Per Capita GDP growth and Vote Share

Introduction

    In 2004 the BJP lost the general election, despite their belief that the Indian economy's performance was outstanding and the voters would reward it for this performance.   Many analysts and most opposition parties accepted the contention that the economy was performing very well, but the fruits of this growth had not reached the “Aam Admi / Aurat” who voted against the BJP.  As a contrarian I argued that the economic performance was in fact worse than during the previous regime and the voters had in fact punished the government for poor economic  outcomes (Virmani(2004))[i].

     Last week the Prime Minister gave a press conference to assert that the economic performance of his government had been outstanding and the Congress party was therefore likely to win the election again. Unfortunately he is making a mistake very similar to the one made by the BJP.  The actual performance that matters to the “Aam Admi / Aurat” voter, is much worse than the performance benchmark (as per the model developed by the author). The outcome is therefore likely to be equally disappointing for the Congress party.

The Model

    Under normal circumstances, elections are held every five years. At the end of the five years, the simplest way for the “Aam Admi / Aurat” to judge a Government’s performance is to see how (s)he and his(her) family, friends, neighbors and acquaintances have done during those five years and compare this with what happened during the previous five years (earlier government).  If the performance is better/worse than in the benchmark years there would be an increased/reduced likelihood (probability) of him(her) voting for the party in power.

   Reduced to the barest essentials, there are three economic indicators that in our view matter to the independent/swing/marginal voter.  These are Economic Growth, Public Goods and Services (popularly referred to as “Bijli, Pani, Sadak”) and transfers/subsidies net of taxes (“populist giveaways”).  The growth of per capita income determines not only the change in living standards of the average voter but also the employment opportunities (job or self-employment) created and available to the average person.  Public goods include a range of local & municipal services such as roads, drinking water, sewage, sanitation, drainage, public health and basic education. An improvement (worsening) in the quality and/or volume of such services would tend to have a positive (negative) impact on the voter and thus tend to increase (reduce) the ruling party’s vote share.  A change in net transfers (subsidy - taxes) would be similarly associated with a change in vote shares. It must be kept in mind that it is not the paper laws, verbal announcements or budgetary allocations (expenditures or subsidies) that matter to the Aam Aurat, but the actual delivery of services at the ground levels and the delivery experience. The quality of governance and the degree of corruption & harassment are a very important element of the Aam Aurat’s judgment about improvement or deterioration in delivery . 

   In this note we focus on the growth of per capita GDP as an indicator of the improvement or worsening of economic conditions for the average of marginal voter: Thus, if the rate of growth of per capita income has increased (decreased) the vote share of the ruling party is likely to increase (decline).

Past Elections

       Given this hypothesis, let us look briefly at the past two elections. The NDA government was in power from 1999-2000 to 2004-5 when the general elections were held. During this tenure the Per Capita GDP at factor cost grew at an average of 4.1% per year compared to an average of 4.5% per year in the previous five years. Thus average per capita growth during the NDA government's tenure was 0.4 per cent points per year (9%) lower than during the previous five years making a reduction in BJP-NDAs vote share likely.  It appears that the “India Shinning” campaign may have jarred with the reality as seen by the more aware/better informed urban voters and thus exaggerated the relatively small decline in per capita growth. Another potential factor may have been that new highway programs and Gram Sadak Yojna (very important "public goods") had not yet produced results that the Aam Admi could feel in the small towns and villages of India. The result was a reduction in the BJP’s vote share by 6.7 per cent points from 23.8% to 22.2%

      The Cong party consequently came into power in 2004-5 and ran the Government as part of the UPA till 2008-9.  During this period the growth of per capita GDP accelerated by an incredible 2.7 per cent points (69%) to 6.8 per cent per year.  As predicted by our model this 69% acceleration in the rate of growth of per capita income, resulted in an increase in the vote share of the Congress party, leading to a sweeping victory in the 2009 general election. This growth acceleration had such a large impact on the "Aam Aadmi/ Aurat" that the effect of other infrastructure & social programs was completely overshadowed.  The vote share increased by only 7.9% to 28.6% (from 26.5% in 2004).
       As is apparent from the varying results of different pols, the translation of votes shares into seat shares is a very difficult exercise. It depends on the distribution of victory margins, the number of serious parties (two or more) in the States as well as on alliances.  Consequently in 2009, the increase in the proportion of seats won by the Congress was much higher (49%) than the increase in the vote share..   

2014 General Election

   What does the model say about the forthcoming general election?  During the tenure of the current government (UPA2) from 2009-10 to 2013-14, per capita GDP growth is likely to average about 5.4 per cent per annum.  This is a decline of 1.4 per cent points or 21% relative to the growth rate during the previous five years. Thus (ipso facto) the fall in Cong vote share in the 2014 general election is likely to be greater than that of the BJP in the 2004-5 election but less than the gains of the Cong in the 2004 election. This suggests a decline in vote share between 6.5% and 7.5%.
   Two questions have been raised with respect to this model's predictions for the next election. One is whether the fact that part of the decline in growth is due to global factors matter?  In my view, what matters to the "Aam Admi/Aurat" is what they feel and see on the ground, not the data and analysis that financially sophisticated people spend so much time reading and discussing. The Second question is how important is economic performance during the most recent period, say the last 6 to 18 months, to the voters judgement?  We know that in a sophisticated economy and highly educated polity like the USA, the recent period is overwhelmingly important.  It is therefore likely that economic performance in the last few years (2-3) has a greater weight in the decisions of  highly educated, well informed, urban Indian voter.  However, what happens during the past 4-5 years is still much more relevant to the "Aam Aadmi."

Conclusion

     The slowdown in per capita income growth during 2009-10 to 2013-14, relative to the average per capita growth during 2004-5 to 2008-9, will have a substantial negative effect on the Congress party’s vote share in the general election.  In addition, the issue of Central government corruption and governance will also affect voter behavior as it is directly related to the quality and volume of public goods and services supplied by the government, as well as to the effectiveness & efficiency of welfare transfers.  Both these will have a further adverse effect on Congress party’s vote share, thus offsetting any positive effect of programs like NAREGA.  The "rights laws" and increased petroleum, fertilizer and electricity subsidies will have little or no effect on vote shares in the general election.

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A version of this article appeared on the editorial page of The Indian Express, on January 16, 2014, under the Banner, "The GDP Poll."   https://www.blogger.com/blogger.g?blogID=767588630765354778#editor/target=post;postID=7024682515623021753 

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[i] Arvind Virmani, “Economic Growth, Governance And Voting Behaviour: An Application to Indian Elections,” Working Paper No. 138, ICRIER, July 2004. http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233 .

New Paradigm: Transform Governance

Governance Failure

 Though poverty has declined over the past decades, it has declined less in the poorer states, because the latter have grown more slowly than the country as a whole, with the result that inter-state inequality has increased.  A number of eminent economists have asked us the question, ‘What is the role of the State in dealing with this issue?’ under the proposed paradigm/approach.  Our reading of the ground reality is that most of these States are characterized by pervasive government failure.  Consequently, ‘the State is part of the problem and may not be part of the solution.’ 

            The senior most officials of one such State govt. admitted in a meeting with  peers from Central and State governments that they were not competent to procure excess production or deliver food to the starving.  Hearing this from a member of the elite service, an inheritor of the ‘steel frame of India,’ was a shock.  Similarly, the top political leadership of one State admitted the existing State machinery could not spend money productively and that it would be very happy if development activities could be carried out by anyone else, including the provider of the funds.

The only solution to this incredible failure of governance is to create alternative non-State institutions within such States to build physical & social infrastructure and carry out development tasks, perhaps including some of the basic functions of governance.  There is an even more urgent need than elsewhere to get the stifling hand of government out of the peoples’ business, by downsizing govt and liberalising State laws, rules and procedures, and focussing whatever positive energy the government is able to muster on the ‘basics of governance.’  The mammoth State of UP will perhaps also have be broken up into (about four) smaller States so that the span of state govt. control is more suited to the provision of basic public services and rural development.

The State and its functionaries have accumulated excessive power to the point that it has corrupted them not just financially but in spirit.  Paradoxically the system’s power to do useful work has been undermined, while its ability to do harm has multiplied. Countervailing power must be created to check the power to misuse and to strengthen the ability of the system to do good. Power must be returned to the people from whom it has been usurped and the State and its functionaries made accountable to the people. This will only happen if the State sheds all activities that the people and its institutions, both economic and social, can do, and the State becomes a facilitator instead of a controller.  Only then will the State focus on and accomplish what it alone is able to but has neglected to do.

INDIA VISION 2020

    Over the next decade (or at most two), the people must re-establish their democratic power by forcing the Central and State Governments to undertake the following reforms:

• ·         Review Laws, Rules, Regulations and Procedures to remove distortions and harmful incentives (e.g. red tape, corruption).

• Remove distortions that provide a disincentive to hire labour in the organised sector and encourage capital intensive, non-labour using techniques of production and supply.

• ·         Promote economic freedom and competition in the supply of all goods and services by removing controls on private/non-governmental economic activity and introducing modern professional regulatory mechanisms where needed.

• Regulatory systems are needed for ‘natural monopolies,’ fiduciary financial institutions, education (school and college) and health (food, drugs, surgery).

• ·         Privatize Public sector units producing ‘private’ goods & services.  Corporatise,  unbundle and privatize all departmental public enterprises (except those producing nuclear, aero-space or defense systems).

• ·         Privatize Public Sector Banks and Financial Institutions and move from government oligopoly to genuine competition.

• ·         De-centralize the supply of ‘Public goods and services’ to the lowest possible level of government and empower each level with the appropriate tax and expenditure power based on the principle of subsdiarity.

• Nagarpalikas and Panchayti Raj institutions must have the power to tax local land and property (within specified bands) and to control the supply of local public services.

• ·         Introduce a Right to Information act that gives the unfettered right to people/poor (& NGOs representing them) to all information relating to the expenditures made in their name and ostensibly for their benefit.  Empower user groups to ensure accountability of expenditures and provision of service to these users.

• ·         Government must ensure all its citizens (poor, rural, urban slums) the following basic entitlements:

• Drinking water of acceptable quality for all by 2010. Pollution of drinking water sources should be eliminated and drinking water quality reach global standards by 2020.
• Water harvesting, watershed development, tanks, wells for conserving water for personal, agricultural or other uses in all rural areas.
• Modern sewerage, sanitation waste collection and disposal facilities in all urban and semi urban agglomerations and appropriate systems for all villages. Emerging economy standards by 2010 and global standards by 2020.
• Epidemic and infectious disease control of global quality
• Permanent Road connectivity to all villages.
• Free and compulsory Primary education for all by 2010, followed by universalisation of secondary education by 2020.

• Though government has the responsibility to provide the funds needed for provision of these entitlements it need not produce everything itself.  Wherever more efficient non-governmental delivery mechanisms are available they should be used.

• ·          Reform the Police system by setting up operationally autonomous Police Commission in each State.  A Public oversight committee, with representatives of government and prominent citizens, would also be set up to ensure that the police do not misuse their authority and obey the law that they are charged to uphold.  The monitoring/oversight committee should have the authority to ensure that any policeman that misuses his position or violates the law is given exemplary punishment.

• ·         Set up a National Legal commission to provide similar oversight over the legal system and the neutrality and probity of judges at different levels.

• ·         Introduce a law to debar those against whom criminal charges have been framed in a court of law from holding or standing for election to a public office, till such time as the person has been acquitted.  Set up a special tribunal for expeditiously trying all such cases in which the person wishes to stand for public office or is holding public office at the time of notification of the new law.

• ·         Ensure access of the rural areas to information on crops, non-agriculture and related activities through telecom connectivity (internet, internet telephone) at competitive cost.  This requires immediate access of the private sector to monopoly networks like the telegraph system, elimination of explicit or hidden taxes (e.g. revenue share) on rural telecom provision, and modernisation of agricultural R&D and extension systems (autonomy, management, accountability).

• ·    Replace the myriads of anti-poverty and related programs for the poor by a smart card system that entitles the poor to a consolidated income supplement based on all relevant family parameters (income, health, age, gender) and identification & authentication systems.

"Conclusions"  from the paper, "A New Development Paradigm: Employment, Entitlement and Empowerment,"  Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. [  NewParadigm4nf ]

Role Of Government In New Paradigm

Introduction

The role of government must be redefined to abandon the many functions accumulated over decades where the government adds no value (even theoretically under ideal conditions) and focus on the basic functions of governance that only the government can perform, but have been neglected.  Right sizing of government requires both downsizing and re-focussing of government attention on essentials.

Down Sizing

 Downsizing of the government requires privatising of production, shutting down of control department and ministries and eliminating producer and middle class subsidies.  All these add to the power of government and thus undermine the power of the public and accountability of the elected representatives to the people.  This is particularly so when the power to harm is so much more than the power to do good. Use of such production units and producer & middle class subsidies for personal vote yielding populist measures is one of the reasons for fiscal bankruptcy. 

Privatise production

            The government must get out of the production of (what are technically defined as) “private” goods and services, i.e. those that can be sold to and consumed by individuals on an exclusive basis.  These are not “Public goods” in the sense that consumption by one individual does not diminish the consumption by another (non-rivalry) or are non-excludable, or they are “Quasi-Public” in that they meet the criteria approximately and have some element of externality.  For instance even though urban piped water & education are ‘private” good/service, I would define ‘clean drinking water’ as a “Quasi-public” good as consumption of dirty water can lead to public health epidemics.  Similarly literacy & primary education have externalities in that the entire society (including the educated) benefits from the expansion of the pool of literates. Further, in rural areas, even piped water and primary education may not be private good/service.

There are several reasons for this.  Firstly they can just as well be produced and sold by non-government (commercial, co-operative or non-profit) organisations, so there is no positive reason for government to produce them.  Their production has been usurped by a ‘Leviathan’ government in its unquenchable thirst for power.

            Secondly, the incentive structures in government are not conducive to efficient commercial operation.  The rigid financial rules (e.g. sale by auction) do not allow even the honest and sincere public servants to run producing enterprises in an efficient manner.[1]  The layers of government hierarchy (PSU/DPE, concerned ministry, cabinet & parliament) as well as the CVC and CAG system is not conducive to making management decisions in a complex economy or to risk taking in an inherently uncertain world.  Thirdly, the rate of return on the assets employed in these units is less than the interest rate that could be earned on the sale value of these assets and much less than the rate of return of similar units in the private sector. Note however, that the “resource rent” on natural resources such as oil that have scarcity value can & should be mopped up by government through a royalty or other resource rent tax, whether the producer/user is a government or private company.  The proper comparison for oil producer/user companies is therefore net of oil resource rents.

            Privatisation of competitive and contestable goods (including units producing civil & dual use items for defence forces) can be done with all deliberate speed, while that of natural monopoly (such as power distribution) must be accompanied by setting up of appropriate regulatory systems.  Regulators already exist for the financial system (RBI & SEBI), so privatisation of banks & other financial institutions (e.g. UTI) can be initiated without delay.[2]

Eliminate Departments

            Many areas have been de-controlled and de-licensed; yet the staff, divisions, departments and ministries set up to implement such controls and licenses continue.  These must be eliminated to remove the threat of ad hoc interference and red tape and root out the control mentality that has wormed its way deep into the government.  Similarly, there is no need for ministries and quasi-public institutions dealing with ‘private’ goods & services such as steel, sugar, fertiliser.

 Phase-out Non-Poor Subsidies

Subsidies must be targeted on the poor, which for this purpose should include the less well of half (50%) of the population.  Impact studies show that the poor benefit less then or at best proportionately to the middle-upper income groups.  Better targeting requires a systematic effort to eliminate both producer and middle class subsidies and search for channels that can be used to focus subsidies on the poor.

The origins of many subsidies have long been forgotten and they continue because large subsidies always build strong vested interests.  The fertiliser (Urea) subsidy is a good example.  Its original justification was to induce small and marginal farmers to adopt new HYV technologies, as higher fertiliser usage was an inalienable part of the HYV package.  Over the years it became a subsidy for large surplus farmers, particularly those producing food grains for the market.  More recently it has become a subsidy for fertiliser producers as the gap between farm price and world prices has disappeared. This subsidy can be eliminated by complete decontrol of fertiliser with the subsidy phased out over 3 years (say).  This will allow the fiscal deficit to be reduced and larger funds to become available for irrigation & rural infrastructure that helps all rural poor including small & marginal farmers. 

Refocus Government

Broadly speaking the government has three broad functions that it must perform for the economy and society.[3]  This is the provision of “Public” goods and services, the correction of “externalities” and “social welfare.”   The former has been most neglected over the past three decades.

Public Goods

‘Public good,’ is an economic concept with a precise technical definition, one element of which is “non-excludability” and another is “non-rivalry.”  The classic ‘public good’ (actually service) is ‘defence’ where exclusion is literally impossible and once provided everybody shares in it.  Other services that meet the definition are general administration, the judicial system, police, roads & prevention/control of communicable/epidemic diseases.   Though in principle government could charge individuals for the use of local roads it is prohibitively expensive to do so (economic non-excludability).  Rural roads, once built satisfy the non-rivalry condition in that they the traffic is very light (and they are thus empty) most of the time.  Inter-city roads have very strong element of externality (marginal cost ~ zero relative to average fixed cost), so that they are also considered ‘public goods.’ Similarly public health measures such as public (not individual) supply of clean drinking water, sanitation & sewerage, population control and public education about nutrition, cleanliness etc. correct negative externalities and are accepted as ‘public’ goods.  Similarly literacy & basic education have positive externalities for other educated people and can be similarly classified even though it does not meet the exclusion criteria in urban areas.[4]  Because of limits to divisibility and the sparseness of population, many basic infrastructure services (drinking water, primary education) in rural areas have very high average fixed costs relative to marginal costs and can be classified as ‘public goods.’[5]

Fifty years after independence the population coverage and the quality of supply of these basic services is pathetic and globally embarrassing. Much more attention, time and funds need to be spent on these basic public goods & services.  Government responsibility for supply means that government must provide the required funds but it need not produce all these services.

 Non-Governmental Producers

Private schools have played a vital role in the high educational attainment of Kerela.  Production of services must be entrusted to those who can supply the service most efficiently.  This implies that the poorest worst performing states have the greatest need to entrust the job to non-government organisations.

The UP government has covered all its districts with secondary schools for girls by giving a one time grant to any organisation that was willing to set up such a school.  Similarly there now exist non-profit organisations that can provide quality primary education at one-tenth the cost of the government system.  Unlike government schools where teachers do not show up these organisations guarantee that on completion students will be able to pass pre-specified tests.   Similarly the Gujarat government has contracted the running of several health centres to non-governmental organisations.  This has solved the problem of perennially absent staff and non-functioning centres.  Such organisations must be used wherever they are available to provide universal primary education & primary health services.

Public-Private Partnership

There are, also specific areas within these broad public service categories, for instance construction & management of jails, in which public-private partnership can be effectively used to improve efficiency.  Again the key concern should be efficiency & quality of output (“biggest bang for the buck,”) not ideology.

Institutional Reform

Defence, Judicial, Police and general administrative services can only be provided by the government, so that the focus has to be systemic reform and introduction of modern management practices for improving efficiency.  Archaic laws have to be repealed; archaic procedures modernised (written evidence-signed & sworn, limited adjournments based on prior written request & notice to counter party) to provide justice to those who have cases going on for as much as 30 years.  The Police system, which has become an instrument of political power for the ruling party has to be refocused on providing personal security & upholding the rule of law. Its slow but steady decline into anarchy has to be stopped and eventually reversed.[6] 

Correcting Externalities

Externalities are a known form of market failure even in a competitive economy and need to be dealt with through government intervention.   Apart from the externalities that we have incorporated in the concept of ‘Quasi-public good,’ the most important externalities relate to Knowledge and information & environment /pollution.  The significant areas in the former are Science & Technology, higher education in special fields of national importance, development of strategic technology (e.g. aerospace & nuclear)[7] and Research & Development and the spreading of knowledge especially in agriculture (information/extension).[8]  This is best achieved through a mix of government expenditures and tax/direct subsidies.  The optimal mix can be different for different sectors and also changes over time.  The private sector can play a much greater role in correcting these externalities at lower cost to the exchequer, but government will also continue to be an important player in this area.  Similar solutions apply to environmental externalities, of which control of water pollution is the most important from the expenditure perspective.

Social Welfare

The third important expenditure related function of government is social welfare.  The definition of Social welfare has a large element of context specificity, in that it cannot be defined independent of the average income & wealth of the country.  Equally there is a basic minimum that even a relatively poor, democratic country must ensure in the 21^st century.  We cannot allow people to die of starvation or to be chronically hungry.  Society must also take ultimate responsibility for the old, infirm and disabled and for abandoned or destitute children.  Every citizen has the right to life, physical security, basic human dignity and equality before law and constitution.   The government has the duty to eliminate pockets of feudal oppression and bandit government that still prevail in parts of the country.[9]  Known criminals, dacoits & murderers cannot be allowed to publicly hold the law to shame because of their muscle power, political power or (sometimes ill gotten) wealth.[10]

Extract from, "A New Development Paradigm: Employment, Entitlement and Empowerment,"  Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. [  NewParadigm4nf ]

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[1] One such secretary level officer told me of his personal experience of being charge sheeted for selling in the market, without due auction process, a by-product of the industry that had traditionally been dumped into the surrounding areas.

[2] Those who genuinely believe that government is to blame for recent financial failures, should realise that systemic tinkering or change of government will not change the basic incentive structures.  Similar, perhaps worse crisis are inevitable in the future if ownership remains in government hands.

[3] The issue here is expenditure related functions, not macroeconomic, tax and other policies.

[4] In general both basic public health & basic education services are more accurately defined as ‘quasi-public’ goods.

[5] Once a primary school is built and teacher provided, or piping for drinking water established, the marginal cost is almost zero (relative to the fixed cost).

[6] It has already reached a point where a beat policeman in Delhi can threaten a SSI producer with overnight theft of materials lying on his premises if an adequate ‘hafta’ is not paid to him.

[7] Technologies of power where normal commercial considerations do not apply and availability depend on geo-strategic considerations.

[8] Thus government must provide facility grants to R&D organisations and scholarships to PhD students in S&T. 

[9] ‘Bandit’ or ‘Predatory’ government is a particular form of pre-feudal government defined in the theory of political economy.

[10] The T&D mafia can arrange to steal half the power supply of the capital city of Delhi, its inspectors can institute false charges of electricity theft and set the DESU equivalent of the CBI on a doctor whose employee inadvertently charged his relative and a government servant has to approach the union power secretary to ensure installation of functioning (rather than a faulty) meter at his house, while commentators still refer to ‘pilferage’ & theft of power by industrialists.