Sunday, September 25, 2011

Indian politics and economy

India has been touted as the new counter weight to China in Asia. India has its own advantages:  large arable land, a sizable population, a growing middle class, and its democracy. Till now, the path of growth that India embarked in 1990s has been well-documented and sometimes over-marketed. We have indeed made enormous progress since early 90s. But what is not discussed is the actual break through made during 1998-2004 period, which saw significant deregulation of several sectors, improvements in infrastructure (golden quadrangle project) and enhancement of corporate governance standards that increased confidence in India as a destination for foreign investments. BJP led coalition took  steps to liberalize the economy in 1998-2004 in infrastructure, consumer goods, and even divestiture of several government linked subsidiaries that were loss-making. These changes might seem not that imaginative or ground breaking policy frameworks, but surprisingly, these obvious policies were ignored in the first 50 years of rule of the government.

One of the disadvantages of an immature democracy that lacks strong economic development and an educated polulace was an administrative system that had become highly bureaucratic, inefficient, and stagnant. The politicians used rhetoric that would appeal to their constituencies and pursued strategies that would address some of the short term problems of people (such as distribution of feed, alcohol, and even household equipment to poor voters right before the election). The politicians in India have repeatedly exploited the lack of education and knowledge of the rural and poor voters by over-promising and under-delivering, using rhetoric based on caste and religion, and implementing short-term policies to win an election rather than actually driving real changes to the economy and community.
The result of the aforementioned actions is a dysfunctional democratic process in which decisions are not taken with the interest of  people in mind, but with benefits that would emerge from the decisions to the ruling clan. The election process has also evolved into a system where incumbents are highly advantaged to win an election than a new candidate from a non-mainstream political party. In India, to win an election requires monetary and political resources. The emergence of new leaders and radical views into policy making mechanism become more difficult due to this already rigged system of democratic elections.

The result of such an ineffective democratic system is a high level of corruption and the inclination to maintain status-co. . The process of growth and liberalization has actually slowed down since 2004. Congress has always been skeptical of privatization and whenever it has come to rule in Central government, the process of liberalization has taken multiple steps backward.The economy in India is suffering due to the politicians and the self-interested policies pursued by them. Inflation is the latest threat to the economy.  It is a devil manufactured by the Congress party, which prefers to maintain its populist programs, without much care to general health of the economy. Most of its programs are intended to help the poor, who happen to be their most loyal vote base, from subsidized food, unemployment wages, subsidies to farmers etc. These policies put a huge pressure on the government budget and increase fiscal deficit. In addition, it adds to the inflationary pressure. The reserve bank of India has  increased interest rate 15 times in the last 18 months to contain inflation. But with the central government taking such highly populist programs, it will be very difficult to contain inflation by using just monetary policy.

The private sector, which is driving the economy of the nation and is helping the poor people by providing them employment opportunities, is suffering the most from the short-term policies of the central government. Private companies not only deal with wage inflation but also with high cost of capital due to rate hikes and inflation. Their profitability gets squeezed and some might even get out of business, thus damaging already fragile economy further. Therefore, what we actually need is a more calibrated fiscal policy (by central government) and a more liberal monetary policy (by the central bank). This fundamental change will enable the principles of capitalism to work properly in our economy.

I do not believe in a pure capitalist model, but the current model practiced by the congress party, which has the objective of getting re-elected in its mind rather than the general growth and development of the nation itself, does not give us enough comfort to discard the model of capitalism either.

We need change and we need it quickly. We need a government that understands economics and makes sensible decisions for long term development of India. We need politicians who are less selfish and deliver at least some tanglible results unlike the circus that has given us CWG, Telecom scandal, etc.

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