The economy did not play a major role in the Bharatiya Janata Party’s (BJP) government formation in Karnataka, but it may be defeated. Reasons listed by political analysts to explain the Karnataka state assembly election results included high levels of corruption and inflation, and the changing preferences of rural voters.
The BJP’s national leadership isn’t taking a risk, going by the obvious responses that the official has been scrambled: tax authorities looked into credit-card spending outside the country and the Reserve Bank of India punished heavily 2000 note death
These hastily announced decisions—a call to banks to return notes during the peak summer months with an unusual lack of empathy—are aimed at undermining corruption and burning the government’s credibility for soaking up the rich. They may eventually seem like minor inconveniences.
Because, if political analysts have it right, the bigger concern for the economy is Karnataka’s rural voters’ disdain for the BJP’s welfare brand. The party claims that it has created a “beneficiary” class of beneficiaries. Dissatisfaction in this self-conscious vote bank could set off competitive populism among political parties. A game of catch may be on the cards.
We have seen this play out before. During the 2019 Lok Sabha elections, the state governments of Odisha and Telangana tried to address rural distress and improve the viability of agriculture by giving money to farmers. The central government felt the challenge and started doing the same through the PM-Kisan scheme. Income supplements are not bad economics for farmers. The minimum support price distorts market signals to farmers about what to produce and how much to produce, but direct transfers do not. However, the failure was that the government missed an opportunity to convert perverse agricultural subsidies like water and electricity into income supplements. It is difficult to explain the merits of this reform in a noisy political climate. It is pending and is likely to remain so. Meanwhile, an income supplement for other vote banks – minus the necessary reforms – began to look like a distinct possibility.
Leading up to the upcoming 2024 Lok Sabha elections, the Congress party has turned the knob on populism. It successfully restarted the debate on pensions, forcing several state governments to go back to the Old Pension Scheme (OPS) for their employees, regardless of the burden it would put on their exchequer. Rajasthan, Chhattisgarh and Jharkhand have announced return to OPS and Himachal Pradesh is expected to follow suit. Punjab is reviewing it.
The Narendra Modi government at the Center has not been able to meet this challenge of populism. It has set up a panel to reform pensions for government employees, a section of the electorate that is not in distress.
Among others, Montek Singh Ahluwalia, deputy chairman of the then Planning Commission headed by then Prime Minister Manmohan Singh, cautioned that going back to OPS would bankrupt governments. OPS was closed by the Atal Bihari Vajpayee government in December 2003 as it was not sustainable.
In Karnataka, the Congress government decided on its first day in office to implement its campaign promises: 200 units of free electricity per month to every household, 2,000 per month to each female head of the household, 10 kg of rice per month to each member of below poverty line families, 3,000 to all unemployed graduates, 1,500 to all 18-25-year-old unemployed diploma holders every month for two years and free travel for women in public transport buses. In its 2019 Lok Sabha campaign, the Congress promised income support under its Minimum Income Scheme (NYAY) 72,000 per year to India’s poorest families. She will likely revisit that promise for next year’s elections.
The danger then would be that under the pressure of a mega-plan of its own the Center would go ahead even though it had not created the necessary fiscal space to make such spending possible. Blame India’s failure to improve its tax-to-GDP ratio from its current level of 12%, lagging most comparable economies.
Fiscal unsustainability is a concern, but not a major one. Karnataka may be in a position to make concessions. The problem is that India is responding to economic pain with populism and appeasement – a kind of political gift that offers no sure way out of economic difficulties. Only sustainable livelihood can provide economic security and also expand our consumption market by increasing the spending power of the people, which is essential for the sustainable development of our economy.
It is widely agreed that India’s economy is not generating the required number of jobs for the millions of youth with low skills. Governments have been under the impression that ‘welfare’ spending can make up for these failures. Money—even through fast, leakage-proof digital transfers—cannot be a substitute for a quality livelihood.
Our economic model is not working for all Indians. Repairing it requires sound policy advice from economists and technocrats, to which governments are allergic. Good bureaucrats often have a stockpile of bad ideas when the political temperature rises. Political confidence in reforms seems to be waning. Both Congress and BJP seem ready to tear apart the progressive economic policies of their former prime ministers. This cannot be good for the economy.
Pooja Mehra is Consulting Editor, Mint and author of ‘The Lost Decade (2008-18): How India’s Growth Story Devolved into Growth Without a Story’
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