Expert Speak India Matters
Published on Apr 26, 2019
India’s economic future faces two imminent headwinds. The 2019 elections cannot solve them if priorities focus on immediacy over the long run. Creative policy expansions may be needed to internalize the long run into the short run. 
Can the 2019 elections resolve India’s growth headwinds?

The Indian economy’s past, present and future is at the centre of debate as India goes to the General Elections 2019. Historically, the economy has played only a limited role in aggregate voter calculations in India. But rural distress and lack of urban employment are creating new pressures. Analysts, public intellectuals and economic experts have put jobs, inequality and growth slowdowns at the centre of media coverage of these elections. Competitive parties have responded by offering cash transfer proposals to mitigate any potential reactions from economic malaise. The opposition, the Congress party, floated the NYAY minimum income scheme. And the incumbent Bhartiya Janata Party swiftly followed with their loan waiver scheme. These initiatives are indeed welcome, but the next government should not ignore the long run requirements of the Indian economy by placing all its faith on short run action.   

Election pressure is immediate

In fact, the electoral logic of these transfers is quite simple and obvious: in a country where the poor vastly exceed the rich, any competitive party will converge<1> on expansive welfare support. Despite doubts on their viability or direction, parties simply cannot compromise on this issue, which is why BJP and Congress differ only on their social manifestos. Electoral promises and rallies deal with the short run where coming to/and/or staying in power is the only objective. In this timeline, offering the poor an income upgrade masks any discourse on the economy’s structural weaknesses. Note that at the same time, no party has explicitly claimed it will raise funds for the ‘have-nots’ by taxing the ‘haves.’ The Indian upper middle class (top 3-10%) mistrusts the government for its inefficiency. And support from the super-rich (top 1%) would be lost if they were integrated into the payment model for welfare. Which means that we are left with money to be doled out from public funds and no one to pay for them. If the last part were not true, no economic expert would object to a political agenda behind the redistribution of public funds to the poor. But once such fiscal expansion is stigmatised, there are tradeoffs. Should limited funds be used for populist transfers when they could instead be channeled into supply side interventions? The usual terminology for this package is ‘inclusive development’ – the private sector will provide investment and jobs if the government funds the population in skill building, education and training.

In fact, the electoral logic of these transfers is quite simple and obvious: in a country where the poor vastly exceed the rich, any competitive party will converge on expansive welfare support.

Except, the election of governments is rarely based on nomination for long term vision. Competing on the use of existing resources for structural development is politically costly. Had the population already been deriving these benefits, no party would be in a position to dismantle them. But implementing them in the first place is expensive. Prioritizing eventual economic emancipation, instead of cheaper promises, is a risk in the cut-throat world of politics. Voters could be easily swayed by myopia. The gestation periods for human capital investment are far too protracted for them to matter even in the largest democratic process on the planet. It is well-known that India’s human development indices are dire. Invoking them is more politically profitable when used in a blame game. The point is not whether the elections will put India on the right growth path, but whether these paths are politically feasible at all, given the aforementioned arguments.

The economic problem is long-run

One of the unspoken truths of India’s post socialist growth story is how much it has relied on the low-hanging fruit. In some sense, most governments have gotten away with ignoring difficult underlying issues. The conventional opinion argues that India exploited market dynamism and relied on business to deliver better growth. In fact, fiscal discipline was more closely associated with socialist phases. Critics who advocate limited government in this story would be wise to recognize that India has known 6-7% growth only with higher fiscal deficits. When push comes to shove, a smart economic representative of past governments can easily argue that India has managed to avert balance of payments crises despite these negative indicators. At the same time, growth also relied on an export led path which was useful once but now faces limits with the onset of global slowdowns and resurgent protectionism. As the easy growth tide clears, there are two glaring headwinds that need to be addressed.

In some sense, most governments have gotten away with ignoring difficult underlying issues. The conventional opinion argues that India exploited market dynamism and relied on business to deliver better growth.

The first headwind is extreme inequalities or what I call the “upper tail” dilemma. The rise of the Indian middle class is a limited phenomenon, perhaps at times even exaggerated. In reality, growth has certainly reduced stark poverty, but it has mostly benefited the rich. With fractions of the world’s poorest and richest now living in India there is an uncomfortable reality facing the nation. The rich are so far ahead of everyone else that statistically they benefit more from inequality than from economic growth. This means it is difficult to solely entrust the rich to expand the pie or to even spend on non-imported goods and services. Outside of occasional altruism, they are better off increasing their current share of national income. The poor on the other hand are still so large a fraction, that their mobilization is impossible without some type of basic income support. This means fiscal transfers for the latter group are here to stay.

In reality, growth has certainly reduced stark poverty, but it has mostly benefited the rich. With fractions of the world’s poorest and richest now living in India there is an uncomfortable reality facing the nation.

The next headwind is jobless growth and sluggish labor force mobilization. Under the low hanging fruit regimes, there was always a belief that more growth would somehow spill into higher employment. It didn’t and the voice of the unemployed returned loudly prior to every election of the past decade. While statistics suggest peak unemployment rates, a more recent study has raised more serious structural alarms. India’s labor force participation rate (at 50%) is comparable to ageing mature economies as opposed to emerging economies. This implies one in two working age adults is looking for jobs or working in the first place. There are serious constraints to redistributive transfers raised by such low participation. Primarily, demographic dividends from population growth will not materialise to their expected potential. Second, without a working population there is no basis to raise redistributive funds in the future. The situation is explained partly by the sectoral composition of GDP growth. The growth rate is underwhelming without the presence of FIRE (Finance, Insurance, Real Estate and Business Services) sectors which constitute nearly 18% of GDP. They are (by design) sectors whose output does not absorb too much labor. With financial deepening, their role will only be more important in the future, but will they provide employment at the scale which India needs? This remains to be seen.

India’s labor force participation rate (at 50%) is comparable to ageing mature economies as opposed to emerging economies. This implies one in two working age adults is looking for jobs or working in the first place.

Such headwinds imply that the task before the next Lok Sabha will be to face these hard-truths immediately. It may be easier to not self-impose fiscal fears just yet. The government certainly needs to offer support to rural farmers and the poor. But it does not have to squeeze funds from its purses to pay for them. A one-time fiscal hit is inevitable. The more the government reduces its spending today, the more it will have to spend on transfers and stimulus in the future if jobs and incomes do not grow. Instead it should use this opportunity to address glaring gaps in development and focus its investments and employment guarantees towards those sectors – schools, colleges and hospitals as well as their staff are obvious candidates. The Aam Aadmi Party, for example, has mobilised its local “Mohalla” clinics as both a development and political tool very effectively. Such initiatives will only increase political goodwill of the party that implements them. No one is under any illusions about the scale of the task ahead. But there are incentives to internalise long term goals into the short run too. The political class is in a rare moment. Business tycoons have become symbols of corruption, excess and default. If the next government delivers more than myopic economic promises, it may capitalise on the politics as well.


<1> While there may be convergence on redistributive economic policy, attracting different voting blocs requires appealing to other channels such as religion, socio-political issues and revisionist history.

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Contributor

Rishabh Kumar

Rishabh Kumar

Rishabh Kumar is an assistant professor of economics at California State University. His interests are Indian economic history political economy growth and inequality.

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