Indian political system – why don’t we see the risks?

If we could have an index for assessing the political climate it would resemble a mirror image of the equity market index. Each time it touches a new low you think this is the end, it always surprises you with a lower dip. The sensex may still decline but there is no upwards trend in the Indian political index.

After the bribery scandal in the Lok Sabha we thought this is the worst that could happen we witnessed shocking scenes in Maharashtra Assembly. Then you keep getting newswires on Karnataka, Jharkhand, Uttar Pradesh, West Bengal etc. Each news tells you of the really sad state of the Indian political system. (Bihar has been silent this time and this is a pleasant surprise.)

Now all this is pretty surprising as we just don’t see these risks reflect on the economy.

The dilemma is best explained if you pick a newspaper. On reading the political news, you would be really worried about India. However the economics section tells you a completely different story – booming economy, growth story, India Inc zipping etc etc. It is difficult to relate the political developments to economic developments. You can discount politics a bit, but not this high. It is as if there are two countries by the same name – India.

There are lot of experts who believe Indian economics has decoupled from The Indian politics and latter has no role. They are just plain wrong. A glance at economic history tells you economics only moves forward if politics play the right role. They pass all the reforms and lay the path for industrial growth.

For instance, I have been reading quite a bit on how central banks have evolved and how they managed to bring inflation to such low levels now. Now all credit goes to central banks and rightly so. But part of it also goes to the government which makes central banks independent, elects professional economists and lets them take a call. When one reads papers on Bundesbank (see this and this), you can clearly see how much politics was involved in setting it up. Likewise, it was only when UK Govt decided to let Bank of England manage inflation and made changes, did things improve.

 I see a lot of linkages between economics and politics in management of crisis. One often questions Japan’s economic policymakers for making a mess in the 1990s crisis. A quick look at Japan’s political system then tells you things were quite bad. Bush and his policies did not help but Obama has led the way. While reading Nordics 90’s crisis, one can see how politics played a role in solving the crisis. They are not discussed as much as focus is on economics but politics is as important.

Similarly, Clinton and his policies were seen as crucial for US growth in 1990s, Narsimhan Rao led the way in reforming India in 1990s and so on and so forth, Brazil’s case study also shows the importance of politics etc

Coming back to India now, why this disconnect? I think people are not factoring the risks properly. Somewhere there is the feeling that economics can go on without any role of politics.

We can keep getting the best economics ideas/policies but if we don’t have a proper political system it will not really work. Anywhere you see the elections are increasingly won on castes, religions, communities  etc. There is hardly any election won on issues over taxes, expenditure, deficits etc –  the things that matter to economics.

But I don’t this can keep continuing. The system will be taxed at some point of time. Either the political system improves or we start to see the poor state of politics reflect in Indian economic conditions as well. Ideally first should happen, but looks highly unlikely. The second should not happen but looks more likely. The real question is timing which is very difficult to predict. It is a matter of time.

6 Responses to “Indian political system – why don’t we see the risks?”

  1. rakesh Says:

    Hi Amol,

    I like your blog and the info about economics.

    Yes, you are right, the election is hardly about economic policies. People are deliberately kept in the darkness. We need a better welfare state for the below poverty line population and better education for social mobility.

    How is this going to happen?

    • Amol Agrawal Says:

      Hi Rakesh,

      Thanks for your kind comments on the blog.

      I have no clue on how we can build a welfare state. There are lots of ideas but hardly any action. We need a revolution in the way we govern and run this country. Unless we bring right people in the political system, nothing will change. It is a everyday low for our political system.

  2. Wars and impact on financial markets « Mostly Economics Says:

    […] reading the paper, I just recalled this previous post where I wondered whether financial markets see the emerging risks in the Indian political system […]

  3. Teaser Rates offered in India…are any lessons being learnt? « Mostly Economics Says:

    […] agrees.   Again the problem is politics. Nothing seems to move in Indian political system and is always a risk. Even if a state govt wants to do something builder/broker lobby would not allow it. We can again […]

  4. Maharashtra and Karnataka….a case of common corruption « Mostly Economics Says:

    […] had written this post nearly a year ago – Indian political system – why don’t we see the risks? I find the risks growing exponentially over a period of time but are just not getting priced. It […]

  5. Why doesn’t the government interfere to lower other prices apart from air fares? « Mostly Economics Says:

    […] more to offer. Despite a huge interest in Indian economy, I continue to maintain we are not assessing the risks of Indian Political System (see this as […]

Leave a Reply to Maharashtra and Karnataka….a case of common corruption « Mostly Economics Cancel reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: