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The economic effects of the BJP

Print edition : May 08, 1999 T+T-

India's National Magazine from the publishers of THE HINDU

During its 13-month term in office, the BJP-led Government has managed to make a bad situation substantially worse and has even hastened the processes that are leading the country to its next economic crisis.

WHEN future historians draw up a balance-sheet of the impact of the Bharatiya Janata Party-led Government on the country, it may be that they will put the economic effects relatively low in terms of the various negative outcomes. After all, 13 months are not all that much time in which major economic implications (whether positive or negative) can be expected. And, it may be argued that surely these economic effects pale into insignificance when compared with the other deleterious effects of the BJP's rule: irresponsible nuclear adventurism, worsening relations between communities, growing social and cultural intolerance which even led to disgraceful acts of unprovoked violence, undermining of the pluralistic base of the country's education system, and tendencies towards creeping fascism.

It could even be suggested that the BJP-led Government inherited an economy that was already in a fragile condition, with accentuated sectoral and regional imbalances, unsustainable patterns of economic growth, more unequal income distribution and so on. Since these reflected the combination of the "economic reform and liberalisation" process of the 1990s and longer term structural tendencies, they could not be attributed solely or even dominantly to BJP misrule.

But these interpretations miss the point in terms of the actual impact this Government has had on the economy. In effect, in this short time span, the BJP-led coalition Government has managed to make a bad situation substantially worse, and has even hastened the processes which are leading the country to its next economic crisis. Seen in such a light, it may eventually appear that systematic economic mismanagement and desperate subservience to the interests of international capital rather than of domestic citizens, are among the more devastating legacies of this short tenure of the BJP in Government.

CONSIDER, to begin with, the basic features of the economy inherited by the Government in March 1998 when it came to power. Domestic industry was already in recession, with output decelerating especially in the manufacturing sector since mid-1996. Agricultural production had actually fallen in the previous year. Although it was a problem largely related to the weather, it also reflected the decline in real agricultural investment over the 1990s.

The balance of payments had already been through several near-crisis situations, with speculative attacks on the rupee being narrowly warded off. Export growth had slumped to 1.6 per cent in dollar terms, while non-oil imports continued to grow apace despite the recession. As a result, the trade deficit reached a historic high of more than $16 billion (in terms of the balance of payments data). External commercial borrowing, always a problematic source of finance, dominated the capital inflows which were necessary to finance the growing current account deficit. All this meant a significant increase in external economic vulnerability.

Employment in the organised sector had been more or less stagnant over the decade, and survey data indicated that in the net, there were declining opportunities for non-agricultural employment even in the non-formal sectors. The secular trend of declining incidence of poverty from the mid-1970s to the late 1980s appeared to have been halted or even reversed by the combination of higher food prices and fewer options for productive employment.

The only relatively bright spots in this rather dark context were that inflation rates were low, even though that was mainly because of the domestic recession, and that the stock markets perked up on hearing news of the BJP's electoral victory, leading some people to believe that even foreign investors would be increasingly attracted by the new Government.

IT was obvious even as the Government was being sworn in that the economy needed urgent attention, and that if there were to be any sustainable economic recovery, specific policies would have to be put in place quickly. In addition, of course, expectations were raised by the BJP's own vociferous protestations while in Opposition that the economy was on the wrong track, that there needed to be more of a "swadeshi" orientation to economic strategy, and that the focus should be on the needs of the domestic market.

But from the first few months it became clear that these earlier statements were not to be taken seriously. Indeed, it had already been apparent to many observers that the very conception of "swadeshi" economics as presented by the BJP was not just flawed but ultimately directed towards serving the interests of international capital. But the rapidity with which this was established through the practicalities of governing may have come as a surprise. In addition, within the economy the impact of the party's traditional base among the trading community also became evident in a range of policy measures that effectively operated to redistribute income to this group.

In terms of accommodating - or even succumbing completely - to the interests of international capital, the list of "achievements" of the Government is long. The first significant act of the BJP-led Government only two months into office was the announcement of nuclear strength through the Pokhran blasts on Buddha Purnima last year. But this supposedly nationalist declaration was speedily sought to be counterbalanced by a willingness to accept economic subjugation.

In the very week after the Pokhran explosions, the Cabinet quickly pushed through Central Government counter-guarantees for four fast-track power projects in different States. Since these assure high dollar rates of return to foreign investors even if the domestic consumers cannot be charged more and/or the rupee depreciates, they are likely to imply fairly large budgetary outlays in future. In the same week, a large number of oil exploration contracts and mining concessions were also awarded, mostly to United States-based companies, in a blatant attempt to barter away the mineral and resource wealth of the country in return for the dubious privilege of joining the nuclear club.

Subsequently, the overt attempt to placate foreign capital and the U.S. Government became even more pronounced. The Exim Policy announced in 1998 involved a substantial liberalisation of consumer goods imports, which was remarkable and unwarranted given the context of domestic industrial recession and a large trade deficit. Imports have been further liberalised in the latest Exim Policy unveiled in March. The two annual Budgets presented by Yashwant Sinha contained measures designed to enthuse international investors: the decision to allow foreign institutional investors (FIIs) to purchase shares in newly disinvested profitable public sector companies, the incentives given to the financial sector, and various other measures aimed to woo foreign capital.

The most clear expression of the orientation of the Government was in the determination to push through two very controversial Bills, relating to the Patents Act and the opening up of the insurance sector to private domestic and foreign players. The BJP's attitude to these was in direct violation of its pre-election programme, and also against the wishes of other members of the Sangh Parivar, and it neatly exposed the hollowness of the party's claims to represent "swadeshi" interests.

However, to ordinary citizens, the two most important economic effects of the BJP's rule have probably been the dramatic increase in food prices and the dwindling of productive employment opportunities. Indeed, it speaks volumes for the economic management of the BJP Government in the past 13 months that it has actually made the previous governments - and even the Congress(I) - look better in comparison. This extremely shabby performance, which has been worse than even the most dire predictions of its opponents, could not have been achieved through sheer incompetence alone; a degree of mala fide must also be involved.

CONSIDER specifically the issue of the high and rising prices of food items, not just foodgrain but especially vegetables (such as the infamous onion) and other essential items such as edible oil and salt. Many of these items are direct and necessary elements of the basic diet of the common people across the country, which makes the demand for them relatively inelastic to price as well.

The latter half of 1998 was dominated by these price increases, which became highly politically sensitive as well, since the large increases in food prices paid by consumers reflected post-harvest hikes which were much larger than what is seasonally normal, with the benefits clearly accruing to stockists and traders.

Speculative pressures were intensified over the past year by the fact that other channels of investment remained uninspiring for investors, given the sluggish stock market and the continuing recession in domestic industry. So once more speculation in food items, which used to be a feature of the Indian economy in the 1960s and 1970s, became a pervasive factor even in determining overall rates of inflation. And this tendency was encouraged by the acts of omission and commission of this Government.

Thus, early into its tenure, the BJP-led Government allowed the Essential Commodities Act to lapse on the grounds that it was a device "open to abuse by the enforcing agencies". Inevitably, this gave a free rein to trading speculation over 1998. When the public outcry against the dramatic price rises became too much for it to handle, the BJP was forced to make some gestures towards control of the speculative activity which was widely seen as the root of the problem.

But these measures against price rise remained half-hearted. On the same day that the package was announced in October 1998, Prime Minister Atal Behari Vajpayee told journalists that "beyond a point, the Government could do little about the price rise, especially of onions and other vegetables." He also argued that under the law of the land it is not illegal for traders to hoard. This possibly inadvertent admission from the "mask" of the BJP was reflective of the basic political reality. It has long been recognised that the basic political support for the party has come from traders, both large and small, and it is only to be expected that such groups would have seen the formation of a BJP-led Government at the Centre as their moment in the sun. And the subsequent control over prices should not obscure the fact that during the period of rapid price rise, very large super-normal profits were made by intermediary agents at the expense of both direct producers and final consumers.

Consider also the basic issue of dealing with industrial recession. In periods of demand downturn, governments must spend more, in order to counteract the decline in private consumption and to ensure that employment and economic activity are maintained. Instead, over fiscal 1998-99, the Government actually managed to spend less in money terms than its own budgetary targets in Plan outlays generally. In real terms the gap was therefore even larger, and this had major negative implications in crucial sectors such as agriculture and rural development, irrigation, industry and minerals, transport and infrastructure.

The latest Budget, similarly, does not have any expenditure measures designed to counteract the economic stagnation, and offers very little in terms of ensuring real economic revival. Further, since all the new taxes are in the form of surcharges which are not shared with the States, they add to fiscal centralisation. They also contribute to the continued shortage of resources for State governments, which are mainly responsible for crucial expenditures on education, health, power and transport infrastructure.

The economic centralisation evident over the past year is interesting. On the one hand, the BJP-led coalition was substantially different from the earlier United Front Government, because it was not a coalition of more or less equal parties but one of a large party dependent upon the support of smaller regional allies. This meant that the allies each felt that they had to extract from the BJP their specific regional demands, rather than work for the stability of the Government as a group. So, for example, the Akali Dal demanded - and extracted - a huge "bonus" increase in the minimum support price for wheat last year, and various other parties managed State-level packages to further their own interests.

On the other hand, the basic thrust of the economic strategy was still a centralising one, especially in terms of fiscal patterns. It is interesting that a Government that was so dependent upon regional parties in the coalition acted in a budgetary sense to work substantially against the interests of the State governments. If the BJP's regional allies have analysed the latest figures closely, they will by now have discovered that the Central Government has actually taxed them so heavily through higher prices of food and diesel, and diverted so much of expenditure control regarding rural development from the States to the Centre and that it is bound to erode their credibility in the coming elections.

FINALLY, therefore, the economy does remain a major issue. And it is one which is far broader in its implications than the way it is currently projected in the media, in terms of getting the Budget quickly passed, meeting the international obligations made in amend for Pokhran, or keeping the stock markets satisfied. In fact, all too often our elite forget that the economic issues confronting the people are not just different from, but more important than, the issues that concern foreign and domestic large capital. It is during election time that they are forced to remember this, which may be a positive fallout of the otherwise tedious political instability.

The economy is probably the aspect of the BJP's rule which has been most negative for most of the electorate. Therefore, it could indeed become perhaps the most important election issue as well.