Mega Trends in India – Economics and Politics

Mega Trends in India – Economics and Politics

Part – I

Harshit Sharma

Political Science (BHU)

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CH2. Coalitions and Consequences: Learnership and Leadership in India, 1948–2008

Coalitions in Kerala: Learnership and Leadership

The essay examines a missing aspect in the literature on coalition governments in India, focusing on their impact on economic development, social change, and government effectiveness.
A key missing aspect is the educational process through which Indian politicians learned the benefits and requirements of coalition governments, beginning in Kerala.
This learning process took nearly a generation and depended on the availability and talents of individual leaders.
Politicians became aware of the necessity to deliver goods to their constituents, raising questions about the effectiveness of coalitions.
The fragmentation of Indian politics, with local political parties emerging, complicates the creation of state-wide or national parties.
Kerala, despite having a small population, is known for its model of economic development and was the first to learncoalitions.
The state’s social structure reflected a microcosm of India, with diverse religious and caste groups, and a high literacy rate.
The Communist Party of India (CPI) effectively mobilized people despite being banned for years, unlike the Indian National Congress (INC), which lacked such local support.
Kerala’s political landscape was shaped by social upheaval and the high participation of the population in politics after independence.
The first universal-suffrage elections in Travancore in 1948 resulted in significant political activity but led to unstable governance, with governments frequently collapsing.
The lack of a political challenge to the Congress Party elsewhere in India made Kerala’s situation unique, with the Communist Party providing substantial competition.
Political parties in Kerala often lacked the ideological cohesion needed for stability, leading to numerous splits and unstable governments.
The political landscape changed in 1969 with C. Achutha Menon becoming Chief Minister, leading to a stable coalition government.
Menon’s leadership marked a shift, as politicians recognized the importance of compromise for stable governance.
By 1970, Kerala politicians understood that ideological purity and self-interest were counterproductive for coalition survival.
Achutha Menon’s reputation and experience contributed to a more stable coalition government, which lasted nearly seven years.
The 1970-77 coalition government faced challenges but resolved them effectively due to a perceived irreplaceable leadership in Menon.
Since 1970, Kerala has maintained a two-party system with alternating coalition governments led by either the Congress Party or Communist Party of India (Marxist).

The Consequences of Coalitions: Kerala

Kerala model is recognized for impressive social statistics, including high literacy, life expectancy, a favorable sex ratio, low infant mortality, and a declining birthrate.
A significant factor is Kerala’s political environment, characterized by public action, as described by Amartya Sen.
Public action empowers citizens to organize and exert pressure on the government; for instance, closures of Maternal and Child Health centres can lead to demonstrations organized by opposition parties.
Members of the Legislative Assembly (MLAs) have a vested interest in delivering services like healthcare, housing, and infrastructure to their constituents.
The fragile political dynamics give MLAs leverage in the capital, where loss of support can lead to government crises.
The 1970 government initiated significant reforms, including a land reform that secured tenure for landless laborers and the one lakh housing scheme aimed at providing homes for the needy.
While social and political outcomes of coalitions in Kerala have been positive, economic results are less favorable.
Kerala’s economy relies heavily on agricultural raw materials and remittances from its citizens working in other regions or abroad.
Despite high literacy, Kerala lags behind states like Karnataka, Tamil Nadu, and Gujarat in terms of economic development.
The computer industry flourished in Bangalore, while Kerala lost traditional industries, like cashew-nut processing, to states with lower wages and lax labor laws.
Coalition governments in Kerala struggle to maintain order and implement long-term policies amid a politically active population.
Police intervention in labor disputes can lead to political pressure on coalition governments to back down.
The Idukki dam project in the 1960s and 1970s exemplifies delays caused by labor disputes and political fragmentation.
Kerala’s coalitions face challenges in decisively enforcing labor laws, deterring investment as capital flows to states with stable majority governments.

Coalitions in India: Learnership and Leadership

At the national level, India has followed a similar pattern to Kerala regarding coalition politics, with politicians learning the necessity of coalitions and the consequences of their success or failure.
The 1967 general elections marked a shift, with Indira Gandhi leading the Congress Party to a narrow victory after Jawaharlal Nehru’s death.
Congress lost nearly half of its control over Indian states, decreasing its share in state legislatures from 60% in 1962 to 48% in 1967.
The period saw ‘aya ram aur gaya ram’, where legislators frequently changed parties, leading to unstable state governments.
Politicians needed to assert their party principles while discovering how to form effective coalitions, with examples in Kerala where the Congress supported a CPI-led government from outside before joining.
New legislators experienced both the benefits of office and the risks of losing power, learning that constant party-switching could lead to dissolution and new elections.
Between 1948 and 1970, Kerala’s political lessons influenced other Indian states from 1967 to 1977.
The first coalition government at the national level formed in 1977, led by the Janata Party, was a diverse coalition but lacked strong leadership.
Morarji Desai and his successor, Charan Singh, demonstrated inadequate leadership qualities for coalition stability.
The 1989–91 period highlighted the importance of trust within coalitions, illustrated by the betrayal involving V.P. Singh and Chandra Shekhar.
Following the political instability of the late 1980s and 1990s, the Bharatiya Janata Party (BJP) coalition led by A.B. Vajpayee (1999–2004) represented a culmination of the coalition-learning process.
Vajpayee’s government managed to maintain stability through a blend of experience, networking, and understanding the importance of being in office.
Characteristics of successful coalition leaders include urbanity, probity, a reputation for achievement, and a willingness to resign if necessary.
Manmohan Singh, Vajpayee’s successor, shared traits of effective coalition leaders despite differing backgrounds; he leveraged his experience and reputation to navigate coalition politics.
Singh’s rise as a surprise nominee by Sonia Gandhi underscored the significance of adaptability and leadership qualities in coalition government.
The overall argument emphasizes the need for politicians to learn the conventions of successful coalition government, with lessons first evident in Kerala and later at the national level.

The Consequences of Coalitions: India

The conclusion that coalition government in Kerala has favored social development over economic development may also apply to the broader Indian experience.
Between 1991 and 2001, many states, including Rajasthan and Uttar Pradesh, saw notable improvements in literacy rates, indicating positive social statistics.
While coalition politics do not guarantee direct improvements, they create an environment where politicians feel pressured to engage with constituents and address local needs.
The perception of coalitions as a hindrance to economic development stems from their fragility and indecisiveness compared to more decisive governments like China’s.
Despite the negative view, a fragile minority government initiated economic liberalization in 1991, and India has since experienced economic dynamism despite the prevalence of coalition governments.
The answer to whether coalitions hinder economic development may be that, in 21st century India, coalitions are a necessary structure due to the social segmentation by language, religion, region, and caste.
Increased literacy, mobility, and media penetration have empowered more people to politically mobilize, often leading to localized political movements.
The current United Progressive Alliance government in 2007 illustrates the coalition landscape with multiple supporting parties, highlighting the complexity of Indian coalition politics.
While a party might galvanize enough support for a majority, the fragmented nature of Indian society makes a single-party majority difficult to achieve at the national level.
The lessons learned from coalition governance suggest that coalitions could provide continuity of policy, which may positively influence social development.
Unlike Kerala’s uninspiring economic story, other regions in India, influenced by globalized capitalism, are more likely to drive economic change.
National governments will leverage regional diversity to implement economic reforms, which may occur gradually rather than through sweeping, decisive actions.
Although coalition governments might not emulate the decisiveness of China’s governance, they can facilitate sustained social and incremental economic change once effective leadership and learnership are established.

CH3. The Indian Economy: Current Performance and Short-Term Prospects

Introduction

The political economy of India’s economic growth is crucial for understanding its impact on living standards and poverty reduction.
Sustained economic growth globally has been a reliable method for improving overall living conditions.
In India, as a functioning democracy, economic policy can be influenced by political expediency, often leading to competitive populism.
This populism can create a disconnect between rising economic growth and lagging social indicators like literacy and infant mortality.
Analyzing the political economy of policy formulation is essential for understanding the potential welfare implications for the large population of India.
The chapter presents India’s growth experience within a broader political economy perspective.
It documents the main features of economic growth in India and discusses the increased resources available due to higher savings, investment, and lower fiscal deficits.
It examines the recent rise in external engagement of the Indian economy, highlighting globalization impacts.
A comparison is made between a rapidly growing sector (automobiles) and a laggard sector (agriculture) to illustrate sectoral performance differences.
The chapter addresses emerging constraints to rapid economic growth in India, exploring factors that may impede progress.
It evaluates prospects for alleviating these constraints, suggesting potential pathways for future economic improvement.
The chapter concludes with reflections on the implications of its findings for policy formulation and economic strategy in India.

The Record of Economic Growth in India

From the 15th to 18th century, India was one of the most prosperous regions with advanced commercial and industrial techniques.
Starting in 1700, India’s GDP per capita began to decline, resulting in over 400 years of low incomes and negative economic growth, despite a growing population.
By 1947, India’s per capita GDP was only 56.4% of the UK’s but had dropped to 10.3 times lower than the UK’s per capita GDP.
The ratio of UK per capita GDP to Indian GDP increased from 2.63 in 1757 to 10.29 in 1947, indicating a significant economic disparity.
The population ratio of India to Britain decreased from 14.03 in 1757 to 8.36 in 1947.
India’s colonial experience was not unique; many colonies experienced stagnation or negative growth, contrasting with European powers and settlement countries like the US that saw positive growth.
Despite a dismal performance, India’s GDP per capita in 1950 was higher than China’s, but now China’s GDP per capita is nearly three times that of India’s.
Post-independence growth has been uneven, with low rates until around 1980, after which growth rates improved significantly.
Per capita GDP growth rose from 1.2% per annum (1972–82) to 3.9% (1992–2002), indicating a positive trend.
Economic growth has become high and stable for over a quarter-century, with significant improvements in aggregate terms since the 1980s.
Sectoral growth rates show substantial growth, particularly in the services and manufacturing sectors since 2000–01.
Agricultural growth has fluctuated, and its share of GDP has decreased significantly.
Manufacturing growth was initially high post-reform but faced declines; however, it has since become robust.
The services sector has been the highest growth area, contributing significantly to GDP and remaining stable.
India’s population is large and young, with a median age of 24.9 years and 95.1% below the age of 65.
India’s economy is over US$1 trillion and has a middle class of approximately 300 million people.
The young labor force is eager to compete globally, evident from consistent double-digit export growth in recent years.
India’s growth is less reliant on global economic fluctuations compared to other Asian nations, with the service sectorcomprising over 31% of its exports, reducing vulnerability to global downturns.

Factors Accelerating Economic Growth in India

Productivity Growth

The current high rate of economic growth in India may accelerate further, as suggested by Kelkar (2004).
Contributing factors include a series of reforms, increased globalisation, and the deepening of product and financial markets.
Key indicators of these changes include market capitalisation, transaction technology, transparency, financial institutions’ balance sheets, and the economy’s openness.
A benign FDI policy framework has facilitated greater tie-ups in high technology areas for production aimed at both domestic and external markets.
Financial sector reforms initiated in 1993 are still incomplete.
The higher GDP growth rate since the 1980s is accompanied by a significant acceleration in total factor productivity growth.
Despite a drop in agricultural factor productivity growth post-reform (1993–04), productivity in the industry and services sectors has accelerated, doubling aggregate factor productivity growth compared to the previous period (1978–92).
Various explanations for rising productivity include Keynesian demand-led expansion in the 1980s, the Green Revolution, and both external and internal liberalisation.
Attitudinal changes in the governments of Indira and Rajiv Gandhi towards private investment and enterprise led to modest reforms, positively impacting manufacturing sector productivity and causing substantial spillover effects.
These changes collectively contributed to an increase in the growth rate of the economy.

Improvements in Labour Supply

Structural changes are contributing to higher economic growth in India, especially on the supply side.
In 2000, the proportion of the Indian population in the working age group (15–64 years) was 60.9%.
The UN’s Population Division projects this ratio will surpass Japan’s by 2012 and exceed 66% in 30 years.
India is expected to overtake China in the same age group during this period.
A quiet revolution in nutritional status is occurring, with declines in calorie and macro/micro nutrient deficiencies.
From 1991 to 2001, the literacy rate rose from 51.54% to 65.38% overall; male literacy increased from 63.3% to 75.85%, while female literacy grew from 38.79% to 54.16%.
India’s labor force is becoming younger, better nourished, and more skilled.
Rapid structural transformation indicates substantial quality improvements in the labor force.
These changes are expected to result in significant increases in labor productivity and an upward shift in the long-run growth rate of the Indian economy.

Higher Savings for Enhanced Economic Growth

A steady rise in savings and investment rates has been central to India’s growth success story.
Savings increased from 23.4% of GDP in 2000–01 to 32.4% in 2005–06, estimated to reach 35.6% in 2007–08.
Investment rose from 24% of GDP in 2000–01 to 33.8% in 2005–06, with an estimate of 36.3% in 2007–08.
Public sector savings turned positive in 2003–04, reflecting improved tax and budgetary performance and the implementation of the Fiscal Reforms and Budget Management Act (FRBMA) in 2002–03.
With 33.8% investment in 2005–06, India achieved 9% GDP growth, compared to China’s 9% growth with over 40% investment.
This indicates that the productivity of capital is higher in India than in China.
To further accelerate growth and reduce poverty, raising saving and investment rates through lower fiscal deficits is crucial.
Since the enactment of the FRBMA, India’s fiscal deficit situation has improved, although further reductions appear challenging.
Public debt is nearly 75% of GDP, while external debt is low, primarily in long-term debt, minimizing pressures on the exchange rate.
As of January 18, 2008, India’s foreign exchange reserves stood at US$284.898 billion, with a significant portion resulting from sterilization operations to maintain a competitive exchange rate for exporters.

India’s External Sector Performance

A notable aspect of India’s recent economic growth is its increasing integration with the global economy.
International trade reforms have advanced rapidly in India.
India missed the first phase of post-War trade liberalization but has actively participated in the current phase.
Indian manufacturing tariffs are now low by developing country standards, at 12.5% or below, with anti-dumpingmeasures slowing down.
The country is less dependent on tariffs for government revenue, though agricultural tariff reduction has not matched the pace of industrial tariff liberalization.
As a result, India’s exports have surged, focusing on high value-added items such as engineering goods.
Significant earnings from invisibles (especially software) and transfers allow India to manage its current account deficits, despite a relatively high trade account deficit.
The Foreign Direct Investment (FDI) regime has been significantly liberalized.
According to the World Investment Report 2006, India is among the top 15 recipients of FDI, with improved intermediate-term prospects.
In 2006, India received FDI worth more than $17 billion, an amount equivalent to the combined inflows of the preceding three years.

Illustrations of High Growth and Stagnation in the Indian Economy

The broadening of the growth base in the Indian economy from services to include industry has led to rapid growth in incomes.
The National Council of Applied Economics Research (NCAER) indicates that real incomes are expanding rapidly based on household consumer expenditure surveys.
In 2001–02, the middle class accounted for 5.7% of Indian households, owning 60% of air-conditioners and 25% of TVs, refrigerators, and motorcycles.
By 2009–10, the middle class is projected to account for 13% of households, with the car market expected to grow at 20% per year and motorcycles at 16% per year.
The projected consumption boom is not limited to urban areas; rural demand is also increasing, especially for low-end products.
The emergence of the middle class signals maturity and serves as a stabilizing force in the Indian economy.
The 61st Round of NSS (2005) shows significant increases in aggregate rural household expenditure compared to a decade ago.
Motorcycles are owned by about 8% of rural households, up from 2% a decade ago; TV ownership has quadrupled to over 25%.
Refrigerator ownership stands at 4%, while ceiling fans are present in 38% of rural households.
The rural sector has significantly boosted the growth of mobile telephony in India, improving quality of life.
The automobile industry has experienced rapid growth in production and exports, while agriculture remains stagnant.
In contrast to pre-reform periods, agriculture’s performance has declined in the post-reform era (1990–2005) in terms of area, production, and yield.
The Green Revolution era marked significant progress for Indian agriculture, but productivity stagnation has been notable in recent years.
Yields for major foodgrains grew faster in the 1980s than in the post-reform period.
One principal reason for stagnation in agriculture is the decline in agricultural investment.
While overall investment has risen since the 1970s, agricultural investment as a share of total investment has fallen since the 1980s.
There was a slight revival from 1999–00 to 2002–03, but agricultural investment as a proportion of GDP has declined since then, contrasting with the overall investment surge.
Agricultural subsidies have sharply increased despite falling investment levels.

Emerging Constraints on Rapid Economic Growth in India

Increasing Regional Inequality

Despite impressive economic growth, India’s performance on broader human development indicators is lacking; HDI rank improved only from 127th (2003) to 126th (2005).
Shortcomings in human development are constraints on rapid economic growth in India, categorized into four areas: increasing spatial inequality, stagnating employment, high fiscal deficit, and inadequate infrastructure growth.
The narrative of aggregate growth masks substantial spatial variations, with real state domestic product per capita increasingly diverging.
The coefficient of variation for real state domestic products rose from 0.45 (1993–94) to 0.56 (2004–05), indicating a 24.4% increase in inequality.
Rising poverty is noted, particularly in rural areas, as economic reforms have been accompanied by an upward trend in the poverty headcount ratio’s coefficient of variation across states.
There is a lack of convergence in rural poverty across Indian states, showing increased personal inequality over time.
Analysis of five states (Uttar Pradesh, Bihar, Madhya Pradesh, Andhra Pradesh, Maharashtra) reveals that their combined share of the national expenditure-poor population increased from 55.47% (1987–88) to 59.99% (2004) despite stable shares in the rural population.
These states account for nearly half of the Members of Parliament in India, emphasizing their political significance.
The concentration of deprivation hinders the poor from taking advantage of economic reform opportunities, reducing their stake in the reforms’ success.
Political parties advocating for pro-reform policies may struggle to win elections in a democratic context, which can impede rapid economic growth.
Changes in poverty measurement methods in 1999–00 complicate ongoing comparisons; however, rural poverty reduction was higher in the 1980s than in the 1990s.
Official estimates show rural poverty declining from 37.27% to 27.09% between 1993–94 and 1999–00, but adjusted data suggests much lower reductions.
Sen and Himanshu (2004) question previous estimates of poverty reduction, indicating the headcount ratio may have declined by only 3 percentage points with no absolute decrease in the number of poor from 1993–99.
Preliminary estimates show rural headcount ratio at 28.7% in 2004–05, a decline of about 9 percentage points over eleven years, primarily occurring after 1999–00.
Urban sector headcount fell by 6.7 percentage points, from 32.6% to 25.9% between 1993–94 and 2004–05, partly due to rural-urban migration.

Rising Unemployment

An emerging constraint on rapid economic growth in India is the inability of reforms to generate sufficient jobs, especially with the rising participation rate from a growing youth population.
India faces longstanding issues of unemployment and underemployment; pre-reform economic growth did boost labor demand, but employment growth has remained sluggish despite high output growth.
The National Rural Employment Guarantee Act (NREGA) offers a maximum of 100 days of employment per household in the poorest rural districts, which is seen as a band-aid solution rather than a sustainable demand for labor.
The Comptroller and Auditor General (CAG) 2007 reported only mediocre progress in the NREG program, highlighting its limitations.
Underemployment remains a significant issue, with estimates from the 50th Round of the NSS indicating that while open unemployment was only 2% in 1993–94, combined underemployment and unemployment stood at 10%.
Despite a reduction in underemployment in the decade ending 1993–94, challenges persist in creating adequate employment opportunities.
Higher unemployment creates a challenging political climate, making it difficult to pursue policies such as increased liberalization of international trade, as these may lead to short-term job losses or increased uncertainty about job security.

High Fiscal Deficit

India’s fiscal deficit challenges are significant, with the combined fiscal deficit of central and state governments hovering near 10% of GDP for some time.
Recent improvements show a decrease in the fiscal deficit: 9.6% in 2002–03, 8.5% in 2003–04, 8.4% in 2004–05, and an estimated 7.5% in 2005–06.
Despite these improvements, public debt in India continues to rise, shifting from a higher share of external debt to a greater emphasis on internal debt.
The persistently high fiscal deficit negatively impacts investment resources by reducing public saving, leading to continuous dissaving in the public sector since 1998–99.
The savings–investment gap contributes to external balance challenges, complicating economic stability.
An ongoing focus on controlling the fiscal deficit limits the government’s ability to implement countercyclical fiscal policies effectively.
Budgetary deficits alone do not fully capture the fiscal burden, as contingent liabilities of the government are substantial, leading to past bailouts of insolvent banks and financial institutions at great expense.

Problems of Infrastructure

India struggles to provide high quality, reliable, and affordable infrastructural services to households and businesses, with no immediate improvements expected.
The private sector’s potential to address India’s infrastructure needs remains largely untapped, but the public sectorwill still play a crucial role, especially in less developed regions.
Infrastructure requirements are estimated at US$215 billion from 2001 to 2006.
Inadequate infrastructure hampers rapid economic growth, with studies showing that states with poor infrastructure have poor poverty reduction records.
Constraints to economic growth include high levels of fiscal deficit and public debt, which limit investment resources, while poor infrastructure contributes to increasing poverty concentration.
The poorest regions often have poor governance and economic reform records, along with high population densities, leading to limited political support for reforms that may not yield short-term benefits.
Unemployment has increased from 1993–94 to 2004, reflecting a lack of public support for rapid liberalization and reform efforts.

Prospects for Alleviating the Constraints on Rapid Economic Growth

Achieving rapid economic liberalization in India, similar to China’s, is challenging due to low tolerance for increasing inequality and slow benefits for the poor.
Addressing the constraints on building consensus for rapid liberalization is crucial for sustaining economic growth.
While there is potential for reorienting subsidies, significant reductions in their total magnitude are unlikely, as inflexible expenditures (interest payments, defense, and subsidies) consume nearly 100% of tax revenues.
India’s expenditure/GDP ratio is comparable to other developing countries but lower than that of OECD countries, highlighting the need for tax reform to raise the stagnant tax/GDP ratio.
Proposed tax reforms include expanding the tax base, removing exemptions, taxing services and agricultural income, consolidating indirect taxes into a value-added tax, and improving tax administration.
Addressing contingent liabilities, such as non-performing assets of banks, is essential alongside reducing the fiscal deficit.
Increasing the employment elasticity of income growth is another significant challenge, requiring substantial investment in agricultural infrastructure.
The services sector has shown impressive growth but has limited capacity for job absorption; hence, India needs to leverage its comparative advantage in low value-added manufacturing.
Removing reservations for small-scale industries and reducing tariffs, along with making labour market regulationsmore flexible, is necessary for competitiveness.
India is slowly introducing competitive markets in infrastructure with some progress in telecom, roads, ports, electricity, and aviation, though challenges remain.
The telecom sector is experiencing rapid growth, with over 50 million mobile phones and plans to improve rural internet connectivity.
There are ongoing highway projects, such as the golden quadrilateral, to connect major cities with six-lane expressways.
Improvements in port operations have been noted, with a significant reduction in turnaround time and increased cargo handling capacity.
Airport privatization is being revisited, with prospects for alleviating constraints on economic growth appearing positive, but continued economic reform is vital for stable growth.