Three years of the UPA government

Updated: May 23 2007, 05:30am hrs
With the Congress having lost Uttarakhand, Punjab and now Uttar Pradesh, the mood in the party headquarters cannot be upbeat. With these setbacks and less than two years left for Indias next general elections, thoughts must be focused on coming up with a winning strategy. And once again, the danger is that wrong conclusions will be drawn. As a senior minister has reiterated, more often than really necessary, the cause of the so-called aam aadmi has ostensibly not been served by policies that serve to boost economic growth, raise Indias stock in the world and generate hope among the people. At the same time, I have yet to see the senior minister or his compatriots in the National Advisory Council (NAC), or even the keepers of the Marxist faith to which he has professed sudden allegiance, come up with a coherent development strategy that will secure the welfare of the aam admi. Because, as West Bengal after three decades and China since 1978 have demonstrated in different ways, there is no simple alternative strategy or a short-cut that can address the trade-off between growth and equity. Rapid growth remains the necessary condition for reducing poverty and improving the aam aadmis condition.

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 further irony is that the Prime Minister and some of his colleagues, having been made to go along with this faulty economic agenda, are being made the scapegoats for political losses. And, once again, we will hear that good economics does not make for good politics. This is simply untrue. Let the next two years of the UPA government be used to address the binding constraints on Indias economic growth. Two of these constraintseducation and physical infrastructureneed urgent policy attention, reforms and greater allocation of public resources. All over the world, these two sectors have been developed predominantly by public resources. This should be done in India, too, with due attention to implementation arrangements. Better this than to persist with employment generation and subsidy schemes. At the same time, a taskforce should be established to ensure that the plethora of government procedures and clearances that stifle business and entrepreneurial initiative be rationalised and done away with. This will directly benefit the small and medium entrepreneurs who will spread the good word even among their workers. The UPA coalition should give its Economic Troika the support to quickly implement these reforms and channel more public resources for improving the education and infrastructure sectors. That package, not populism, will be a winning strategy.

The author is director and chief executive, Icrier. Email: rkumar@icrier.res.in