Political Economy of Reforms

Economic reforms are drawing a new dividing line in the society between small groups of beneficiaries and vast sections of casualties. The Political Economy of Reforms designed for and affluent India can only be resisted with a political economy of radical transformation in favour of working people’s welfare.

The ongoing Economic Reforms in India are described differently in different circles. While the Fund-Bank establishment designates the package as a combination of measures aimed at bringing about macroeconomic stabilization the structural adjustment, and economist, especially critical economists call it the economics of neo-liberalism. In popular perception, it boils down to a three pronged strategy of Liberalization, Privatization and Globalization. In official parlance, it is now plain economic reforms- Yashwant Sinha proposes to initiate a discussion on second generation reforms, but the most familiar refrain among trade union activists is still the Ram-Manohar era nomenclature of ‘New Economic Policy’. While description may differ, what is perhaps commonly noted today by all observers, activists as well as academics and other analysts, is that the euphoria around the reforms has now considerably evaporated and the situation today is far more conducive.

When reforms slow down, two explanations are commonly given: lack of consensus and vested interests. While these are powerful and plausible explanations, they also raise a curious puzzle: why do we observe periods of mega reform punctuated by long spells of inaction?

Surely neither consensus nor vested interests can shift dramatically within a short period to produce the wide swings in the pace of reforms.Thus, recall that as the 1980s drew to a close, the spurt in reforms during 1985-86 and 1986-87 under Prime Minister Rajiv Gandhi seemed to peter out. Yet, in 1991-92, Prime Minister Narasimha Rao and finance minister Manmohan Singh began to lay down the foundation of systematic reforms. They did away with investment licensing as also with import licensing on capital goods and raw materials, substantially lowered industrial tariffs, opened most industries to foreign investment, dramatically reformed both direct and indirect taxes, substantially cut fiscal deficit, considerably liberalised the financial sector, and made the rupee convertible on the current account.But by mid-1994, despite clear evidence of significantly improved economic performance, reforms came to a standstill. Congress party lost elections in May 1996 and a series of unstable governments followed. There was some effort to revive the reforms by these governments in areas of taxation, civil aviation, telecommunications and insurance but their success was at best limited.At this juncture, Prime Minister Atal Bihari Vajpayee and Finance Minister Yashwant Sinha came to the helm. Defying the conventional wisdom of the day that the consensus for reforms was lacking, they went on to introduce deep and wide-ranging reforms in virtually all areas during six years of their rule. They promulgated the New Telecom Policy, 1999, and introduced some of the toughest reforms in the sector. Those reforms have led to a sharp rise in the tele-densitfrom just 2.8% in 1998-99 to approximately 19% today.Import licensing on consumer goods, which the trade reform of 1991-92 had ubiquitously left in place, came to an end in April 2001. The top industrial tariff rate was brought down from 45% in March 1999 to 20% in January 2004. The indirect tax system and tax administration were reformed in a major way. The government introduced genuine privatisation with several public sector enterprises transferred into private hands. The Urban Land Ceilings and Regulation Act, 1976 was repealed. The government successfully embarked upon a massive programme of highway construction. A major step towards the reform of the power sector was taken through the Electricity Act, 2003.On the macroeconomic front, the Vajpayee-Sinha team liberalised most interest rates, introduced greater competition in the banking sector through more liberal entry of domestic and foreign private banks, freed up several external capital account transactions and introduced the Fiscal Responsibility and Budget Management Act. It opened the insurance sector to the private sector with limited foreign investment permitted. Vajpayee-Sinha combine also launched reforms of the civil service pension system and the exit policy though they remain incomplete to-date.In May 2004, the Vajpayee government lost election and the reforms were once again setback. Outside of international trade, last three years have seen very limited progress in opening up the economy further. Why? Shifts in the consensus and the power of vested interests cannot explain this large shift in the policy stance. We must seek explanation elsewhere.My own view is that within India’s parliamentary democracy, the leadership at the top plays a decisive role in shaping the policy. A leadership committed to reforms faces resistance from three quarters: opponents among the supporters of the government in Parliament, those sitting in the opposition, and the vested interests that expect to lose from the policy change. A determined leadership can often overcome resistance from all three sources.Those on the ruling side rarely want to vote themselves out of power. In the beginning of its term, when the present government decided to raise foreign investment caps in telecommunications and in civil aviation, the Left Front parties eventually dropped their opposition rather than bring the government down. They only stood to lose by voting the government out. Chances are better than 50% that they will do the same in the current stand-off on the nuclear issue.The power of the opposition to stop the reform is even more limited. When disinvestment minister Arun Shourie proposed an ambitious agenda of privatisation in the early 2000s, the opposition accused him of corruption to derail the programme. But a determined Shourie, backed up by an equally determined Vajpayee, could successfully advance his agenda.Even vested interests, frequently credited with blocking the reforms, have only a limited standing power. If the public views the change favourably, agitators quickly lose its sympathy. The airport workers trying to block the privatisation of Delhi airports in 2006 faced this situation and had to quickly give up their agitation. Indeed, even when the public views a policy change as detrimental to its interests, the free-rider problem in agitation works in favour of the government. The cost of the agitation falls disproportionately on those actively participating but the benefits are diffused. Therefore, a patient government is often able to outlast the agitators. The failure of the public in 2006 to reverse the government’s decision to extend caste-based quotas for admissions to private schools and colleges illustrates this point.Many observers today hold the Left Front parties responsible for the slowdown in the reforms. While this view has some merit, the bulk of the problem resides within the ruling coalition. While Prime Minister Singh would undoubtedly like to proceed with the reforms, by all indications, the Congress party president Mrs Sonia Gandhi holds his hand back. Faced with similar challenges from within the party during his tenure, Prime Minister Vajpayee confronted his opponents and prevailed. Unfortunately, Prime Minister Singh has not done the same.

Economic Reforms Vs. Narendra Modi Government:

What does India’s political economy look like in the aftermath of a series of high-profile economic reforms that the Narendra Modi Government has undertaken? The economic effects of these reforms will play out over the long run. This piece is not an economic assessment of these policies. It is a reflection on the political economy of the Modi model, which is now acquiring systematic contours.First, broadly speaking, macro-economic stability matters. But, politically, the government remains convinced that inflation carries serious political risks. This is going to remain a cornerstone of macro political economy.

Second, the relative bargaining power of capital in relation to labour will continue to radically favour capital. This has been the trend for the last two decades. In emerging economies, there will be a race to the bottom as far as sensible protections for labour go. Indonesia has, like India, gutted labour protections. The previous regime of labour laws was deeply broken and it served neither the cause of capital efficiency nor labour protection. So, it is politically pointless to defend the status quo. Politically, it was easy to portray the small section of the economy that has protected labour as an aristocracy impeding the progress of other excluded labour rather than as a bulwark against capital but the migrant labour crisis throws up another puzzle. The degree of hardship inflicted on migrant labour is still not showing up in any serious political backlash. One explanation is the politics of faith — like demonetisation, this punishment has not deeply broken faith in Modi but there may be something deeper: That migrant labour has been always so radically disenfranchised in political terms that they have little faith that any alternative dispensation would have done better for them.

Third, in agriculture, the problem is similar to labour — any position that simply involves defending the status quo loses political support. Whether or not these bills will result in greater prosperity for farmers is an open question. It depends on the follow-up. The political consequences of the agriculture bills are far-reaching in a state like Punjab where MSP is very significant but the political effects will be largely concentrated in a few states like Punjab and Haryana. In fact, for those not in agriculture, the bills strengthen the government’s reformist credentials. Ideologically, it is not easy for the Congress to mount an opposition to the bills, because their policies were headed in the same direction, even if they might have been more nuanced. Also, nothing in the bills precludes the state from continuing with MSP. So, the whole argument will turn on convincing affected farmers of the government’s intentions. The events in Punjab could yet spiral into a crisis if not handled well. But there is little evidence of a national opposition to the bills.

Fourth, state-capital relations. State and capital relations will remain very politically cosy. In significant sections of Indian capital, there is a deep commitment to the Hindutva project. The government understands that control of the information order requires control of capital; so it will superintend it. Corruption will be more structural rather than transactional. This has the advantage of being able to mobilize all the necessary funds, and yet at the same time giving the impression that transactional corruption has come down. There are three areas of discretion that will continue to be the subject of state-capital negotiations. First, there is no evidence to suggest that the channelling of credit will not, at the margins, continue to be directed to the favourite players. The Insolvency and Bankruptcy Code was a good legislation. But, as Urjit Patel argued in Overdraft, the government undermined its own legislation, largely it seems so that it could still exercise discretion. So the political economy suggests that we are not going to see major financial sector reforms soon. With Atmanirbhar Bharat, there is more scope for negotiation on tariffs in different sectors. It will be interesting to see if these negotiations are governed by an economic or a political economy logic.Finally, this government is comfortable with greater concentration of capital. The argument that there is a need to create national champions who can leverage scale will be used to justify the dominance of the Ambanis over the Indian economy to a point that is unhealthy. But can this nexus be converted into a political narrative of corruption? This is going to be difficult. In the previous anti-corruption movement, the media was complicit in the campaign and it acquired plausibility because of existing high-profile transactional corruption. Structural corruption will be harder to convert into a political narrative.

Fifth, there is a deepening of the new welfare state. Interestingly, the Modi government’s focus here is on six of the new indicators that the Oxford Multi-Dimensional Poverty Index uses to supplement traditional indicators of health and education. Cooking fuel, water, sanitation, electricity, housing and assets. These schemes have several political advantages. These are vital initiatives. They target women, and are visible. The real question is whether outcomes are translating into results. For instance, the Ujjwala Yojana was quite successful in reaching its target of the number of new connections but, according to government data, per capita cylinder use under the scheme in 2019 was 3.28 refills, suggesting that the gap between the number of connections and the usage you would expect based on those connections was very wide but these are the six schemes to monitor closely. We need more objective scrutiny of these schemes of the kind MGNREGA was subject to under UPA but a lot will depend upon whether the government narrative on these schemes can be countered with some real evidence that these schemes are not delivering. From a political point of view, the challenge will be that while some of the government’s claims may turn out to be inflated, will the shortfall be sufficient to demonstrate government failure?Finally, there is the political economy of federalism that has come under immense strain because of GST and the government’s encroaching on the state’s rights in recent legislation but the blunt truth is that, in the final analysis, the potency of this fault line depends on the states. If the BJP wins Bihar and Bengal, the potential of significant revolt on federalism issues will diminish.

Despite economic headwinds, it has not been easy to use the economy as a point with which to attack the Modi government. It has still positioned itself as a breaker of the status quo. The opposition will have to think more intelligently about the political economy of protest to counter the new political economy of reforms.

Reading between the Lines:

PrelimsQ: Oxford Multi-Dimensional Poverty Index uses to supplement six traditional indicators, which one of the following is not one of them ?

(a) Cooking fuel
(b) Water
(c) Sanitation
(d) None of the above

MainsQ: Critically examine the issue of privatization of all PSUs by the Government. Why every economic reform of the government is opposed ? Support your arguments with suitable evidences.