Thursday, December 08, 2005

Ghastly coalitions, away Times of India Dec. 4, 2005

Nitish Kumar’s victory in Bihar reminds us what a young country we are. The young look to the future, not the past, and Laloo’s appeal to caste had to fail ultimately because it sought to undo the wrongs of the past. The young want to make something of their life, and they look to the government to enable them to do so. Congress learned this lesson painfully in the winter of 2003 in the west central states. The difference is that to bijlee, sadak, pani, the young Bihar voter has added padhai and naukari.

It is now BJP’s turn to learn this lesson. The Bihar election gives moderates in the BJP an opportunity to stand up to the RSS and prove that a backward looking appeal to Hindutva will eventually fail in a young country. Vajpayee understood this, but people called it a mask. Advani too had begun to grasp this. Their speech writer, Sudheendra Kulkarni, kept reminding them relentlessly to look to the future, to shed Hindutva, and become a moderate, inclusive, secular party of the right.

As things stand, voters don’t trust either of our two main parties, which is why neither is able to win a majority, and we have to suffer through this era of ghastly coalitions that paralyze decision making. Voters don’t trust the BJP because they fear its sectarian extremists; they don’t trust the Congress because of socialist extremists, who believe in state control. India’s democracy will only be effective once we have two strong centrist parties, which shun identity and ideology, and yet offer genuine choice to the voter. Democracies around the world have learned that extremist parties fail and centrist parties succeed. This is because ordinary voters care about things that affect their daily life. They are pragmatic and fear extreme, ideological solutions. Hence, socialists in the Congress and Hindu fanatics in the BJP are liabilities. Neither mandal, mandir, nor socialism are viable strategies long term.

Since Congress occupies the space left of centre, the BJP ought to seize the empty space right of centre. Since Congress has always appealed to the poor with populist handouts, the BJP ought to embrace the exploding new middle class, which desperately wants reforms. This might seem a losing strategy as there are more poor people than middle class, but remember that every poor person wants to be middle class. Middle class is not only defined by income, but it is a self-reliant state of mind, which looks to the future, invests in its children and pulls itself up by its bootstraps. In contrast, the mindset of the poor waits for handouts and subsidies. NCAER projects that large parts of India are already turning middle class and soon half of India will be so.

Once India has two viable national secular parties, there will be pressure on both to perform, and attention will shift to governance and reforms, and away from caste and religion. If voters of Bihar are discovering this, the voters of UP will not be far behind. They watch television and see how far the rest of India is leaving them behind. They see that the simple goods of life are plentiful and cheaper in their neighbouring states, and they will wonder why Mulayam Singh refuses to enact VAT. So, it is time for both our national parties to wake up. As for the BJP, its best compliment to Nitish Kumar would be to support him to clean up Bihar and never utter the word, Hindutva there.

A New Social Contract, Times of India, Nov. 20, 2005

I was deeply embarrassed last week before a distinguished audience of sophisticated investors abroad—they virtually called me a liar. A year ago I had reassured them that our stellar reformers–Manmohan Singh, Chidambaram and Montek–would not only ensure that our economic reforms would continue but they might even accelerate. A year later, the reforms are stuck and they were angry. I could not pretend that the reformers had become victims of coalition politics, for insiders tell me that the problem is with the Congress Party itself, which has lost the will to reform.
Luckily, I was bailed out by the Indian economy, which continues to grow robustly, and has been doing so for two decades, contemptuously ignoring our governments. The only way to explain this contradiction is that politics and economics are increasingly getting divorced in India, and we may have become like Italy, where they used to say, the economy grows at night when the government is asleep. Stephen Roach, the chief economist of Morgan Stanley, who exercises considerable influence on investor minds, explains: “India is on the cusp of something big. After my third trip there in 18 months, I am as enthusiastic about India as I was about China in the late 1990s. What excites me is the potential for an increasingly powerful internal consumption dynamic - the missing link in most development models.”
Roach points out that India’s consumption share of GDP is 64%–higher than that of Europe (58%), Japan (55%), and China (42%). The world economy needs another major consumption-led growth nation other than America. Thus, “India’s consumption-led approach to growth may be better balanced than the resource-mobilization model of China”. That consumption is a virtue is an idea that Lord Keynes made popular, and serious economists still believe it, but Indians with their streak of asceticism are less confident. Roach suggests that this government’s populist programs, which go under the code name “inclusion”, such as the Employment Guarantee Act, might even generate a consumption dividend in the hands of the poor. I would agree with him if I had any hope that its benefits would actually reach the poor.
Vijay Kelkar reminded us recently in his Gadgil Memorial lecture that India ought not to take its “golden age of growth” for granted. The window of opportunity for “a grand demographic dividend” will be a limited to the next two decades, and if our leaders do not reform aggressively, and if they continue down “the slippery path of state capitalism and populism”, we will lose the opportunity, become economically stagnant as we did before.

So, how do we get our government off its “slippery path of state capitalism”? The political scientist, Bhanu Pratap Mehta offers an answer. “In this situation, any imaginative party would propose a new social contract. It would expand the social security functions of the state in areas such as health, education and employment. But it would also argue that reforms elsewhere - creating an integrated goods and services tax, furthering disinvestment, committing to genuine special export zones and fiscal prudence - are not incompatible with, but might actually further, social objectives.”

Our entire political class must buy this new social contract with urgency, and especially the Congress Party. The great failure of reformers in all parties is that they did not convince the rank and file that the reforms would not lose them votes. Will our stellar reformers do it now or must we resign to snatch defeat from our golden age of growth?