Column: Will politics trump economics?

The Budget that Chidambaram presented was a rare specimen of economic rationale dominating political expediency. Much was feared about a populist give-away Budget with an eye on the elections. But, for once, he was moderate, kept his eyes on the deficit and produced a moderate budget.

The question is, will it do the trick? Can UPA-II win the next election with this Budget? Is good economics bad politics or the other way around? Beneath our skins, we are all economic determinists. Economics, we believe, ultimately shapes politics. But look around the world and you find that lately politics seems to be taking a lead role in creating shocks to the economic system.

The pride of place here must go to the Italian elections. Italy, like many other countries, is a fragmented polity in which there is no clear view as to how to pay back the excessive debt the country has built up during the good days. This is not dissimilar from what Greece has to face. Greece elected a government that is taking the punishment despite its unpalatability. Italians will either have to do the same with a Grand Coalition of Socialists and Berlusconi, each getting 29% of votes, or with the outside support of the maverick Beppo Grillo. But there is no common ground on economics between the three factions.

The US has also now crashed into sequestration. That seems to be the only possible way to tackle its debt/deficit given the gridlock in the politics. There is no way a reasoned solution will be found as of now given the vast distance between the rival refuseniks of tax increase and of spending cuts. The latest by-election result in the UK has led to nervousness about the persistence of George Osborne?s policy. Politics may yet wreck what I believe is a sensible economic strategy.

What is going on? The economic crisis in the Western world is deeper than anyone anticipated. The structural deterioration in Western capitalism after years of neglecting manufacturing and hoping that services would replace industry adequately has been exposed. Rebuilding productive capacity even with the newer developments in industrial technology?3-D printing, etc?requires a lot of savings and will also require restoration of competitive wages. Years of being used to Keynesian solutions, which asked for spending boosts to solve recessions have insured Western polities to the need for hard choices.

The central issue behind the Italian and the American gridlocks is that politicians have not been able to agree on a fair distribution of the costs of structural adjustment. In the US, the Republicans want the rich to be spared any pain while the Democrats want to protect public spending without any questioning. The British party system is also failing to draw clear lines between the hard-liners and the Keynesians since the coalition is a muddle of the two camps.

Indian politics is also in a fragile state. The support for the two major parties has been declining with each election. In 2014, it is difficult to predict that either Congress or BJP will get enough seats on their own to be able to entice coalition partners to form a ruling majority. The Budget skirted the issue of inflation, the Achilles? heel of Congress/UPA. Urban voters will punish Congress for the failure on inflation. But then, BJP has not covered itself in glory as the Opposition in the way it blocked FDI in retail or has failed to articulate a coherent economic strategy. If we end up with a third party coalition, then politics will dictate economics.

The truth is of course that there is very little difference between Congress and BJP on economic issues. They are both for reform and populist when it comes to spending money on subsidies. They like what the market delivers by way of growth but are quick to put fetters on the market because they hold on to out-of-date economics. For example, the distrust of forward trading, or of exports of foodgrains from India. Economic thinking in India is a hopeless muddle. The crucial issue the voters have to face is whether the deterioration in India?s economic performance is due to the failures of Congress/UPA or due to this incoherence of both its ruling parties.

It would be complacent to think that India will resume its 8% growth automatically. Whatever the deficit, the burden of debt servicing is still the largest item in the Budget. The issue of the debt-GDP ratio is hardly mentioned. This way lay the ruin of Western economies. This is the issue dividing the politics in the West. India could drift into a debt crisis if populist subsidies are seen as the only way of winning and retaining power, whoever wins the next time. In that case, prolonged inflation and stagnation will be the result.

The author is a prominent economist and Labour peer