The Telegraph
Since 1st March, 1999
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- No growth without reform, and no support for reform without growth
Populist in a crisis

A series of high impact strikes in quick succession is a warning about the impending economic unrest that lies ahead. The traders’ strike against value added tax, the truckers’ strike against all manner of taxes, the banking strike are all signals of turbulent economic times. After almost a decade of low labour militancy, few public sector strikes, we may be on the threshold of returning to the kind of civil unrest that characterized politics in the early Seventies. All indications are that growth will slow down, inflation is creeping up and the general outlook for economy is, at best, modest, despite all the bluster of McKinsey reports targeting eight per cent growth. Although the structure of the Indian economy and the prevailing ideological climate are vastly different from the early Seventies, the state is once again in serious crisis: unable to endure both its current fiscal condition and the measures needed to reform it.

Simply put, we are in for a major round of unrest because the central component of economic reforms, reform of the state itself, has not even got off the ground. During the Nineties India integrated into the world economy with modest success and managed to successfully deregulate some sectors of the economy. But the overall impact of these measures on growth has been modest for many reasons. The economy is still shackled by too many perverse incentives that stem from state regulation. The state itself spends most of the resources it generates unproductively either on interest payments on its debt or on itself. State investment in infrastructure and social services has been almost stagnant.

A key component of economic reform was to get the state to both use growth to generate more resources and to use these resources more productively. But this ambition depended upon the state being able to reform itself in two ways. First, it would have to rationalize its own functioning and second, it would have to free itself from powerful lobbies and vested interests that were unproductively draining away its resources. In a sense the difficult part of the reform process is yet to be undertaken.

What these strikes, taken together, represent is growing opposition to reform. The opposition does not come from any ideological challenge to the idea of reform itself, but from the fact that no one wants to pay the price. Since most lobbies are so used to looking upon the state as a free lunch, any attempt by the state to rationalize tax structures, to cut subsidies, to lower its own wage burden, will provoke resistance. We all want transparency in the state, but few of the most influential political groups in the country want transparency in their own dealings with the state. The Kelkar report was scuttled as much by corporate anxiety over rational taxation as it was by an uncertain middle class; the opposition behind VAT was motivated at least as much by fear that tax evasion would be more difficult as anything else; the opposition to genuine power sector reform comes from all kinds of lobbies used to free power; public sector reform will be opposed by privileged public sector employees and so forth.

During the Nineties we avoided a head on confrontation on these issues mainly because of three reasons. First, in the Nineties we had a genuine balance of payments crisis that allowed the political space for some reform. Second, the economy, except for a brief period continued to expand, allowing opportunities to be created. Third, governments pursued what has been called “reform by stealth”, an incremental measure here, confronting a small lobby there and so forth. The net result was that our discontent was mild and diffused.

Oddly enough, India’s successful management of its external sector, helped largely by remittances and the information technology boom, has disguised the real fiscal crisis of the state. The prospect of your gold being shipped to the Bank of England, the threat of a run on your currency concentrates the mind more than runaway internal debt does. So once the external front was secured we continued to behave as if the state could invent more and more money out of thin air.

Unfortunately this was not a situation that could last forever and the state had to, at some point, confront the fiscal deficit. Someone has to pay. But who will pay' The middle class thinks its taxed enough, business thinks taxes will make it uncompetitive, agricultural tax is politically unviable, and other traders and truckers think that they are taxed too much and too arbitrarily. Introducing rationality and fairness to any system of taxation is immediately interpreted as a sign that one particular group will be asked to carry a greater share of the burden. Hence we are all resisting reform, out of convenience, if not principle.

The fiscal crisis of the state is serious enough so that reform by stealth is no longer an option. Many vested interests have to be challenged simultaneously and they are going to resist together. Hence, we can expect a crescendo of strikes of the likes of which we have not seen of late. Second, the outlook for overall growth is gloomy. This is only adding to economic anxiety and resistance to the idea of reform. Indeed, in retrospect, it is clear that we will pay a heavy price for not reforming the state more when we had the political opportunity.

The crisis of the early Nineties had given an opening, and the economy during much of the subsequent decade gave enough of a cushion to take hard decisions. But now we are in the tough situation of having to undertake the most difficult of economic reforms in more precarious economic times: a stagnant international economy, lower growth and possibly higher inflation. We are in the vicious circle that we cannot grow unless we reform more, but there will be no political support for reform unless we grow more. We are in for tumultuous economic times.

The impact of this on politics is uncertain. Most politicians respond to economic crisis by turning populist as Indira Gandhi did. There are signs that the Congress will traverse the same path. The Bharatiya Janata Party will go slow on reform, although it has to be said to its credit, that it has at least dared to open the hard issues the Congress managed to mostly avoid. The good news is that good old-fashioned things like inflation and labour unions, public sector workers and disgruntled agriculturalists, business lobbies and irate consumers, may once again dominate politics. Praveen Togadia may have to work harder to gain attention.

The bad news is that attention to economic matters does not always mean that those matters get politically resolved. Politics, currently at any rate, is less about the art of the possible. It is more about the skills of deferral and we can expect it to continue on this path. But as the heat gets oppressive, water and power scarce in most parts of the country, no one will be in any doubt that a summer of economic discontent is upon us.

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