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HEYDAY OF THE HANDOUT

- A tale of two UPAs

The high-decibel cacophony of the election campaign has all but drowned out the still small voice of reason about the prime determinant of electoral success. We have almost forgotten President Clinton’s maxim, “It’s the economy, stupid.” Instead, we have been subjected to dire predictions of the blood-thirsty “butcher of Gujarat” in hot pursuit of terror-stricken minorities and promises to chop Mr Modi up into Saharanpuri kababs, presumably in the belief that such predictions and promises will bring home the electoral bacon.

But while the media — and large segments of the intelligentsia — are seduced by such apocalyptic visions, common folk have the unpleasant habit of being more concerned about the mundane details of prices, jobs, the state of the roads, the scarcity of water, power shortages and the like. Unfortunately, these minutiae decide elections and in fact they have decided India 2014. But the question remains — how did UPA II with all its expert economists paint itself into a corner that even the stupidest of economists would have described as a disaster area?

Many answers have been offered to this question. The Left believes that, after the ‘brilliant success’ of UPA I (thanks of course to the pressure exerted by the Left itself), the Congress deserted the leftist road to Utopia and sold its soul to the US, to the multinationals and to monopoly capital everywhere. One wonders if the Left believes that it did precisely the same thing on the way to its own electoral doomsday in 2011.

The Congress loyalist echoes the Left on the ‘brilliant success’ of UPA I, crediting it, of course, to pressure not from the Left but from the ‘party’ (meaning Sonia and Rahul Gandhi, and the National Advisory Council). The failure of UPA II, he tells you (sotto voce, of course), was due to the technocrats in government (notably the prime minister) getting above themselves and delaying the Rahul-Sonia ‘rights-based’ schemes (like the right to food) until it was too late to make a difference.

How do we evaluate these claims? Was UPA I indeed the golden age that the collective nostalgia of the Left and the Gandhi-family loyalists portrays it as? The hard facts of chronology suggest otherwise. The allocations in the Coalgate scam were perpetrated between 2005 and 2009. The 2G scam occurred between August 2007 and February 2008. Most of the crucial events of the Adarsh scam (while they may have begun earlier in Congress-ruled Maharashtra) reached their culmination during UPA I. Suresh Kalmadi was appointed and authorized to run the Commonwealth Games before the 2009 elections. UPA I was, in fact, a scamsters’ paradise.

It represented also the heyday of the handout. Not since the 1991 reforms have subsidies been so popular and defended so vigorously as the major instrument of poverty alleviation as in UPA I. The diesel subsidy, the cooking gas subsidy, the fertilizer subsidy, irrigation and power subsidies, minimum support prices for agricultural produce, farm-loan waivers, various educational subsidies, above all the massive food subsidy were not only persisted with but also reinforced despite the basic premise of economic reform — that market prices represent the best guides to optimal resource allocation. Subsidized irrigation and fertilizer encouraged fertilizer- and water-intensive techniques and crops, depleting soil fertility and water-tables. So did the tubewells encouraged by subsidized electricity and diesel — which also fostered the lavish use of gas-guzzling luxury vehicles. Selective support for some crops distorted cropping patterns, while repeated farm-loan waivers encouraged farmers to gamble with high-risk crops. Quite apart from their disastrous allocative effects, subsidies imposed a crushing burden on the exchequer.

The classic example of this was the National Rural Employment Guarantee Act. NREGA committed the government for eternity to providing every rural family with 100 days of employment at wages at or above the minimum legal wage every year. The work done was supposedly geared to the creation of rural infrastructure — but since the explicit purpose of the scheme was the generation of employment, not output, only the most labour- intensive techniques were permitted. Machinery by and large was banned, so that the roads, irrigation channels, dams and embankments built were all washed away during the monsoon, creating yet another set of job opportunities the year after, but with no end product. Income and demand were injected into the rural economy with no commensurate increase in productive capacity. Indeed, the impact on output was negative: labour no longer needed to move to productive employment when it could stay at home, dig ditches and fill them up at reasonable wages. Excess demand for food was the inescapable long-run consequence, although the immediate result was an expansion of rural job opportunities that won UPA I the elections of 2009.

UPA I began in 2004 with a substantial legacy of assets. It inherited from the Vajpayee government a momentum of rapid growth and from the early years of the Narasimha Rao government Manmohan Singh’s international reputation as a committed reformer. These assets sustained it for years: rapid growth continued, foreign investors retained their faith in the rupee, the buoyancy of tax revenues made the hand-out extravaganza not totally insupportable. However, the legacy was not inexhaustible. There were limits and these were finally reached in UPA II.

The most dramatic component of the ensuing dénouement was, of course, the exposure of UPA I’s scams, the attempts at cover-up, the anti-corruption movements of Anna Hazare and Arvind Kejriwal, the daily hullabaloo in Parliament, on television and on the streets. The immediate upshot was the total paralysis of decision-making as the spectres of the CAG, the media, the courts, even perhaps the CBI began haunting the corridors of power.

Less dramatic, but no less far-reaching in its impact, was another exposure — of the prime minister, Manmohan Singh. The discovery that here was no crusader for reform but only a devout acolyte at the shrine of the presiding deity of the Congress was long delayed. But by mid-UPA II, the realization was inescapable that all that mattered in the government of India was a mother-son duo who believed firmly that hand-outs are the only route to poverty alleviation and, more importantly, the panacea for all electoral woes.

The declining international credibility of the UPA and its prime minister was reflected in an exodus of capital, a flight from the rupee to harder currencies and gold, a consequent depreciation raising import prices and intensifying inflationary pressures. This coincided with a build-up of domestic inflation arising from fiscal prodigality. Food prices soared as the rural incomes created by NREGA impinged on the declining or inelastic outputs of all foods that were not sustained by minimum support prices (vegetables, fruits, oils, pulses, meat, eggs and the like). The government’s response to this crisis was typical — more hand-outs. The Right to Food Act legislated the dole-out for all eternity of essentially free cereals to the bulk of the population regardless of the possible cost to the treasury. Even the feeble effort to rein in the galloping cooking gas subsidy was scuttled by the royal family. No voter unfortunately seems to have been too impressed.

The seeds of UPA II’s economic disasters were in fact sown during UPA I. Far from being a brilliant success, 2004-2009 was a chronicle of wasted opportunity when, instead of laying the foundations of sustainable long-term growth, the government dissipated its surpluses in rigid commitments to long-term populism that not only severely constrained its freedom of action over the ensuing quinquennium but will also tie the hands of all future regimes.