India now has a world-class economic team, with the prime minister, Finance Minister Palaniappan Chidambaram and planning czar Montek Singh Ahluwalia. But as a former senior government official, Shankar Acharya, wrote recently, it “makes for an intriguing contrast with the poor quality of economic ideas swirling about.”
The ruling coalition has put together an economic plan that is, quite simply, a disaster. Its most outlandish promise is a guaranteed job for every able-bodied male for 100 days a year–something that could end up costing 3 percent of GDP. India’s labor laws and wage laws, which make job creation very difficult, are not to be reformed. Even the plan’s commendable idea of increasing spending on health care and education is oblivious to the reality of India’s budget deficit. (With a consolidated deficit at about 10 percent of GDP, only Turkey is in worse fiscal shape among the major economies.)
What explains these bad ideas is India’s recent election. The Bharatiya Janata Party lost, so the conventional wisdom goes, because it did not pay attention to the losers of economic reform. Its policies left behind hundreds of millions of poor Indians living in villages, and a democratic government must address their concerns. It’s a powerful argument–except that it’s not true.
First, there’s the small matter that India’s economic reforms have not left behind the rural poor. Over the last 15 years, poverty has declined from 39.1 percent to 24.1 percent in cities and from 39.4 percent to 26.4 percent in rural areas. More broadly, the Indian election was narrowly won by a large, diverse coalition of parties–many of them regional parties with regional agendas–that espoused many different ideologies. In some places reformers lost, in others they won. It is impossible to read into this messy election a single national message. But like soothsayers reading chicken entrails, political elites have used the vote to trumpet their own message of choice. And some influential leaders in the Congress party and its hard-left allies still believe in the old gospel of state socialism–that brought India 40 years of stagnation–and want to see it resurrected. (The phenomenon of a party elite’s reading what it wants to from election results has happened across the aisle as well, with the BJP drawing from its defeat the message that voters wanted more Hindu nationalism.)
If there is one persistent message in India’s many elections over the last decade, it is “Throw the bums out.” Indians get easily disillusioned by incumbents. Most Indians don’t like their government and keep voting in a new bunch of politicians in the hope that they will fix it. Day-to-day, Indians confront a government at all levels that is intrusive, bossy, ineffective and corrupt. Perhaps this is why Indians have among the lowest rates of tax payments in the world.
Manmohan Singh understands all this. In his first speech to the country he spoke of the need to reform the state itself. He also understands that the government can and should spend more in areas like education, health care and infrastructure. But to do so, he has argued in the past, it has to be less involved in running factories and airlines. Above all, he knows that the only way to cure poverty is to grow the economy.
There is an emerging democratic model of economic reform. It encourages government spending as investment (in human capital and infrastructure) but rejects subsidies (of goods or jobs). In Brazil and South Africa, populist governments have been able to pursue sensible economic policies. In Brazil, President Lula freed up some money by pruning defense spending, which has allowed him to direct some resources toward the poor. In South Africa, programs like rural electrification have been both popular and spurred economic growth. “There are ways to spend money intelligently on the poor that have very good results for the economy,” says Stanley Fischer of Citigroup and formerly of the IMF.
India has a head start with a private sector that is bursting with energy and inventiveness. Its new government could embrace this model and soon show the world that you don’t have to be a dictatorship to move from poverty to plenty. But to do so it must push forward disciplined, reformist policies. Will it? For now, I’m going to bet on that young man who got up at 4 a.m. to take a cold shower.
