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Sunday, 13 December 1998

A Vote for Reform - Lessons from the Southern Debacle


(Originally appeared in the 1990s in the Times of India, as published in M. D. Nalapat's book "Indutva", Har-Anand Publications, 1999)


After leading the United Kingdom to victory in World War II,
Winston Churchill and his Conservative party were bundled out
of office in the 1945 parliamentary poll. Five years later, he
returned to office, this time more respectful of the doctrines of
the Labour opposition. The conciliatory policy followed by the
Conservatives under Churchill from 1951 onwards resulted in
the sharp growth of union power in Britain, and to a diminution
of competitiveness that eventually pushed that country below
France, Germany and even Italy in the growth league. The effects
of Churchill's flirtation with Fabianism were effaced only with
the coming to power of Margaret Thatcher in 1979. The eleven
years of Thatcherism saw the taming of organised labour and the
withdrawal of the state from key economic sectors. Today, rather
than the Conservatives acquiescing in Labour dogmas, it is the
latter party - led by the 'non-ideological' Tony Blair - that is
shifting to the right.

The swelling cacophony of voices within the Congress party
calling for a rethink on the policy of liberalisation is reminiscent
of the Conservatives in 1945. The difference is that unlike
Churchill, P.V. Narasimha Rao has made it clear that he would
not go back on the process of economic reform initiated by him
in 1991. However, the Prime Minister is facing considerable
opposition to this stance. Should one of his rivals unseat him, it
is possible that the populist policies favoured by Deve Gowda,
N. T. Rama Rao and Mulayam Singh Yadav will also be adopted
by the Centre. The Nasik Security Press is ready at hand and can
be placed on overtime to finance pet schemes through a ballooning
deficit.

Short-Lived Benefit
However, the 'benefits' of populism would be short-lived. Easy
money would perpetuate the system of leakages, in which most
of the funds spent on specific programmes disappear into the
pockets of the officials and contractors entrusted with
implementation. It would also lead to pressure on prices. India
was on the verge of hyperinflation when the Rao government
took over in mid-1991, and two to three years of fiscal
extravagance would lead to a return to high inflation rates. This
would have an immediate impact on social stability. With their
real incomes and savings destroyed by rising prices, the middle
classes would take recourse to agitational methods. Issues now
dormant, such as Mandal and the temple controversy, would
once more erupt. The government in office may attempt to douse
the flames by releasing fresh wads of banknotes for yet more
populist schemes, thus stoking the flames of inflation higher.
Finally, the populist alliance may itself disintegrate, each
constituent blaming the other for the crisis.

Any move to meet populism with populism is bound to
recoil on the Congress as did its attempt to fight the Akali Dal
in Punjab by propping up a Sikh fundamentalist like jarnail
Singh Bhinderanwale. This flirtation led to a conflagration that
consumed the state for over a decade. Ostensibly aimed at
reducing the temperature of protest within the Muslim
community, the Muslim women’s Bill sponsored by Rajiv Gandhi
similarly boomeranged on the Congress. The act gave legitimacy
to fundamentalist groups and encouraged them to gain control
over the minority agenda. There is a lesson in this: Neither
populists nor fundamentalists can be beaten at their own game.
The trick is to change the parameters of the dialogue so that the
short-term and essentially destructive nature of their policy
formulations get exposed.

Critical to Success
In a democracy communication with the voters is critical to
success. And it is in this that the Narasimha Rao team has failed.
It took a convulsion within his party to goad Finance Minister
Manmohan Singh into ’selling’ his reforms to MPs of his own 
party. Before that, his attitude was largely one of disdain for
those who were ignorant of the programmes or had the temerity
to criticise them. The Prime Minister's publicity managers too 
did precious little to improve his image in the media. There were
few formal interviews to the media and apart from the anodyne
speeches in public, there was little projection of Rao’s policy
imperatives. For any policy to succeed it is essential that it is
perceived as having wide support. This is especially so with the
new economic policy because after a point reform should be self-
sustaining, and not depend on governmental fiats. If a perception
has gained currency that the defeats in two southern states last
month were an indication of voter anger at the reform process,
the Prime Minister’s lack of contact with the media should carry
a major share of the blame.

This is because the anti-Congress vote in Andhra Pradesh
and Karnataka was not an anti-reform vote. Indeed, a case can
be made out that it was a vote in protest at too little reform. For
it is a fact that the process of reform has remained largely
confined to the Finance, Commerce and Industry ministries at
the centre. The discretionary powers enjoyed by the state and
district administrations continue. Consequently the average
voter’s interface with the bureaucracy has remained unchanged
despite the reform. The palms stretched out to be greased, and
the forms needing to be filled, are as plentiful as before. Small
wonder that he is impatient with the talk of liberation.

In Andhra Pradesh and Karnataka (not to mention Uttar
Pradesh) the state governments will need to generate resources
to pay for the populist schemes they have introduced. Assuming
that the Centre refuses to meet such expenditure through deficit
financing, the state governments will have either to raise taxes
or sell off assets to generate funds. Increasing taxes will make
their states less attractive for investors, thus leaving disinvestment
in government assets as the only way out. Such a ’takeover’ of
the public sector by the private would in fact help the process of
reform, rather than retard it, though of course only till the assets
last. After that, the only option would be—again assuming we
have a sane government at the Centre—a scaling down of
administrative expenditure by cutting back on government staff.
In the years before the reform process got underway, expansion
of government employment or what was euphemistically known
as "planning" was seen as a desirable end in itself. As a
consequence, much of revenue now gets spent in salaries for
individuals with very little effective work. Both major
disinvestment in state assets and a scaling down in government
employment are desirable, although they have to be carried out
in ways that are politically acceptable.

Three Directions
The finance ministry’s technocrats forget that they are functioning
in a democracy, and not the junta administration so familiar to
Chicago School theorists. A scaling down of public sector
employment can take place, provided a golden handshake is
provided in the form of discounted shares of the public sector
units, or by other means. In the same way, labour resistance to
relocation can be overcome by making over a percentage of the
revenue from sale of land (at the old site) to the relocated
workers. At present much of the cream from such sales is
accruing (in black money) to politicians. Instead, it should go to
those affected by the reform process. Thus, rather than go slow
on reform, political commonsense dictates a speeding up of
reform in three directions: first, helping the domestic producer
by removing obstacles to expansion; second, by carrying forward
the process of reform to the state and district level, so that not
only a handful of businessmen but the average citizen also 
enjoys its benefits: third, by much quicker disinvestment and
curtailment of government overhead costs, accompanied by
golden handshakes to reduce the political fallout. The lesson
from Andhra Pradesh and Karanataka is not that reform should
be abandoned. Rather, it is a protest that reform has not yet
percolated down to the state, district and tehsil level.



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