Free right turn

As the second United Progressive Alliance (UPA) government completes its first year in office, there are signs that 2009 could constitute a second turning point in India's post-Independence economic history. UPA-II is different from its predecessor inasmuch as this coalition government, although still led by the Congress and Prime Minister Manmohan Singh, is not hampered by Left support for survival. It, therefore, was and is widely seen as capable of adopting policies that could not be implemented by the previous government because of the role of the Left. Hence, at the end of year one of its tenure, attention is focussed on the direction policy is taking and whether the absence of the Left has resulted in a significant shift or turning point in economic policy.

The first turning point was, of course, in 1991, when under Prime Minister P.V. Narasimha Rao and Finance Minister Manmohan Singh India experienced a remarkable turn in its post-Independence economic trajectory. The trigger for that turn was the balance of payments crisis that resulted from a combination of trade liberalisation and deficit-financed government spending. Yet, leveraging that balance of payments crisis and the inevitability of relying on the support of the International Monetary Fund (IMF), the government of the time embarked on a policy road that fundamentally altered the country's development path.

In a series of steps adopted over the subsequent years of that decade, the state's role as a driver of economic growth, a regulator of private investors and an agent working to reduce inequalities of various kinds was altered. Regulatory intervention was substantially diluted or dismantled, the state was increasingly presented as a facilitator of private initiative, and through various acts of omission and commission the government contributed to a shift in the distribution of income in favour of asset owners and a thin upper crust of the middle class.

Even though this shift was initially presented as the result of the requirements and conditions set by the IMF in return for its support in the form of an SDR 5 billion loan, it soon became clear that the economic policy establishment and a section of the Congress clearly favoured such policies. The IMF loan, which in any case was not used in full, appeared to be more a ruse, providing these sections with the instrument needed to push through policies that the people had for long been taught to distrust.

Not surprisingly, when the UPA came to power in 2004 and Manmohan Singh was made Prime Minister, the government was expected to push ahead with similar and even more radical measures of liberalisation such as accelerated privatisation, full convertibility on the capital account and dilution of financial sector regulation. There was indeed movement in these directions under UPA-I. But the government faced roadblocks at each point and had to withdraw on a number of occasions. Many measures favoured by the economic policy establishment could not be implemented because of opposition from the Left, support from which was crucial.

Moreover, a tendency in the Congress to publicly advocate pro-poor policies but do little to ensure their implementation, to adopt progressive rhetoric but ignore it in practice, proved difficult to sustain. Policies that were seen by the economic policy establishment as good on paper or in public speeches but inappropriate and a waste of money on the ground, such the National Rural Employment Guarantee Scheme (NREGS), had to be implemented once included in the Common Minimum Programme (CMP) because of Left pressure.

This loss of full control over the levers of policy was particularly disconcerting for the advocates of reform, because it was during UPA-I's tenure that some of the ostensible benefits of the reforms of the 1990s were beginning to be experienced. During the 1990s, after a brief period of high growth during 1993-97, the economy experienced a slowdown with only a moderate revival after the injection of demand in the late 1990s when the Fifth Pay Commission's recommendations were implemented. Compared with this, from 2003 growth picked up substantially, and an economy that seemed to be falling off its 5-6 per cent annual growth trajectory moved on to a much higher, 8-9 per cent growth path for a relatively long period of time. That growth was seen as having legitimised past reform and provided the case for further liberalisation.

The effect of the high growth was that although poverty and deprivation persisted and were even increasing in some areas, the language of the UPA had come to resemble the India Shining slogan that spelt the downfall of its predecessor, the National Democratic Alliance (NDA). Fortunately for it, the CMP and the pressure exerted by the Left and sections of civil society ensured that it adopted at least some measures such as the NREGS and the Right to Information Act. This enabled the Congress, to its own surprise, to become the single largest party in the Lok Sabha and form a coalition government without relying on outside support from the Left. But that did provide the basis for a shift in policy from the so-called progressive policies, dismissed as populism, to the ostensibly technocratic neoliberalism.

However, the first Union Budget under UPA-II did not reflect this shift in full. One reason was, of course, the realisation within the Congress that its surprise performance in the elections was not unrelated to some of the ostensible populism of the UPA-I government. This meant that it had to give more credence to its own campaign promises than it would have otherwise done. The other important reason was that though the global financial and economic crisis had not overwhelmed India, it had slowed down the gross domestic product (GDP) growth and adversely affected employment and livelihoods, necessitating a response from the government.

Fiscal stimulus

The fiscal stimulus adopted in response to the crisis, combined with the implementation of the Sixth Pay Commission's recommendations, resulted in an expansionary fiscal stance. This did benefit business inasmuch as it moderated the impact of the crisis, increased demand in the economy and injected liquidity, which supported credit-financed expenditures even in a time of crisis. India proved to be a country that rode the crisis well. Industrial growth during financial year 2009-10 is estimated at a creditable 10.4 per cent compared with 2.8 per cent in 2008-09. But for the fact that the growth of agricultural GDP is estimated at 0.2 per cent, the services expansion facilitated by the Sixth Pay Commission's recommendations would have taken aggregate GDP growth well beyond the advance estimate of 7.2 per cent for 2009-10.

One consequence of this performance is that even the case for a further dose of populism based on the surprising election results seems to have lost its strength. Policies such as the provision of social security benefits for unorganised workers or guaranteeing food security for all, which were made much of by the Congress propaganda machine, are being diluted and delayed. Even with regard to those initiatives that have been legislatively launched, such as the NREGS or Right to Education, the actual funds allocated in the UPA-II Budget point to a complete lack of seriousness.

What is more, the cutback in allocations is being defended using the fact that the implementation of the Pay Commission recommendations and the announcement of a number of stimulus packages in response to the crisis have widened the fiscal deficit. Fiscal adjustment, the government argues, is crucial. Not that it is serious about this either, judging by the tax concessions it has provided in the Budget. An income tax-paying minority has been offered an unexpected bonanza through a widening of the income slabs subjected to different rates of progressive taxation. In addition, the surcharge on corporate taxation has been reduced from 10 to 7.5 per cent. Not surprisingly, losses of direct tax revenues are estimated at upwards of Rs.25,000 crore. The Budget was in this and other ways clearly inequalising.

This process of contributing to inequality is being intensified by hikes in administered prices, including of intermediates such as petroleum and gas, and by reductions in subsidies for food and fertilizer. The increases in administered prices would have cascading effects on prices across the economy, and the subsidy cuts would reduce the degree to which the government moderates inequalising tendencies in the economy. All this occurs in a period when the prices of essentials are already rising sharply and the government appears to be doing little to halt the price rise other than call upon State governments to come down heavily on hoarders and speculators. Finally, despite its rhetoric, the pattern of public spending as reflected in the second Budget of the UPA-II government points to further erosion of real spending on crucial social sector projects.

Overall, economic management under UPA-II is not just characterised by a reduced commitment to redress inequality, but by the willingness to adopt initiatives that are very obviously inequalising.

On the other hand, the willingness of the government to accommodate and promote the interests of private capital is obvious. Access at relatively cheap rates to land, mineral and forest resources; easy access to credit from the public banking system for activities that are even speculative in nature; public-private partnerships in forms where the private sector is the principal beneficiary; a commitment to accelerated privatisation of public assets; liberalisation of the rules governing the operation of financial entities; and easy access to foreign exchange for forays by Indian capital abroad are the many ways in which UPA-II has been, and promises to continue, supporting the private sector. The influence of private capital on government decisions, in areas as diverse as gas pricing to regulation of mining, is palpable even if not always provable.

In the rush for quick profit that this new environment has generated, allegations of fraud and corruption have become routine. Whether it is the public sale of 2G spectrum or the private organisation of the Indian Premier League, allegations of huge profits in short periods with little sweat have become common. Nobody is fooled any more that market-friendly, neoliberal policies promote greater transparency and reduce rent-seeking. They only seem to make the state a facilitator of the private quest for profit, and sometimes a willing or unconscious accomplice in efforts at profiteering.

With the Left wielding little influence on its behaviour and four more years of power before it, UPA-II is intensifying its pursuit of such policies. If it persists in this direction, 2009 will indeed be a second turning point in India's post-Independence economic evolution where the quick enrichment of a few would be at the expense of the well-being of the poor majority.