India is courting a political default

So, the United States has managed to escape a default by a whisker. With the extreme liberals and the Tea Party hawks holding out, the centre of the US political system had to unite to ensure that a measured, though interim, solution was put in place to cope with the country’s massive debt. Closer home, however, India, too, is close to default, but of a political kind.
After the washed out winter session of parliament of 2010 and the anemic budget session, the question in many minds is whether the political system can correct its course which, as of now, seems to be heading straight for a train wreck.
Some commentators are seeing in the BJP’s decision to permit a debate on price rise as a sign that the political centre is willing to moderate the Opposition campaign against the government on the  issue of corruption. But that may be too optimistic interpretation. In India, political competition seems to have gridlocked the system to the point where it is unable to think about short and long-term issues in any but the most confrontationist and unproductive ways.
 
Momentum
Take the short-term: On Monday, the Prime Minister’s Economic Advisory Council said in its report on the Economic Outlook for 2011/12 that the government had lost valuable momentum in the period 2009 to the present. This period could have been fruitfully employed in “rolling out physical infrastructure, pushing through reforms and improving efficiency in public expenditure in the social sector.”
The report cited four issues that led to this. First, hubris arising from the successful handling of the 2008-2009 global economic crisis, compounded by fears arising from a weak monsoon. Second, a disinclination to roll back monetary and stimulus measures quickly. Third, the rise of food, followed by non-food, inflation and fourth, the corruption related controversies “that consumed the energies of the government and has led to an unintended slowing down of initiatives to restore investment and economic confidence.”
The PMEAC has listed a set of key issues that need to be addressed to regain the lost time— remove bottlenecks in physical infrastructure, enhance the pace of capital investment dependent on government decisions, create a corporate debt market to finance infrastructure and provide speedier environment clearance. In addition, bring in GST, end the regime of administered prices, control inflation and modernise the retail sector.
But there are other jokers in the pack that have stymied the government as well. The Supreme Court’s activism on the many scams that have hit the government have had their own set of consequences. Anna Hazare continues to dog the system and is scheduled to re-launch his movement against the government later this month. Telangana remains a festering self-created sore, as do Kashmir, the North-east and the Maoist affected regions. The monsoons, too, have decided to act up. India was able to withstand the 2009 shortfall with greater ease than it had anticipated. But in the current inflationary climate, things could well go in another less comfortable direction.
 
Long-term
Finally, of course there is the global outlook which is even gloomier than India’s. The US has escaped default. But its high unemployment rates and poor growth are becoming a drag not only on its economy, but on global demand. As for Europe, its fiscal health is none too good. Oil prices remain uncomfortably high and if they increase, it will only add to the inflationary pressures on the economy.
The longer term issues are in many ways connected to the short-term ones. But the scale of the challenge becomes apparent when you view them at a macro level. They relate to feeding and keeping a population of a billion plus healthy, providing them gainful employment and undertaking policy measures that will shift large numbers of them— hundreds of millions— from marginal agriculture to manufacturing and services.
The problem takes a sharper edge when you look at it from the demographic point of view. India currently has a population of 1.2 billion of which some 770 million are in the age group of 15-64 and are considered to be the working age population; the balance, some 410 million, are seen as the “dependent population” of people who are either too young or too old to work. The country’s dependency ratio—that of the dependent population to the working age population is around 0.5 which is the norm for many developing countries, but in the coming decades this could decline further, meaning we will have proportionately even more working age people. This is considered a good thing, because these are the people who are economically productive, who earn, save and consume.
But obviously for this future to become a reality, we have to ensure that these young people are healthy and educated, and that we have an economic system which has jobs for them. And this is what the challenge of the coming two decades is all about—feeding, educating and keeping hundreds of millions healthy and ensuring that they have productive employment.
Few observers of the Indian scene will deny the PMEAC’s blunt observation that the worries about success and failure in this country are centred on the “uncertainty arising from political developments [which] has a very negative impact on business confidence and investment outlook.” Here many will agree that it is not just the UPA that has lost its way, but the entire political system itself. The UPA which has been in power since 2004 may bear the primary responsibility for the state of affairs, but the Opposition, cannot shirk its share of the blame.
The system needs to differentiate  between legitimate protest and jockeying for political advantage— which must be part of any democratic politics— and petty barracking of the kind witnessed in parliamentary proceedings these days where entire sessions are being wasted because the Opposition parties think that that is what politics is all about.
Disrupting the monsoon session and showing that the government is unable to function is risky strategy. Bringing the government down now will not be a particularly smart thing to do since the numbers ensure that no combination of the Opposition can take its place. This could actually have the unintended consequence of giving the coup de grâce to a dying government and enable a new UPA team to take office, with enough time on hand for the 2014 general elections. Preventing the government from functioning is a short-sighted policy which only degrades our political system and extracts a long-term price from all those involved and, of course, the country.
 
UPA
In the decades to come, historians will wonder just why a government that had beaten back a massive political challenge on the Indo-US nuclear deal, overcome the turbulence of the world economic crisis of 2008, won a substantial victory in the general election of 2009, became rudderless in the stormy waters of 2010-11. It is not as though its leaders—Sonia Gandhi and Manmohan Singh—faced any allegations of personal impropriety. Neither was there any serious challenge to their leadership from within the UPA.
One big problem is that it is not easy to forecast outcomes of phenomena that are happening even as you try and understand them. So it is with the seemingly dismal  future that we seem to be drifting towards.
Viewed from an admittedly short perspective, it would appear that the monsoon session of parliament could well be  a sort of last chance for the system to avoid political default, and for the UPA to recover its lost balance.
Mail Today August 4, 2011