Three years of UPA rule is testimony to this ongoing tussle between two schools within the Congress. This is also well in keeping with the partys traditions. One school subscribes to high GDP growth. But, as I argued in this column a fortnight ago, this has to be supplemented with an expanded coverage and better delivery of public goods and services through administrative reforms. The other school seems to believe that growth-inducing policies per se are inimical to the interests of the poor. Therefore, they focus their entire attention on increasing public spending on welfare or so-called poverty reduction measures. The underlying logic (sic) of this school is that if by some means purchasing power can be put in the hands of the aam admi, the demand impetus so created will induce the needed supply response and generate growth.
This is a seductive line of thinking and therefore has so many opportunistic adherents. It sanctions unbridled populism by arguing that increasing transfer payments (subsidies, unemployment benefits, handouts in the name of employment guarantee schemes, wage increases unlinked to productivity and other free lunches) generate economic value by employing unemployed resources. This is the rationale that motivates the so-called left wing of the Congress, and has succeeded in getting the UPA government to adopt big-ticket populismas reflected in its common minimum programme and early utterances of the NAC.
The proponents of this line conveniently forget that these welfare schemes are simply transfer payments or handouts. They do not create any productive assets. Neither do they improve the employability of the beneficiaries nor generate sustained employment. And worse still, as the upright Rajiv Gandhi had warned us, hardly 10% of these handouts ever reach the target beneficiaries. The end result has been that FRBM targets have not been adhered to, fiscal profligacy has been condoned, and more cash sloshing around the economy has resulted in the inevitable inflationary pressures (as always happens when an economys productive capacity cannot fulfil extra demand). This is why, like all seductions, this line of thinking is so frightfully dangerous.
It is only the dynamism of the Indian private sector and the momentum generated by the earlier reforms that has kept the economy going so far, but this cannot carry on indefinitely. Populism, as in the 1969 Garibi hatao phase, has a bad habit of catching up with those who perpetrate it. The unfortunate part is that the UPAs ministers do not want to learn from history that such populism does not win elections. It is dishonest to pin the blame of lost elections on such excuses as anti-incumbency or lack of an organisation. As Ms Sheila Dixits victory in the previous Delhi election amply demonstrated, it is not populism but better governance and delivery of public services that win elections.
Handouts have meant more cash sloshing around the economy which has resulted in the inevitable inflationary pressures, as always happens when an economys productive capacity cannot fulfil extra demand
The author is director and chief executive, Icrier. Email: firstname.lastname@example.org