India’s Political Economy: High Growth, Low Votes

Arvind Panagariya

Predicting election outcomes in India is a hazardous activity; inferring them from economic performance is even more hazardous.

Going by per-capita income growth, one would predict a resounding victory for the ruling Congress party-led United Progressive Alliance (UPA).

At 7.4%, per-capita income growth during the first four years of the UPA rule has been by far the highest of any four-year period in India’s post-independence history.

Yet, if the electorate goes by the contribution the present government has made to the accelerated growth in incomes, it would hand the latter its worst defeat.

The UPA government has perhaps done the least of all governments since the 1991 Narasimha Rao-led Congress administration to advance economic reforms.

At the outset, it committed itself to not reforming India’s archaic labour laws. Sadly, it also failed to deliver in areas it had assigned high priority.

Unclear answers

Early in its tenure, the UPA had identified pension reform, further opening of the insurance sector and rapid build-up of the country’s infrastructure as high-priority areas.

More than four years later, legislation to set up a pension regulatory authority and raising the share of foreign investors from 26% to 49% are languishing in parliament.

In the entirely uncontroversial area of infrastructure, the government lost the momentum its predecessor, the BJP-led National Democratic Alliance (NDA) government, had achieved.

Even trade liberalisation, which greatly accelerated under the NDA government and was initially continued by the UPA, has come to a standstill in the past two budgets.

A costly National Rural Employment Guarantee Scheme, some additional opening up to foreign investment in the telecommunications sector, construction of new airports in Bangalore and Hyderabad, and the setting up of a Food Safety and Standards Authority and Competition Commission after four arduous years remain the main achievements of the government.

Will the excellent performance of the economy benefit the UPA? Or will its near paralysis in carrying forward the reforms hurt it?

At least the past experience does not offer an affirmative answer in clear terms.

The government of Mr Rao, which came to power in June 1991, is credited with launching the most far-reaching and systematic economic reforms.

The reforms not only stabilised the economy following the 1991 balance of payments crisis, they also delivered the hefty 6.5% per annum growth during the last three years of his tenure.

Yet, he lost the 1996 election.


In a similar vein, led by Prime Minister Atal Behari Vajpayee, the BJP-led NDA government undertook massive reforms in virtually all areas of economic activity during its tenure from 1998 to 2004.

Those reforms made a significant contribution to the shift in India’s growth rate to the current 8% to 9% growth trajectory. In the last fiscal year of the NDA government, 2003-04, the economy grew 8.5%.

Yet, the NDA government lost power to the UPA.

The popular view is that the NDA lost the election because its reforms, highlighted via its “India Shining”‘ slogan during the election campaign, mainly benefited the urbanised, industrialised India and left the rural poor behind.

But this view scarcely stands up to close scrutiny: according to the available evidence, the proportion of the poor below the poverty line significantly fell in both rural and urban areas during Mr Vajpayee’s rule.

Regional inequalities and the rural-urban divide did rise, as has happened in every country experiencing rapid growth at low levels of development, for the simple reason that rapid growth concentrates in a handful of urban agglomerations.

But that did not drive the election outcome either: there was neither an urban-rural nor a regional divide in the voting pattern.

The BJP-led NDA lost in richer states of Andhra Pradesh and Tamil Nadu while winning in the poorer states of Rajasthan, Madhya Pradesh and Chhattisgarh.

In the former group of states, it lost in both rural and urban areas while in the latter group it won in both.

In recent elections, two factors seem to have critically influenced the eventual outcome: coalition formation and anti-incumbency at state level.

Today, Congress has only 153 of the 272 seats it needs for a majority in parliament. The UPA consists of 11 parties and still needs the outside support of half a dozen other parties to achieve a majority.

A dramatic example of the importance of coalition politics is provided by the role played by the southern regional party, the DMK, in 2004.

It had been with the NDA in the 1999 election but switched allegiance to the UPA in the 2004 election. Its 16 seats, subtracted from the NDA and added to the UPA, provided the balance of votes the UPA needed to from the government.

In recent years, voters have returned state governments to power only when the latter have provided decisively good management and delivered perceptible improvement in living standards.

Therefore, Delhi, Madhya Pradesh and Gujarat represent a handful of the cases in which the electorate returned the incumbent governments back to power.

Excellent chance

In most cases, the electorate has handed punishing defeats to incumbents even if it has meant replacing them with another equally incompetent government.

In turn, the anti-incumbency factor at state level has spilled over to parliamentary elections. That factor substantially contributed to the losses the BJP, the dominant partner in the NDA, suffered in the 2004 election.

If the voters this time around vote on the basis of improvements in their lives, the UPA stands an excellent chance of returning to power.

Growth in agriculture, which employs 60% of India’s workforce, has been 4% in the past four years. Prosperity in rural areas is also apparent from the spread of phones. Rural tele-density today is more than 13%.

Making the conservative assumption that each household has four members, this figure implies every other household in rural India now has a cell phone.

Even the sales of motorbikes and automobiles in rural areas are now on the rise. As for urban India, some slowdown in the economy due to the crisis notwithstanding, its face has been dramatically transformed in the past four years.

Why have the average or worse performing incumbents fallen out of favour with the voters?

After all until the 1980s, the electorate had routinely returned the incumbent governments to power. In a Wall Street Journal article in 2004, Jagdish Bhagwati and I hypothesised that the key factor behind the change in voter attitude was the “revolution of rising expectations” unleashed by the reforms and the resulting growth acceleration.

As long as India took the Hindu rate of growth, the voter remained in the grip of fatalism: kya karen, bhagwan ki marzi hai (What can we do, this is God’s will!).

But once reforms showed him that change was possible and that poverty was not God’s will, he became more demanding: If the incumbent won’t deliver fast enough, he would try someone else.

In concluding, let me raise a slightly different question. Between the UPA and the NDA, the major contenders, who will provide a better government in the next five years?

Reform advocates who are also social liberals face a dilemma in answering this question.

The UPA is bound to interpret a victory as vindication of its current policies, which would seal the fate of reforms for another five years.

The NDA is more likely to return to the reforms it had vigorously promoted during its previous stint.

But alas, the NDA’s prime ministerial candidate LK Advani, who lacks the moderation of his predecessor when it comes to Hindu-Muslim relations, leads it.