Of mud pies and onions

Of mud pies and onions

Policy paralysis and the uncertain outcome of the 2014 general election are behind India’s recent economic difficulties, Lord Meghnad Desai told an Asia Scotland Institute gathering at the University of Edinburgh Business School, but once the votes are counted growth will resume, the Emeritus Professor of Economics at the London School of Economics predicted.

Lorddesai Crop

Striking an optimistic note, he contrasted “porcelain vase China” with “mud pie India”: the former outwardly stable but liable to crack; the latter amorphous, without a dominant power, constantly reshaped by coalition politics and therefore enduring.

For Scots contemplating investing in India “the key is patience” along with rigorous preparation and the right advice: “Academics are much cheaper than consultants and they have the advantage of knowing what is actually happening,” he quipped, adding that Scots should have more visible relations with Asia and “promote your own brand and not just be subsumed in the wider UK.”

In a wide-ranging, witty and forthright Adam Smith Series address titled ‘India and its economy: The final collapse of a plan or a pause for breath?’ Lord Desai tackled the Indian economic slowdown in its political context.

Political gambling

“My view is the drop in the growth rate is a feature of political uncertainty and that the growth rate will be restored once that uncertainty is removed,” he said, adding that widespread corruption, backlogged infrastructure projects and persistently high inflation have also contributed to the economic gloom.

He argued that the outcome of the election depends on two gambles.

The ruling Congress Party has wagered that providing generous subsidies to the agricultural sector and progressive welfare policies for the rural poor under the Food Security Act will secure victory. “In 2004, Congress interpreted the BJP loss of the election as a reaction to the fruits of economic growth bypassing rural areas and accruing only to urban areas,” he explained. “As a result, the government has guaranteed certain benefits for agricultural constituencies and farmers. Now there is greater prosperity in the rural areas thanks to this redistribution.”

But this has caused “immense resentment” in urban areas where the high price of food staples, onions in particular, has become a common gripe even among the affluent middle classes. “Governments have fallen on the price of onions,” Lord Desai half-joked.

The opposition BJP’s gamble is pre-announcing their candidate for Prime Minister, Narendra Modi. The chief minister of Gujarat is controversial: accused by opponents of Hindu chauvinism and complicity in communal riots that killed hundreds of Muslims; lauded by supporters for overseeing increased prosperity in Gujarat without resorting to corruption. “He is a great public speaker and his slogan ‘Minimum government, Maximum governance’ has gained a lot of traction,” noted Lord Desai.

And the winner will be…?

“I expect the BJP to win in coalition with Modi as PM,” said Lord Desai, although the result is highly unpredictable because India’s youthful demographic structure—two thirds of the population is under 35—means that 120 million new voters will take part in this election.

Nobody really knows which way this new generation of voters will swing: whether they will support the established dynastic and caste-based political parties or back new political players such as the recently formed ‘Common Man’ anti-corruption party.

Another factor will be the voting patterns unique to India. “The poor vote more assiduously than the rich and rural areas more assiduously than urban areas. And people are smart enough to be bribed by all sides and then vote whichever way they want anyway,” he said.

If India gets a good, stable government it could return to double digit growth, he reckoned, but that’s a big ‘if’ because whichever government takes office, India faces enormous governance challenges.

“The problem is there is no fiscally responsible party. Nobody thinks we should run a balanced budget. India must be the only country in the world in which one third of tax revenues go on servicing government debt. Also, all parties are statist, certainly outwardly. It is not the done thing to say that liberalising reforms have delivered growth through the private sector and that is a fantastic thing. What India needs is minimal government interference as there is tremendous entrepreneurial energy in the country.”

Functional corruption

The country also needs to tackle corruption. “People below the poverty line are paying $800m in bribes to get what they are already entitled to according to Transparency International. And so politics in India plays the role of an agency to deliver what the state should be delivering to the population. In that sense corruption in India is functional.”

The effects are seen in all aspects of public life. Responding to a question on the environmental and pollution challenges India faces, Lord Desai was withering. “The laws are there but not implemented. Serious action is not happening because the government is not willing to take on the people breaking the law.  I don’t think India has got a serious environmental policy.”

Can India rid itself of pervasive corruption? “I don’t think so but the question is whether we can reduce the interference of corruption in private sector decisions which leads to crony capitalism rather than competitive capitalism. The big issue is whether we are going to have new parties springing from the younger generations with new systems or whether the old parties are going to transform themselves.”

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