Dump populism, let India grow

As 2005 draws to a close, it's tempting to take stock of the broad themes, which seem to have emerged in economic policies and developments over the past year.

I can't help feeling that the dominant theme has been one of resurgent populism. What do I mean by populism? I am referring to economic and social policies which are popular (especially to politicians) in the short run but which are fundamentally ill-conceived and inimical to the long-term economic and social progress of the country.

Of course, all democratic governments indulge in populism; it is an inevitable part of competitive democratic politics. But when populism becomes the leitmotif of a government's policies, watch out for its massive economic and social costs in the coming years.

The arch exponent of populism was Indira Gandhi (her 1966-1977 government), with her "garibi hatao" slogan, kitchen socialism and penchant for legislating government control over economic activities and agents.

Just recall some of her populist initiatives, which may have won her votes then but lingered on to undermine India's economic performance for decades. There was: the nationalisations of banks (1969) and insurance (1970), whose legacies still dominate and hobble our financial sector; the introduction of small-scale industry reservations (1967), which was to throttle our comparative advantage for exporting labour-intensive manufactures for over three decades; the Monopolies and Restrictive Trade Practices Act (1969), which curbed expansion of large firms; the draconian Foreign Exchange Regulation Act (FERA, 1973), which deified the false god of foreign exchange scarcity, spawned a stifling (and corrupt) edifice of forex and import controls and justified a myriad sins of economic policy; the hiking of direct tax rates to stratospheric levels, which gave a huge fillip to evasion and the black economy; the severe tightening of the Industrial Disputes Act (1976), which made it virtually impossible to retrench industrial workers and thus choked the incentives for fresh employment to this day.

All these actions were, of course, justified (perhaps even motivated) by noble sentiments such as expanding banking services to rural areas, curbing industrial monopolies, nurturing small industries, husbanding scarce foreign exchange, deploying taxation for equitable redistribution, and protecting workers' rights.

But their actual consequences for economic development were quite devastating. The period 1967-80 (yes, the Janata government was also populist) witnessed painfully slow growth of per capita GDP at barely 1.5 per cent and productivity growth of less than one per cent a year, with the national poverty ratio staying stubbornly above 50 per cent. Poverty was anything but "hataoed"!

Indeed, the partial reforms of Rajiv Gandhi and the more far-reaching reforms of the 1990s can be largely construed as efforts to roll back the misguided economic initiatives of Indira Gandhi.

Indira Gandhi had no monopoly over Indian economic populism. The V P Singh government gave the country huge write-offs of rural credits and the massive Mandalite expansion of reservations in public sector jobs and educational facilities, thereby seriously weakening meritocratic principles in the functioning of education and administration.

The United Front government's decisions on the Fifth Pay Commission report in 1997 bloated government salary and pension bills and undermined severely the states' capacities for providing effective public services in social and economic arenas.

In the 21 years after Indira Gandhi, there have been two periods when populism, while not absent, had taken a backseat in the framing of economic policies: the five years of the Rao-Singh economic reforms during 1991-96 and the period of the National Democratic Alliance governments, 1998-99 and 1999-2004.

Judging by the events of the past year or so, the Gandhi (Sonia)-Singh led United Progressive Alliance coalition seems to have brought populism back to the driver's seat of economic policy-making. Consider the following examples.

The new Rural Employment Guarantee Act could prove horribly expensive and provide a gravy train of political patronage with little meaningful impact on rural employment and poverty.

The Delhi Congress government's retreats on electricity and water reform in the face of well-heeled, populist pressure reduces hopes for urban infrastructure reform, as does the recent Union cabinet nod for dilution of the 2003 Electricity Act.

The demonstrated reluctance to pass on international oil price increases to domestic users and the preference for burdening our oil companies with large subsidy bills does not augur well for sensible energy policy.

The recent constitutional amendment to enable reservations in private, unaided educational institutions is fraught with plenty of long-term, efficiency-reducing consequences. As if such populist measures were not enough, there is an ill-conceived bill for social insurance of informal sector workers lurking in the wings.

This populist resurgence has occurred against the background of stalled reforms in agriculture, labour laws, electric power, banking, privatisation, pensions and employee provident funds.

It raises the intriguing question: if reforms are stalled and populist policies are riding high, how come the economy is performing so well, turning in the third successive year of 7 per cent (or higher) growth, with inflation moderate and external finances reasonably robust? There could be several answers.

First, the growth may not be quite as strong as government data indicate. For some time I have been voicing the heretical suspicion that the sustained strong growth of the services sector (accounting for more than half of GDP and 70 per cent of all economic growth after 1997) at 8 per cent plus since 1997 may reflect statistical infirmities more than reality. Such doubts are not helped by the CSO's reluctance to publish an updated "Sources and Methods" for many years.

Second, the last couple of years have clearly seen an upswing in the industrial cycle, buoyed by an unexpectedly robust international economic environment and a more open Indian economy. Neither the industrial upswing nor the global economic buoyancy is guaranteed to last.

Third, and perhaps most important, the economic costs of populism typically balloon over time. Which is why populist policies are difficult to resist in the short-run cycle of competitive (and myopic) democratic politics. But, as history shows, their long-run consequences can be seriously negative.

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.

Such leadership was provided by Rao-Singh in 1991-96 and Vajpayee-Advani-Sinha in 1998-2004. As the new year dawns, we can only hope that Sonia Gandhi and Manmohan Singh can rise to the challenge of keeping populism at bay in 2006. The record of 2005 is not promising.