There are three reasons why governments, like humans, act irrationally rather than the rational economic agents they are supposed to be.
First, if they perceive that their time in office is limited there is nothing to be lost by dropping all restraints and doing whatever they wish to – a daring end-game strategy.
Extravagantly, unsustainable, populist welfare measures– of the kind being recommended by Left-liberal economic analysts – are one such. These would inflate the fiscal deficit (FD) of the Union government to 10% of GDP as against the targeted 5% by adding 1% for additional defence and security expenditure, 1% on health, 1% to recapitalise banks against new debt write-offs and 2% to extend generous cash support to households.
General government FD (including states) would then become 14%. GDP would be lower than the 2019-20 level of Rs 204 trillion by 4.5% (IMF) and 4% (ADB) per their June assessments in 2020-21, recovering in 2021-22 to barely equal the 2019-20 level. IMF and ADB assess growth at 1.5 to 1% in 2021-22. But they are habitually optimistic forecasters.
The fact that the Modi government is being cautiously generous in adopting a “permanent income” approach – as should any entity in a downturn- shows it expects to be in power over the medium term.
Second, if governments perceive that the political cost of not exploiting an opportunity exceeds the economic cost, they will sacrifice the treasury even if they do not perceive an existential threat to remaining in power. The 1971 war to liberate Bangladesh falls in this category.
Indira Gandhi returned as Prime Minister for her second stint in March 1971 for a five-year period. She plunged in to support the courageous revolt against oppressive discrimination of Bengalis by the West Punjab dominated regime in Pakistan in December 1971.
Security analysts committed ideologically to the United States, would recollect that the United States intervened to thwart the Indian support for the Mukti Bahini, reflecting the then US global strategy of maintaining stability (the quiet of the graveyard) in preference to global equity or justice. Cold war counter-tactics pushed the then mighty USSR to checkmate the US by stepping in to support the Bahini and India.
That Bangladesh remains a friendly neighbour with whom we have deepening economic ties and with whom we have settled the border issue peaceably, speaks volumes of the sagacity of that overseas adventure.
Third, nations become dysfunctional when the leadership stops working in the public interest; the line between personal ambition and national interest becomes blurred and state resources are used for personal aggrandisement.
India had its moment during the national emergency from 1975 to 1977. So isolated had Prime Minister Indira Gandhi become by the bureaucratic firewalls she drew around herself, that she was led, by her fawning advisors, to believe that an election would validate the emergency. She was wrong and suffered a humiliating defeat at the polls.
The US, under President Donald Trump, is similarly playing to the gallery of middle America, which has not benefited from the enormous wealth accretion at the top since 2000. Stepping back from charity and muscle-flexing in distant jurisdictions, which have no visible link to the welfare of the average American, mixed with jingoistic rhetoric makes an attractive pre-election gambit.
Mike Pompeo, US Secretary of State has called out the Communist Party of China as a “rogue party”. Since there is only one party in China this is equivalent to terming China itself a “rogue state”- an over-the-top end-game tactic.
This posture aligns with our near-term interests to pressure China into restoring status quo ante in Ladakh. But the depth of US commitment to support sustained militarisation of Ladakh is unclear. It is pressuring its European allies to pull their own weight, whilst pulling away assets from Europe (targeting Russia) to counter the Chinese threat to ASEAN and India.
The Dragon has acted whimsically in stampeding non-aligned India into the US corner. Does this irrational decision warrant a check on Emperor Xi’s physical and political health?
The CCP is solidly in control of China and faces no political threat. China remains on an economic ascendant albeit with a lower trajectory. But it is only an upper-middle-income country with a per capita GNI of current $ 9460 – higher than India at $2020, but far below the lower limit of $ 12,375 for joining the High-Income economies like Japan at $ 41,310 and Australia at $53,250.
China’s growth expectation for this year is 1.2% (IMF) and 2.3% (ADB). Slower global growth will hit China significantly since exports are a big growth driver. It has little to gain politically by a flurry of “Empire” type adventures. All this points to the third driver of irrational government decisions – a leader in hubris or one who perceives he has run out of time.
Consider that, Muhammad Ali Jinnah’s improbable propagation of Pakistan in the 1940s was a similar end-game tactic when he found no substantive room in the Congress leadership. The Lahore Declaration, 1940, of the Muslim League cemented the demand for a separate Muslim state. Jinnah died of Tuberculosis – a fatal disease back then, which he concealed – within a year of Pakistan being created. Would the Hindu nationalists within Congress have been less opposed and Nehru more agreeable, to accept him as the leader had they known it was a mere short-term gesture?
For the moment, India can do little else but dance to the tune of the Dragon by responding actively to the military threat whilst continuing the diplomatic initiative to isolate China.
Domestically, this means tighter belts for all. If the government departs from its class alignments and goes into overdrive to benefit the bottom 40% of India directly, the economic pain will be sucked upwards by osmosis- to the delight of the CPI(M)- imposing higher taxes leading to a richer government but a poorer economy.
Big business and small entrepreneurs will enjoy a short spurt of demand for goods and services, funded by the government largesse followed by continuing depression and further loss of jobs. The 100 million-strong salaried class (one-third of Indian households) will find, like middle America, that they have been left holding the cost of China’s hubris induced misadventure in Ladakh and that too, minus the cheap imported products we are all addicted to, in our shop-till-you-drop, upside-down world.
This commentary originally appeared in The Times of India.
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Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...
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