Saturday, March 7, 2009

Indian Politics

After five years of UPA rule, and before the next elections in India, here are my thoughts:

The crisis of governance continues as both Congress and the BJP decline in importance.  The Congress has lost a coherent message or stance, its constituency has steadily siphoned off to the regional parties, and it is only held together through feudal loyalty to the Gandhi family.  Meanwhile, the BJP is radioactive as a coalition partner.  As fear of the Congress party declines, the need to ally with the right goes down.  They have virtually no presence in critical states, and those allies they do have often prefer leftist economic ideas.  

That is, the move to coalition governments that prize the contribution of the regional parties continues.  The problem is that these governments lack stability or ownership in national problems, so you see institutional decay.  It's very hard to govern large countries--the US is hard enough to govern, but now you're seeing the economic rise of very large, very diverse countries like Nigeria, China, and India.  These countries have fractured and conflicted polities, and are looking at poor institutions for some time to come.

This is crucial in India as the next stage of reforms will need to build state capacity.  Plenty of bad regulations and laws exist, but the bigger hurdles involve a more engaged state.  Establishing law and order is crucial an environment where Naxals and terrorists run free, while criminals run for public office and court systems are overburdened.  A bigger problem is establishing health care, education, and physical infrastructure.  The state has failed catastrophically at providing these goods in the past, though various governments have seen progress in coming up with public-private partnerships to deliver infrastructure.  Creating these links and investing in social/physical infrastucture tackles the biggest hurdles towards growth in the future.  It also complements a more market-driven approach; with a greater social safety net, people are more insulated against the creative destruction of the market and can better support market initiatives.

But you look at the UPA government in the last five years and they failed badly in that role.  Sure,  NREGA and Bharat Nirman provide useful rural spending.  But that the most a government flush with cash after hard-won reforms could do is corrupt populism doesn't bode well for the polity.  Much of this work simply continues existing schemes, while the transfers could be made much more efficient through direct cash vouchers.  These types of populist sops now dominate the budget, which is facing a deficit of 11%--about as bad as in the days when this led to a crisis.

This is not the end of the world, if only because Indian savings are heavily directed towards government borrowing needs.  This leaves the corporate bond sector short of funds and dependent on foreign inflows--which are quickly diappearing.   State incoherence here comes directly from the fact that the UPA governs as a coalition and is dependent on obstructionist coalition partners to remain in power.  That said, Vajpayee while in power was able to pass bills while in power by threatening to resign.  Manmohan spent this type of political capital on a Nuclear Bill.  

The outlook going forward doesn't look great.  Both coalitions on the left and right are falling apart.  The best possibility I can see would involve a Nitish Kumar-led government with support from the BJP and some Third Front parties.  

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