At the risk of using a cliché, Christmas has come early in India’s poll-bound states. From cash transfers for pretty much everybody (the list includes school-going children, unemployed youth and women) to gold for young women getting married to even an IPL team for Madhya Pradesh, political parties are promising everything under the sun to win votes. Lest there is any confusion, no political party including the BJP – the Prime Minister keeps talking against the danger such culture poses to fiscal sustainability – is immune to what is now referred to as the ‘freebie’ syndrome in Indian politics.
This column has discussed this problem in the past and argued that the growing political traction for freebies is a manifestation of the unequal nature of India’s growth in the post-reform period. If one party is making such promises and delivering such gains to the electorate, others cannot preach fiscal prudence in elections and hope to emerge as winners.
This edition of the column wants to make a slightly different point vis-à-vis the ‘freebie’ syndrome. This is concerned with the broad framework of economic policy and its interaction with the realm of political economy in India.
Standard economic theory tells us that a low-income country faces two important constraints in its path to economic development. The first is a ‘wage-goods constraint’ which means that as labour moves from traditional to modern sectors (read outside agriculture) food production must increase despite a loss of labour in farming to make sure that urban workers do not run out of bread. The second is the ‘mobilization of savings to fund investment’ challenge which is what is needed for long-term sustainable growth.
India struggled with both of these challenges in its initial years after Independence. The persistence of land monopoly along with absentee landlordism in agriculture created a basic asymmetry between the capacity and incentive to invest in productivity-enhancing techniques in agriculture. This meant that self-sufficiency in food production continued to be a problem. Given India’s democratic framework, the State could never coerce the farmers to part with their agricultural production like the socialist regimes in the Soviet Union or China which would have allowed it to cushion household budgets and mobilize domestic savings for investment purposes.
A big part of this problem was solved via the Green Revolution which, essentially speaking, was the State offering multiple kinds of subsidies to farmers for the adoption of modern inputs in food production. Once food production started increasing, India’s food safety net also expanded widely. These constraints were eased further when economic reforms eased regulations on private capital, both domestic and foreign, making investment in the Indian economy.
While these developments have made India’s non-farm economy (this is now almost 85% of India’s GDP) much more independent of the agricultural sector in terms of these two macroeconomic constraints barring the seasonal inflationary shocks, India’s political economy now has a problem of different kind. It is the following.
The fruits of India’s economic growth in the post-reform era have been distributed very unequally because almost half of India’s workers are still engaged in agriculture and a very large share of those working in the non-farm sector is engaged in low-value activities. Now, the pure economist need not worry about this imbalance too much as long as a section of the economy is doing well and creating new opportunities for growth. This small pocket of opulence, by the way, could be as big as many developed countries in Europe in absolute terms.
The politician, however, does not have this luxury and cannot ask the poor (even if in the relative rather than the poverty line sense of the term) to live on India’s GDP growth rates and business sentiment metrics as they struggle to make ends meet and cannot find a stable well-paying job and are increasingly having more and more aspirations. The bipartisan pivot around ‘freebie’ politics is basically a move to pre-empt this anger of the modal voter.
To be sure, India is not alone in facing a problem of political legitimacy due to economic inequality. Developed countries had their moment of reckoning through events such as Brexit and the election of Donald Trump when the proverbial ‘Rust Belt’ gave a jolt to what the liberals considered was an economically rational status quo worth preserving. Even China, which is the biggest economic miracle modern capitalism has produced in terms of growth rates, is now struggling with managing a soft landing of its economy as geopolitical tensions are killing global growth drivers and the communist State is realising that not all cats which catch mice – Deng Xiaoping’s famous saying in defense of Chinese economic reforms – are necessarily good for its own legitimacy.
As a country which is behind not just the advanced western countries but also China in terms of GDP and per capita incomes, India needs to draw the right lessons from the ongoing political economy churn in these places.
The backlash against liberal consensus in the West teaches us economic prosperity means nothing if its gains are not shared equally. The US has made significant gains from outsourcing production to China, but those gains have overwhelmingly accrued to American capital rather than workers. Similarly, the Chinese State is not entirely wrong in arguing that there is some merit in controlling profiteering in industries which can have an adverse impact on the next generation (say video games) or multiply the effect of existing inequalities in the economy (such as tuitions or home prices).
To be sure, it is still early days to argue whether the American and Chinese policies in the wake of such realities are doing a course correction or making things worse. However, the difference they have with the Indian situation is that these countries are at least engaging with the problem rather than kicking the can down the road by using the stick of ‘freebies’ like in the Indian case.
While the argument may provoke a lot of people, the polarization in favour of freebies in politics and against it in markets is also a manifestation of the complete irrelevance of development economics discourse in today’s India. Good old development economics was invested in guiding politics in achieving a structural transformation in economies. Today’s politician is ideologically promiscuous and uses economists who swear by either markets or populism to suit his immediate needs. Nobody can disagree that India’s economic trajectory post-Independence has been one of progression. The irony is that this has been accompanied by a severe retrogression in our economic discourse.
Every Friday, HT’s data and political economy editor, Roshan Kishore, combines his commitment to data and passion for qualitative analysis in a column for HT Premium, Terms of Trade. With a focus on one big number and one big issue, he will go behind the headlines to ask a question and address political economy issues and social puzzles facing contemporary India.
The views expressed are personal
