Globalization, Growth and Welfare: India under Narsimha Rao & A B Vajpayee

Backdrop

   One of the first policy actions of the Aam Admi Party on forming the Delhi State government was to announce that it would try and rescind the decision of the previous Sheila Dixit government to allow FDI in Delhi’s retail sector.  The anti-FDI position of the left in BJP(or RSS) is very similar to that of the leftists in the Congress party even though they draw their inspiration from different sources.  There is therefore a danger that the manifestos of several parties may take an anti-FDI stand, and thus unnecessarily bind the next PM and the ruling coalition into policy positions they may regret.   It is therefore vital to understand how India has benefited from the opening and globalization of the Indian Economy since 1991.  The note shows how Globalization of the Indian economy, acceleration of economic growth and improvement in peoples Welfare have progressed in tandem during the tenures of both Shri Narsimha Rao and Shri Atal Bihari Vajpayee as Prime Ministers from 1991-2 to 2003-4.

Nineties Reforms

   The 1990s policy reforms consisted of three major elements- Domestic decontrol, Tax reforms and External opening and one smaller element- Public sector disinvestment.  Both the domestic and external liberalization focused on product and capital markets. On the product side, prices, production, investment, imports, exports and technology import were freed from controls.  Agricultural products were kept out of this agenda and remains largely so till today, at great cost to consumers and farmers.  Capital markets were also liberalized in a carefully phased manner to allow domestic companies to raise funds and for domestic and foreign savers to supply capital and innovative financial products. This was accompanied by a major effort to simplify Central government taxes (CIT, PIT, sales-excise-VAT, customs) by reducing exemptions & deductions and unifying and reducing rates. The Public Sector disinvestment was also intended to nudge the political owner (govt. departments) and the bureaucratic managers & employees to act more like private owners and managers.  The basic objective of this set of policy reforms was to improve the competitiveness of the product and capital markets and thus promote productivity and growth.  These reforms succeeded in promoting competition and opening, and raising the growth rate of the economy, resulting in a closing of the gap between the Indian per capita income and the World average.

Outcome: Opening & Competition

      India’s Imports rose from 8.3 per cent of GDP in 1990 before the Narsimha Rao reforms to 19.3 per cent in 2004, the last year of the NDA government. Part of this was a consequence of the rising World trade ratios. However the (negative) gap between the Indian and World Import-GDP ratio almost halved from 11.9 per cent to 7.3 per cent. India’s exports also rose from 6.9 per cent of GDP in 1990 to 15.3 per cent in 2004, closing the (negative) gap between Indian and World export-GDP ratio from 12.9 per cent to 9.3 per cent.    There was a corresponding opening of the Capital account and of technology imports as jointly captured by the inward Foreign Direct Investment (FDI). The ratio of net inward FDI to GDP increased eleven fold from a miniscule 0.07 in 1990 to 0.8 in 2004.  The ratio of Global FDI flows to World GDP however almost doubled from 0.93 to 1.66. Thus, India’s FDI-GDP ratio remained below the World FDI-GDP ratio by 0.86 per cent points.  Overall the opening of the Indian economy to international goods, services and capital improved competitiveness of the domestic producers and accelerated growth.

Growth and Welfare

      Indian Industry responded to the increased competitive pressure and opportunity for import of higher quality input, capital goods and technology by raising the rate of investment and productivity growth, particularly in the corporate sector and thus accelerating economic growth. The growth of per capita income at purchasing power parity accelerated to 4.3 per cent per annum during 1992 to 2004, up 1.4% point from an average 2.9 per cent per annum during 1981 to 1991. Though part (0.6% point)of this was due to an acceleration of World growth, Indian per capita income growth was faster than World average by 2.5% points during the Narsimha-Vajpayee period compared to the 1.7% point gap during 1981-1991 (Indira2-Rajiv). As a result of this growth acceleration, Indian per capita GDP at PPP rose from 18% of average World per capita GDP in 1990-1991 to 24% in 2004.

Lessons For Future

  The economic reforms of the 1990s were wider and deeper than those of the 1980s, overall as well as on the three major dimensions:[i]  Domestic decontrol, tax reform and external liberalization (opening and globalization). Consequently they resulted in a greater acceleration of economic growth relative to average World growth and a faster closing of the gap between the welfare of the average Indian and the average World inhabitant. We need to carry forward and complete the reforms in these three areas, including agriculture decontrol, further simplification of taxes and FDI in Defense, Insurance and Retail.   Reforms have been very limited and hesitant in one dimension, which has been shown to enhance productivity growth: Disinvestment and privatization of the Public sector, including Public sector Banks and Financial institutions, and de-monopolization of infrastructure enterprises.  This is partly due to inertia-the original objectives have long since become irrelevant and practiced only in the breach.  Land market reforms remain flawed and incomplete. Labor laws remain mired in an ideological swamp.[ii] These reforms could yield enormous dividends in terms of Welfare gains in the next two decades! We can only hope that the next government will have the understanding, will and political leadership to carry them out.

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A version of this article appeared on the editorial page of the Times of India on 20th February 2014, under the banner, “Don’t Close Down, Open Up.”  http://timesofindia.indiatimes.com/home/opinion/edit-page/Globalisation-during-Narasimha-Rao-and-Vajpayee-years-was-good-for-growth-and-welfare/articleshow/30689500.cms

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[i] See for instance, Arvind Virmani, “Policy Regimes, Growth and Poverty in India: Lessons of Government Failure and Entrepreneurial Success!, Working Paper No. 170, ICRIER, October 2005.           http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233 or other references  at https://sites.google.com/site/drarvindvirmani/growth

[ii] See Arvind Virmani, "Reform Agenda for Growth and Welfare," Policy Paper No. 1/2014, New Delhi, January 2014; at https://sites.google.com/site/drarvindvirmani/policy-papers or “Reforms for Policy and Growth” at http://dravirmani.blogspot.in/2013/12/reforms-2014-19-for-employment-and.html for further details.

Aam Admi Party (AAP): An Economic Evaluation

Introduction

   In the election to the Delhi State assembly, AAP emerged as the second largest party and formed the government with the help of the Congress party.  As far as Delhi is considered it should have 4-5 years till the next election to demonstrate its abilities.  However, it has already declared its intention to enter the General elections in a big way.  So the public has the right to use all available information including the utterances of its leaders, their personal actions and its performance so far in Delhi, to make a judgement about its national potential!  Given its outsized ambition one is forced make quick judgements about it from the available information.

Anti-corruption Crusade

   The most positive feature of the AAP is its declared objective of attacking corruption in Public life and the Bureaucracy.  In fact one could call this its USP to the urban voters, particularly the urban middle class, who are fed up of the harassment and corruption. The appeal of this issue encompasses the poor who face the brunt of the corruption of the lower bureaucracy and its overbearing attitude towards the citizens who they are supposed to service.  It also touches the small business man who has to deal with extortion, corruption and inadequate public services on a daily basis. Thus this issue cuts across all classes and unites them. Given the origins of the AAP leadership in the Anna Hazare movement for probity in public life and against corruption, it has a certain amount of credibility in this respect.  However, this goodwill is not likely to last till the general election, unless it is able to demonstrate that it can bring the corrupt (who it had so vociferously attacked when in opposition) to book and make a visible difference in the extent and degree of corruption in Delhi.  It should keep a lazer focus on this issue, introduce the promised Lok Ayukt bill and show how a reduction of corruption can lead to an improvement in the quality and volume of services provided (including for example in the incidence of rape & water-sewage-sanitation).  Given that estimated fraction of corrupt payments on virtually all government expenditures ranges from 30% to 50% this is far from impossible!

Correctable Weakness

Constitutional & Govt. Rules

 Having never run a government before, the public statements and actions of several AAP ministers seem to display a weak understanding of government systems and procedures, though this cannot be said of Mr Kejriwal a former IRS officer. This is however, correctable with a little serious effort to listen and understand Governmental systems and procedures with an open mind (instead of suspecting every interlocutor to be corrupt).  These include the constitutional separation of powers and responsibilities between Center, States and localities (Nagarpalikas and Panchayats), between Government, Judiciary and other institutions and between ministers and their secretaries. Some of AAP’s  leaders also have to understand the complexity of government decisions. Most major decisions  have positive and negative effects on different sub-sets of voters. Any such decision will therefore have to be judged by its net overall effect.  This is an assessment that political leaders have to make.  It cannot be decided by mohalla sabhas, by those who agitate and shout the loudest or through pols & referendum.  Voter interaction is highly recommended for understanding public problems and concerns, but not for making decisions that affect many sub-groups, some positively & others negatively.

Self-Absorption(righteousness?)

         There also seems to be an excessively individualistic approach to corruption, with little thought or understanding of the pervasive and systemic nature of corruption in India today.  The AAP leaders have identified a set of “bad guys” in politics and business and posited themselves as the “good guys”.  It is assumed that once they the “good guys” replace the political “bad guys” and go after the “bad guys” in business most of India’s problems will be easily sorted out. This self-righteous approach, earlier seen in the V P Singh anti-corruption campaign, is extremely naive!  Though trial & punishment of the corrupt has important signalling effects, an anti-corruption campaign is unlikely to be sustained in the medium-long run, unless systemic improvements are made. This includes institutional improvements like the Lok Ayukt bill, police and bureaucratic reform and economic policies such those related to land use, auctioning of government land and public transport & parking, that create incentives for honest behavior.

Negatives

        From the past statements and behavior of the AAP leaders, their academic contacts  and the kind of prominent personalities that these leaders have invited & enticed into the party (as against those who applied and/or requested to join it), one can discern two  potential negatives in this party.

NGO Ethos

       Given the background of the original leaders (as well as of the prominent personalities they are trying to attract into the leadership) in the NGO sector, they share the micro-specialized approach of these NGOs. Most of the activist NGOs operate at the village or mohalla level and have a good idea of the problems faced by the local people. To the extent that problem and solution is purely local they can contribute to the solution, even though the issue of scalability is often ignored -success depends on every locality have the same quality of leaders who are just not available elsewhere. But when any potential solution has repercussions beyond the locality to the district, State or Nation, their approach is often too narrow to offer a viable & sustainable solution. In other words such NGOs usually lack an understanding of broader macro issues and often act betray a self-centered arrogance towards other equally well -meaning experts!  There is thus a serious danger that the AAP will rapidly deteriorate into a Federation of NGOs with narrow interests, thus bringing the worst features of the NAC right into the government, with not even a cabinet system to limit the macro damage to an indulgent list of micro policies.

Leftist Ideology

     Many of the academics, intellectuals and think tankers associated with the AAP leadership appear to be leftist adherents of State Socialism with an ideological distrust of markets.  They seem to have learned little from the 30 years of Nehru-Indira socialism and the LPQ Raj from 1950 to 1979.  They even refuse to believe the fact that the real per capita income (Pc GDP at PPP) in India declined progressively from 29 per cent of World average to about 20 per cent of World average during this period. In other words, the ostensibly pro-poor Socialism reduced the Welfare of the average Indian relative to that of the average World inhabitant by nine per cent points (or 30%).  There is therefore a serious danger that an AAP government would re-introduce failed policies, which put the economy back on a lower growth path with serious adverse consequences for growth of job opportunities and public welfare!

Conclusion

   The Aam Admi Party (AAP) has stirred up the political system by showing that an underdog can come from nowhere to second place finish in India’s capital.  Its anti-corruption plank makes it a good candidate for running urban local governments, where it could demonstrate the positive effect of reducing corruption and thus generating better public services as well as saving money that can be used to transform service delivery.  However, given its NGO origin & character and leftist, State socialist ideological baggage (that it seems to carry), it could be an uncertain proposition at the State level and downright dangerous at the Central government level. 

    This judgment can and will need to be reviewed, If and when AAP is able to establish a track record of good policies and governance.
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A version of this post appeared at, http://blogs.economictimes.indiatimes.com/PolicyAnalysis/entry/evaluation-of-aam-admi-party-from-national-perspective

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 .