Sunday, April 15, 2007

Economics of populism

Populism may be an inherent part of democracy, but one must be wary of opportunism. I review the book, 'Can India grow without Bharat?' by Shankar Acharya, one of India's leading economic policy maker. This was published in the Financial Express, on 15 April 2007, under the title "The Economics of populism".

Can India grow without Bharat, asks Shankar Acharya in the title of his new book. Whether you are a politician or an economist, the answer to that question is almost always a no. So what is it the economist wants to bring out in this book?

Acharya had served as the chief economist advisor to the government of India for seven long years between 1993 and 2000. Unusually, he served four prime ministers in four different political formations during this period getting a ringside view of politics of economic decisions. Here he brings together 33 short essays, written between late 2003 and 2006. These essays cover a range of issues from macro economic policies, budgetary and taxation policies, infrastructure issues, foreign trade, and foreign policy issues. He presents a sense of cautious optimism at India’s economic future. He recognises the potential and possibilities, but also stresses that India will not rise automatically, unless a range of policy changes are effected. And he is not sure that the political processes have the capacity to do it.

No doubt India has moved a long way in the past 15 to 30 years. One of the chapters, ‘India’s tax reformers’, reminds us of the extent of these changes. He briefly traces the history of tax reforms from the 1970s, and credits the personalities that were involved in those decisions. In the 1970s, customs duty were often above 200% on many products, excise duty ranged from 2 and 100% spread over 24 slabs. Cascading taxes were the norm. On the other hand, personal income tax had 11 slabs, ranging from 11 to 85%, and with a surcharge of 15%, the top marginal rate was effectively 97.5%. Needless to say that tax administration was very complex and distinctly arbitrary.

From the Wanchoo committee report on direct taxes in 1971, to the Kelkar report a few years ago, from VP Singh to Manmohan Singh, Chidambaram and Yashwant Sinha, the general direction of tax reforms have been sustained. But Acharya credits Singh as the father of modern tax reforms, for “he and his team took a holistic view of tax reforms, both direct and indirect.”

Another interesting essay is ‘Why did India reform?’ Going beyond the 1991 balance of payment crisis, Acharya points out that while the 1991 elections were not fought on the grounds of political ideology or market versus the state, “most elements of the reform agenda had been around in influential sections of India’s technocracy for some years”. Contrary to left-wing criticism, reforms were indeed home grown. Secondly, the clear mandate by Narsimha Rao to Manmohan Singh enabled the latter to coordinate closely with the PMO, RBI and the commerce ministry. Dr Singh’s previous experience at various senior government positions helped him clear a lot of the minefields. The author characterises the reforms process as a “medium bang”, in the spectrum between the ‘big bang’ and ‘gradualism’. The results started to become visible as early as 1993, and thus the momentum for reforms were sustained. Finally, he stresses Singh’s role for seizing the opportunity, saying “he was the right man in the right place at the right time.”

Since most of the essays in this volume deal with the issues facing the present UPA government, it is natural that the readers may like to read Acharya’s assessment of the present political dispensation. In a mid term review of the UPA, the author gives the government just 38 out of 100, over 10 parameters. Predictably, the author assesses the performance of exchange rate and external payment at a high of 8 out of 10, while employment, public sector reforms, agriculture and human resource development all awarded a low of 2 out of 10. Not much for a government that repeatedly declares its concern for the common man at the top of its agenda. One of the critical essays deals with one of the corner stone of UPA policy — National Rural Employment Guarantee scheme. Writing in November 2004, Acharya is categorical. This law would “certainly destroy India’s public finances and much else besides.” As UPA took over the reign of power in the summer of 2004, Acharya acknowledged that the economic team of Dr Singh, P Chidambaram and Montek Singh Ahluwalia is the strongest at the cabinet level. Still, he castigated the Common Minimum Programme for falling under Gresham’s law — “bad money drives out good money”.

By the end of 2005, Acharya is apprehensive of the resurgent populism, where long term economic and social health is sacrificed for short-term political gains. The author traces a brief history of political populism in India, from the days of Indira Gandhi and slogan of ‘garibi hatao’. In all these years, Acharya says, populism while present, took a back seat only during the 1991-1996 regime of Rao and Singh, and 1998-2004 of the NDA rule.

Needless to point out that at the end of both these era of relatively low level of populism, both these regimes were humbled at the next electoral battle. But the electoral outcomes for populist regimes have been even more pathetic! “The only effective remedy against the obvious political temptations of populism, lies with the country’s leadership and their motivation, courage and ability to protect long-term national interests, from short term political opportunism.”

From an author who believes that economic incentive and institutions matter, his assessment of the political process is not very satisfactory. This book provides a lucid explanation of a lot of economic issues. Although such compilation have their own limitations, this reviewer expected some insight in to the politics of economic reforms, and some thoughts on the incentives that make political actors behave in a particularly “populist” way.

Can political sensibilities match the needs of economic sensitivities? From his vantage position, one hopes that Acharya will pen another volume exploring whether economic reforms can ever capture popular imagination, or whether populism can usher in an era of sustainable reforms. Such an insight may prove to be much more long lasting in its impact, contributing to securing national well being, than the political dust raised by many specific policy debates.

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