Column: The difficulty of being right

Written by Meghnad Desai | Updated: Feb 11 2013, 05:36am hrs
While Left populism has failed us, Narendra Modi may yet spell out how he will change policyif his party lets him

The revised GDP growth estimates for 2012-13 should not cause any surprise. They may yet be revised up or down but the message is clear. The economy is not out of trouble. It was obvious at the time of the last Budget and I, among many others, more or less said that the economy was going downhill. P Chidambaram must now regret that he had to give up the finance minister job after 26/11 to take up the ministry of home affairs. While he did a good job there, he is now back in the finance ministry with not enough time to fix the mess. Elections beckon and soon the populist pressures will mount up, to do even more damage to the economy.

At the root of the problem is the failure to tackle persistent inflation in the Indian economy. The UPA-2 was never able to get any sense of urgency in the foodgrain price inflation, which began after the drought of 2009. Ever since then, it has failed to do anything serious about the supply-side policies or restrain government consumption expenditure. Every so often, the various powers that be promised that inflation would come down in six months. Yet we have had inflation in high single digits for four years now. Households have dipped into their savings to keep up with their rising EMIs. The household savings rate has thereby slumped. The inevitable impact on investment has followed. Add to that the delays in completion of infrastructure projects, and the supply bottlenecks have increased. At the same time, given the populist pressures, the procurement prices of foodgrains have been going up quite fast. The cut in fuel subsidies has been slow and reluctant. MGNREGA has been kept up.

The government has been somewhat half-hearted about the inflation as well as the growth slump. From its Left has come the argument that growth is not sufficient for inclusive development. Indeed, high growth has sharpened inequality. So, it is as if low GDP growth is a solution. Chidambaram does not subscribe to this fallacy but, as elections come near, the Congress Left is bound to tilt the policy away from growth and towards redistribution.

There should be no conflict between growth and redistribution. Indeed, the growth strategy chosen should tackle distribution as one goes along. But, in India, historically, the growth strategies have been concentrated on capital-intensive growth, neglecting employment. It began with Nehruvian Socialism and has not changed much. The labour legislation that is at the root of slow growth in manufacturing employment has never been admitted to be an obstacle and never reformed. All sorts of apologetic denials of the restrictive effects of labour legislation are offered instead. We are told that the old Indian skill of jugaad manages to nullify the bad effects of the legislation. But, unlike Bangladesh or Malaysia or Indonesia, India has failed to develop labour-intensive manufacturing for decades both before and after 1991.

Let us conclude that whatever may happen to the GDP growth rate in the short run, we are not going to see a shift in policy towards high growth dynamics. Yet there is uncertainty in the air. Narendra Modis speech at the SRCC in Delhi has put development and governance at centre stage. While many will go on worrying about his 2002 record, we are beginning to discuss for the first time in many years the idea of reviving Swatantraa Right-wing political party. Even now commentators say that given Indias poverty, no Right-wing party can be good for India.

But India has tried Left populism for 67 years now. In its first phase during 1947-1980, there was dismal growth, no discernible reduction of poverty and employment growth confined to the tiny organised sector. The next phase of the 1980s reluctantly tried to change direction but did not alter much. Since 1991 we have had higher growth but since 2004 there has been the growing burden of populist spending policies. There are no policies to take people out of poverty; only to keep them comfortable in their poverty, immobile in their constituencies so they can cast their vote for their masters.

This model has run out of steam. It would help India if someone articulated an alternative that made growth rapid enough to raise employment all around. This would require dismantling many regulations that still exist, improve the logistics of supply chains and remove barriers to the movements of goods and people. Western social democracy has been convinced that growth can only be achieved with a vibrant private sector, especially SMEs. There is not much hope yet that the Indian Left and even the rest can boldly articulate such a vision.

Narendra Modi may yet spell out how he could change economic policies. He is about to be saddled with Ram Mandir by the more stupid elements of his party. If so, we will have to wait till another leader who will have to change direction.

The author is a prominent economist and Labour peer