populism to new heights. It wrote off farm loans (1 per cent of GDP), and announced massive pay and pension hikes for government staff (another 1 per cent of GDP or more). Coming on top of the NREGA and a ballooning subsidy bill, this basically wrecked the fisc, so that the deficit shot up from 2.7 per cent of GDP in 2007-08 to 6.4 per cent two years later – the highest in a decade and more. And try as it might, the Congress has not been able to put the fiscal genie back in the bottle. The chickens have come home to roost, in the form of higher inflation.

 

Meanwhile, the rapid growth that reforms made possible has slowly dissipated, while the Reserve Bank’s campaign to control inflation through higher interest rates has hit the facile assumption that rapid growth was here to stay. Growth in the 2003-08 period averaged 8.9 per cent. The four years since then (2008-12) will have averaged 7.4 per cent or less. Both high inflation and low growth reflect parallel trends in the global economy, and hence cannot be blamed entirely on domestic factors. Indeed most economies have suffered 2-3 percentage points in their growth momentum, and some of the fiscal deterioration was a consequence of the tax concessions given to counteract the slowdown in late 2008.

But India’s share prices have been the worst performer in 2011 (down close to 25 per cent at the time of writing), and the rupee has also been an under-performer, losing 15 per cent of its external value. There can be no doubt that government indecision, Parliament’s failure to pass laws, the prolonged hold-up of large projects, the failure to reform pricing in key infrastructure sectors (such as electric power) and not least the eruption of corruption scandals have combined to create business uncertainty and an investment famine, while the spike in interest rates announced by RBI to control prices have forced consumers to postpone purchases of houses, cars and a variety of consumer goods.

 

What looked like successful political management in Narrative No. 1, has now begun to look like disastrous economic management in Narrative No. 2. The big face-off between the two narratives is on the proposed scheme for food security. The government wants to limit spending under this head, but the Sonia Gandhi-led National Advisory Council wants to act on the conviction of many in civil society that 77 per cent of India lives on less than Rs 20 per day; hence, 75 per cent of the population must be given grain at between 7 per cent and 20 per cent of its cost.

If the government caves in, the public distribution system will be asked to deliver heavily subsidized grain on a scale it has not done, at a time when the government’s annual Economic Survey has cited research to the effect that roughly half the grain so supplied goes into the wrong hands. Given mass-scale leakages and mishandling, much of the subsidized grain could loop back into government procurement (buy it at Rs 2, sell it back at Rs 12!). Besides, why would a subsistence farmer grow grain if he can get it at Rs 2 per kg? Better to grow some other crop and buy subsidized grain from the government! If enough farmers think along such lines, it could destroy Indian agriculture. But grain for virtually everyone at or around Rs 2 per kg might look to the embattled Congress like an electoral cinch.

So we are at the point where Narrative No. 2 might be about to derail Narrative No. 1. The years of no reform, the growing conviction that no reform can be expected even in the future, the macro-economic mismanagement (high deficits, for instance) and a rudderless government have combined in a hostile global environment to undermine growth itself. The July-September quarter saw GDP growth slip below 7 per cent, and the October industrial production index produced the shocking information that output had actually shrunk 5 per cent. Exports have ground down to 4 per cent growth in November, down from the region of 25 per cent earlier in the year. There is a very real chance now that growth in the year as a whole will be under 7 per cent, lower than the government’s forecast of at least 7.25 per cent, and well down from the previous year’s 8.5 per cent. The quarterly growth numbers could dip below 6 per cent.

 

A slowing economy will inevitably deliver smaller tax revenues, so the government’s ability to spend on big ticket populism will become constrained. All the activists and naysayers who mocked the ‘growthniks’ by saying that rapid growth had not reduced poverty, had helped only the rich, had increased inequality, and so on, will now have to wait till growth returns so that their favourite programmes can be given budgetary outlays.

Still, the prevailing political mood shows little patience for that tired word called reform, perhaps because it is still to absorb the economic shocks that are hitting one after the other. In any case, a fractious mood will see the opposition using the poor growth numbers as one more stick with which to beat the government, while those in the government seem to have lost internal cohesion as well as the will to act. Not to be forgotten, the purveyors of Narrative No. 1 will continue to ask how retail FDI will deliver that cobbler’s vote in Amethi.

 

If there is hope, it lies in the investment that the government has been making in the physical as well as social infrastructure. Much more money is going into education, and a little more into health care. School retention levels are going up in the higher classes, and higher education institutions are getting set up at an ambitious rate. More money is also going into creating the physical infrastructure (e.g., new power generation capacity in the 11th Plan, 2007-12, will be twice what it was in the 10th Plan). These investments will of necessity show results down the road, though when and how remain uncertain in an environment where the macro-economic indicators look problematic. This and the policy stasis threaten to undermine any upbeat narrative, while at worst the country could see a return to the ancien regime. What might that mean in real life? Here are some pointers from the recent past:

Parliament did not function for much of 2011, and 2010 was no better – for the first time, an entire session was wiped out. But Parliament did find the time to vote for its own members a 150 per cent hike in their budgets under the MP local area development (MPLAD) scheme. Each parliamentarian, even those who don’t have a ‘local area’ because they are indirectly elected into the Rajya Sabha, can n ow spend Rs 5 crore every year on schemes of their choice. For nearly 800 MPs over five years, that’s a total spend of about Rs 20,000 crore. Did anyone say the government has no money?

Then there is the Dubai-based International Cricket Council (ICC), presided over by a certain someone called Sharad Pawar. In response to an appeal from the ICC, the government in its wisdom gave the cricket World Cup of 2011 tax-free status. Reports at the time said that this meant a tax saving for ICC of Rs 45 crore, but other published figures have talked of World Cup revenue being Rs 1,476 crore, and expenditure Rs 571 crore. If the profit from organizing the cup was in the region of Rs 900 crore, then the tax giveaway would have been close to Rs 300 crore.

 

Bear in mind that the British government had denied ICC tax-free status, which is why it left London and first went to Monaco before settling down in Dubai. Penny-pinching London could learn a thing or two from the generosity that New Delhi shows to the aam aadmi’s favourite sports organization.

Then there is Vijay Mallya and his mismanaged airline. The banks, led by State Bank of India, were persuaded (by whom?) to swap loans for Kingfisher equity, the conversion taking place at Rs 64.48 per share when the market price was Rs 40, and on its way down to Rs 24 – thereby giving Mallya a free gift worth hundreds of crores.

While some get favoured treatment, others face the squeeze. Vedanta wanted to buy Cairn, the oil producer, but the government blocked the transfer until Cairn gave up its contractual rights and agreed to pay the state-owned Oil and Natural Gas Corporation money that it had no right to demand under its contract with Cairn. Shades of Vladimir Putin?

Favours and disfavours are but two sides of the same coin; what political India wants is discretionary power, to grant one or dish out the other. The truth is that the majority of elderly Indian politicians cut their milk-teeth in the heyday of Jawaharlal Nehru, who dreamt of the public sector occupying the commanding heights of the economy. Many of the rest were schooled in Indira Gandhi’s populism and the arbitrary use of power under state capitalism. These approaches to public policy have provided resilient to an unusual degree, even as the reality has changed (public sector plan investment, for instance, has shrunk from over a half of the total to less than a fifth). But while the private sector may have the money, government retains discretionary power. So what you get is crony capitalism, and Andimuthu Raja.

 

One reason why the government is short of investment funds is because the central subsidy bill, mostly on food, oil-related products and fertilizer, is slated to be Rs 1,43,570 crore next year. The reality is likely to cross Rs 200,000 crore. That is without counting the accumulated losses on underpriced electricity, which the government will have to take on its books (another Rs 70,000 crore?). Meanwhile, the Economic Survey cites research which suggests that between 40 per cent and 55 per cent of foodgrain meant for the poor is pilfered. The leakages on subsidised kerosene and cooking gas are likely to be even greater.

Meanwhile, Parliament votes money for Prasar Bharati, the supposedly autonomous broadcaster which is now once again little more than a government department, employs 38,000 people, and loses Rs 2.5 crore a day, to earn about as much revenue.

Finally, in the booming field of telecommunications, it takes a special kind of government company to lose Rs 8 crore a day, while earning just Rs 10 crore as revenue. That’s Mahanagar Telephone Nigam for you.

Did anyone say reform? Perish the thought.