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Friday, May 24, 2024

India’s Transformative Trajectories in Political Economy

The economic and political landscape immensely contrasts between one nation and another, especially based on their political ideologies. For instance, the structure of the economic framework greatly relies on whether the nation is operating in a capitalist system or a socialist one. The economies of the US, UK, Canada and other capitalist countries are identified by the free market (unregulated system of economic exchange) and private ownership of resources which in turn influences the income, wealth, price and allocation of goods. On the other hand, more intervention by the government to allocate resources and wealth equitably is something that defines a socialist society. A gripping point to take note of is that no nation, as of today, is completely socialist, wherein countries like China and Vietnam, other than India function in a mixed economy. Regardless of where a country is placed on the political spectrum, its political stance will greatly influence its economy.

Improving economic performance is one of the government’s primary goals. Popularity power is correlated to the effective management of the economy. This is one of the reasons why the government prefers to adjust its expenditure, using monetary and fiscal policies to perpetuate a healthy economy. For instance, if inflation increases, the government tends to decrease demand and lower inflation by relying on tax payments, interest rates, and savings. Conversely, if the economy is suffering from a recession, initiatives like reducing taxes and interest rates and encouraging investments and exports will be the action plan of the government. Therefore, economic development is greatly benefitted by having political stability as uncertainty and disruption can affect market confidence.

Ideological differences shape political parties worldwide. Nevertheless, the fact that political parties in India do not label themselves based on ideologies, especially when it comes to ascertaining economic policies, is widely recognised.[1] It said that parties, like the Bharatiya Janata Party (BJP), Congress or the Third Front, often tend to execute identical strategies, no matter which party or coalition government is in power. Suri (2013),[2] after conducting a rigorous study, states that the border between the parties based on overall economic policies is fading away, with the Left  as the only exception, since their opinion contradicts with liberalisation inclined government.

The Indian political landscape is an intricate interplay of ideology and practical approach, where parties negotiate their way through a subtle blend of economic policies within changing social trends and voting requirements. This complex design reveals how determining the character of Indian politics is never just black and white because it is made up of so many diverse views, desires and concerns of various people and groups.

In the last ten years, the country has witnessed an increase in the popularity  of the BJP, which in turn has led to a rise of alternative perspectives regarding the apolitical nature of India. According to Sengupta (2019),[3] the BJP has a slightly different perspective on the welfare state of the country. He added that encouraging private businesses and increasing infrastructure expenditure is preferred by them. In 2014, in a meeting with the business community in Japan, Prime Minister Narendra Modi confidently proclaimed, ‘Being a Gujarati, money is in my blood… commerce is in my blood.’

 

A Decade of Slow Growth and Reforms (2004-2014)

It is believed that the differences between the governments of UPA and NDA are simply due to their political structure and formulation. The current government is navigated by a single party which is leading the policy-making by having a complete and commanding majority. This is important when it comes to the provision of political stability. This, if we compare it to the former government, highlights how policy was usually captive of coalition compulsions since it was held in collaboration with a loose alliance of parties.

A single-party government implements their agenda with greater freedom as they are not compelled to rely on the agreement of coalition partners. In this case, more powerful executive authority is enjoyed by them. With no need to make striking concessions to any coalition partners, this type of government is more consistent in policy formulation. This results in the government acting more positively and swiftly.

Conversely, competing demands and priorities of different parties within the alliance could lead to delays and compromises in decision-making while accommodating the various interests of various partners. Key policy decisions are made and implemented only after consultation and negotiation with the partners. When there’s no single party that forms the government, accountability is also not concentrated on a single party but rather is spread among the multiple parties. This also creates a hurdle for the voters to hold the government responsible or to assign blame.

UPA government faced an economic challenge to formulate new mechanisms and address the distinctive problems that can arise from growth. These problems include unequal distribution of income, economic disparity, social exclusion, unemployment, etc. One of the prominent issues during the UPA time was the issue of land acquisition or the process where land is acquired from individuals or communities by the government or private entities.

The increase in growth also led to a shortage of skilled workers, increasing the skill premium and unleashing a high demand for education which acted as a means of social mobility. Fundamental differences couldn’t be made in the public education system, and the government couldn’t address the ongoing problem of low quality. Administrative incompetence, resource hindrances and institutional gridlock were the systematic challenges faced by them.

It is not that UPA did not have a vision for altering the institutional framework of the nation. It approved aspiring and enthusiastic legislation to boost transparency and ensure justice for citizens. Banerjee (2014) [4] demonstrated a splendid horizon and desire to increase transparency issues through acts like the Right to Information (2005) which was indeed a turning point in the history of legislation. Under this act, any information can be sought from the government authorities. The citizens are thus empowered to question the confidentiality and misuse of power practised in governance. Not only information is sought by this act, but it also allows citizens to inspect Government documents and ask for certified photocopies of them.

 

Growth performance:

Annual Average UPA I (2004 -09) UPA II (2009 -13) UPA (2004 -13)
Growth rate of real GDP (%) 8 7 7.6
General inflation (industrial workers) (%) 6.1 10.4 8.1
Food inflation (industrial workers) (%) 7 11.6 9
BSE sensex, average annual growth (%) 15 13.9 14.5
Fiscal deficit (% of GDP per year) 3.9 5.5 4.6
Annual FDI inflow (billion $) 15.44 26.19 20.22

Source: RBI and Planning Commission [5]

Economic growth and inflation:

The UPA I, under Manmohan Singh from 2004 to 2009, witnessed amendments to social welfare programs such as NREGA. Although it achieved 8%, this was a period when the inflation average rate was at 6.1%. The UPA II period of 2009-2013 faced the global financial crisis of 2008 that slowed growth. However, its active 7% achieved average is attributable to its stimulus packages. The period had the highest inflation as well, mainly concerning food inflation of 11.6% on average. Such high inflation was due to the disruptions in the supply chains and rising global prices for commodities.

Stock market and fiscal deficit:

Concerning UPA I, the stock market boomed and grew by 15% due to high economic growth as well as foreign investments. At the same time, the fiscal deficit was under control and amounted to 3.9% of GDP. The situation allowed the adoption of various social programs that were not excessive or overstretched. The global crisis and its aftermath led to significant volatility (13.9%) in the UPA II stock market. The deficit rose back to 5.5% of GDP as the government implemented stimulus measures.

Foreign Direct Investment (FDI):

The UPA I government saw a modest increase in FDI ($15.44 billion annually) as reforms opened up the economy to foreign investors. With the global crisis making India an attractive investment destination, the UPA saw the second-highest inflow of FDI ($26.19 billion annually).

Two major initiatives stand out:

1) Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA):

Launched in 2005, initially NREGA then renamed to MNREGA, was an important social welfare program to provide rural households with 100 days of employment annually. The program addressed chronic rural unemployment and underemployment, especially during lean agricultural seasons. This program has not only provided vital security for millions of poor families but has also invested in the rural economy, stimulated local demand and boosted infrastructure development. NREGA empowered women through increased labour force participation but faced challenges such as leaks and limited skills development.

2) Liberalization of Foreign Direct Investment (FDI):

The Government intended to encourage overseas investment in India by relaxing controls and increasing sectoral caps. This approach led to a considerable increase in Foreign Direct Investment (FDI) that provided an essential financial base for the expansion of infrastructure and industry. One of the benefits of FDI is technology transfer which improves productivity and facilitates job creation. Nonetheless, worries were expressed about the possibility of the loss of jobs through foreign firms as well as surrendering control over key sectors. The UPA addressed these issues by establishing protective mechanisms and encouraging domestic investments in addition to FDIs. These two policies – NREGA and FDI liberalization – have deeply impacted the Indian economy and society while promoting growth with social equity in mind.

 

Challenges and Progress in the Modi-led government (2014-2024)

If we look at just the economic growth numbers, the accomplishment of the Modi government has been remarkable. When Modi became Prime Minister in 2014, the economy was growing at a slow pace. Several prominent corruption cases have shaken the trust of the investors, both foreign and domestic in the Indian economy

However, between 2014 and 2022, an increase in gross domestic product (GDP) was witnessed in India, with an increase from US$5,000 to over US$7,000, which is a growth of around 40% in eight years. Such computations rely on purchasing power parity, the process of comparing overall purchasing power across various nations and periods.

According to the International Monetary Fund’s (IMF) forecast, India’s economy will expand at a rate of 6.5% in 2024. Exceeding all other large economies, this is higher than the projected growth of China which is 4.6%. However recent projections suggest that inequality in the country has also reached its peak. Growth, if it has occurred, has appeared to be unequal.[7]Two major challenges for the Modi government in its upcoming term will be to convert this increase in growth into the generation of more productive jobs and to control political and economic elites’ excess wealth.

A greater emphasis was placed on providing more public services and delivering social welfare programs with a reduced level of corruption during the second term of the Modi government. This led to the launch of a large-scale rural road construction project and enrolment of around 99% of Indian residents in Aadhar, a digital identification system directly linked the bank accounts.

Through the introduction of Aadhar, national and state governments are now able to directly provide benefits through their bank accounts. It also solved a prominent issue in the welfare system of India, since it led to a reduction in the leakage of subsidies to the poor households. Toilets, gas cylinders and other such essential services, which are typically privately provisioned, are now provided by the government in large numbers. Former Chief Economic Advisor and a prominent Indian economist, Arvind Subramanian, therefore referred to this period as the beginning of ‘new welfarism’ in India.

Post-2014: Focus on Market Liberalization and Ease of Doing Business

The present administration of the Indian government recognizes the crucial role that businesses play in the economic growth of the nation. Various key initiatives are in progress to create an atmosphere where businesses can flourish.

Streamlining the Business Landscape:

Substantial strides have been made by the government in streamlining business rules. Multiple initiatives by the Modi government have been launched to provide a more conducive business atmosphere. The most crucial step towards advancing ease of doing business is the passing of GST bill, whose objective is to accelerate growth.

Attracting Foreign Investment:

There has been a notable increase in the Foreign Direct Investments (FDI) reforms, which has accelerated after the 2014 elections. FDI cap in insurance, defence and e-commerce was increased in the first year of their term itself. The credit for this success mostly goes to the initiative namely, ‘Make in India’, which has promised investors a favourable environment for FDI which will ultimately result in an increase in the confidence of investors.

Digitalization:

While Digital India, a flagship initiative of the NDA gained momentum soon after the NDA assumed power, it peaked following the demonetization of currency in November of 2016. During the last three years, the emphasis on ‘going digital’ has been widespread, ranging from village-level e-panchayats to the distribution of subsidies under the scheme of DBT – Direct Benefit Transfer, from launching apps like BHIM to the major push for the identity platform with Aadhar.

Post-2014 Challenges: A Deeper Look

While the world after 2014 witnessed significant technological breakthroughs and economic strides, there exist several persistent challenges:

The problem of job loss:

Of the estimated 140 crore population of the country, 67% fall between the ages of 15 and 64[6]. This indicated that approximately more than  91 crore is the job-seeking population. The commitment to 2 crore jobs annually along with the mantra of ‘achhe din’ (good days) helped the Modi government win the 2014 election. The need of the hour is to formulate and enforce policies that promote the generation of jobs, such as infrastructure expenditure, creating industry-friendly laws, and offering financial incentives for businesses generating employment.

Uneven growth:

Recently, the Indian economy became the fifth largest in the world, surpassing the United Kingdom. However, the GDP growth trajectory of India has been inconsistent in recent years. The primary reason is COVID-19, a worldwide outbreak that had serious domestic repercussions leading the economy to decline in the FY 2020-21. Attempts to comprehend this differential growth performance have been made by a wide range of socio-economic studies, with arguments ranging from the nature of the government to planning the economic development, taxation system, education, and infrastructure, among others.

 

Conclusion

Political economy is the combination of political and economic influences on our contemporary society. This approach has been effective, as it enables us to comprehend governments and societies. Understanding this intricate relation allows people to make better, informed decisions about their financial situation, career choices and overall health. Moreover, citizens may influence the policies that ultimately shape the economic environment by being actively involved in the political process. By understanding the significant profound influence of politics on the economy, we can better navigate these forces more effectively and strive towards a brighter future for our own and our communities’.

 

References

  1. Kothari R. (1964). The Congress system in India. Asian Survey, 4(12), 1161–1173.
  2. Suri K. C. (2013). Party system and party politics in India. In Suri K. C. (Ed.), Indian democracy (pp. 209–252). Oxford University Press.
  3. Sengupta H. (2019). The economic mind of Narendra Modi. ORF Issue Brief No. 318.
  4. Banerjee, A (2014): “UPA Is Not Able to Take Credit for What It Has Done”, Hindustan Times, 25 March.
  5. Reserve Bank of India (RBI). (n.d.) https://www.rbi.org.in/
  6. Ministry of Statistics and Programme Implementation (Mospi). (n.d.). Periodic Labour Force Surveys (PLFS).  https://www.mospi.gov.in/

Sen K., (2024) How India’s Economy Has Fared under Ten Years of Narendra Modi. https://unu.edu/article/how-indias-economy-has-fared-under-ten-years-narendra-modi

Authored By:

Khushboo Zaveri

MA Economics Student,
Mithibai College (Mumbai)

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