After The Tempest, What Now

Written by Subhash Agrawal | Updated: May 20 2004, 05:30am hrs
Indian politics keeps getting more curious by the day. The new wisdom is that the BJP lost because of its neglect of the rural economy and its tiresome parroting about a feel good factor that did not exist in the countryside.

Not true. Yes, the BJPs election jingle did not connect with the masses and perhaps renewed a sense of self-despair for many, but the party lost its mandate largely because of an anti-incumbency trend that is now deeply entrenched as the result of a complex confluence of media penetration, consumer-triggered values and entry of new voters in every cycle. Remember, almost 20 million 18 year-olds enter the voting age every year, pre-disposed to emotion and disenchantment.

In fact, on the question of help to rural areas, the NDA government more or less continued past levels of subsidies. Official statistics and budgetary disclosures in India are notoriously opaque but inclusive of all subsidies, entitlements, exemptions and development funds, the rural economy received in excess of 40 per cent of all budgetary allocation in the last five years. The problem is not the quantum of aid but rather its miserable returns, a trend which has been discernible for two decades.

The rural sector has always been the highest recipient of government largesse but its problems are too complex to be solved by handouts. At one level, subsidies have created an insidious cycle of dependency, corruption, wastage and duplication, while real investment in real farming assets such as irrigation, food chain and agro-industries has declined. The Green Revolution has long run its course, rapid population growth has created one of the worlds most economically unviable land fragmentation, and in a larger sense, the rural economy is becoming boxed in.

One of the positives emerging from this election is the highlighting of how India has this fragile double track and how the rural-urban linkage is so unbalanced and artificial. Despite substantial improvements, India is unlikely to achieve a higher growth path by leaving behind its lower 70 percentile population. Far too much growth has been concentrated in services, and it has been an urgent call to arms by many people to reverse the trend.

If the Left parties and Congress are now saying all this, they are absolutely right, and in fact no sensible analyst thinks otherwise. But the problem with knee-jerk rejection, or even thinly-veiled contempt of reforms, is that privatisation, government downsizing and labour reforms do not take away from the rural sector. Yes, they may not address the immediate crises in village life, but over the medium term they provide the extra boost to public finance and investor confidence that can be leveraged for the masses. If none of Indias poor have seen any extra food on the tables as a result of past disinvestment, it is a reflection of poor leveraging and not of the policy per se.

Which leads to a key question: How would the new regime change things, and what will be its impact on business and economic conditions Some editorials have suggested that post-election market behaviour is simple paranoia since even the Left government in West Bengal has been an eager reformer. I hope they are right but an initial assessment points to political risk now going up a couple of notches, and heres why.

First, the beginning has been clumsy and suspenseful and the decision of major constituents, like the Left and DMK, to opt out of government raises the possibility of downstream machinations, if not pressure on key issues. Sonia Gandhis brilliant political stroke to take the high road over the PM job does allow her far more elbow room and prestige than was imagined earlier, but it hardly immunises her party from tantrums thrown by allies. The danger is not really in the specific threats emanating from Left parties but in the morass, inertia, conflicts, competitive pulls and in-built unpredictability that underlies the new coalition, of course based on memories of the past United Front government.

Second, the return of populist measures. The governments in Andhra and Tamilnadu have announced free power to farmers. The latter has also cancelled the penalisation of employees who had participated in a strike that had paralysed government for a month. These are regressive measures taken under post-election panic. Even the most die-hard socialist has to realise that less than a fifth of all taxes and government revenue is available for any worthwhile development, only because of unsustainable level of subsidy and size of government.

Frankly, disinvestment was a contentious issue even earlier, and it was Vajpayees strong backing of Arun Shourie that allowed the sale of some big-ticket PSUs. That context was always to change, even if the NDA were to return. But now, and largely because of noise by the Left, many potential investors will simply leave. It would be surprising to see the continued stay of market players who do not have to be here. Overall, large investments, both local and foreign, are likely to be put on hold for a few months, till such time that the attitude and stability of the new coalition becomes clearer.

The author is an analyst of Indian political and business trends and the editor of India Focus, a political risk report for international investors