Boom and bust of Indian political economy cycle

Nice paper by Kunal Sen of University of Manchester and Sabyasachi Kar of Institute of Economic Growth.

Instead of looking at the standard gdp growth, inflation etc, the authors look at the political economy of India’s growth in period 1993-2013. They say one has to look at the role of industry as well in the space. The deals between govt and industry were clean in period 1993-02 leading to high growth phase. This was followed by corruption in 2003-10 sowing the seeds of destruction. From 2011 onwards with spotlight on corruption, one is not sure of the path going ahead:

India’s post-reform growth experience can be separated into three distinct growth episodes. The first growth episode was from 1993 to 2002 and was characterised by a set of predictable informal relationships (“ordered deals”) between political and economic elites, which were relatively open as well. The second episode was from 2002 to 2010, and deals in this period became increasingly closed, leading to negative feedback effects along with structural retrogression of the economy. The third episode, beginning in 2011, was one of an incipient growth deceleration, and was characterised by increasingly disordered deals. This paper argues that this deceleration is the outcome of two separate phenomena: (1) increasing political delegitimation of the growth process that was seen as highly predatory and corruption-intensive; and (2) the pushback from accountability institutions in the post-2010 period. For growth to return, more than economic reforms or infrastructure spending, it is necessary for a realignment of the relationships between political and economic elites and between elites and non-elites such that there is a return to “open ordered deals”.

Well, the interesting thing is how the elites shifted sides conveniently on seeing change in political power just to save themselves. In all the criticism of previous govt, it was amusing to see private sector heads talking about corruption. One claps with two hands. And how with change in government they just absolved themselves of all economic sins. With most controlling media as well, this was really easy.

The paper has this interesting classification of econ sectors into 4 types: workhorse, magician, powerbroker and rentier. They show how powerbroker’s share in economic activity increased in the period 2002-10 reflecting the nexus issues.

Implications:

A clear implication of our analysis is that the fundamental cause of India’s current economic stagnation is related to the institutional environment underpinning the 2002-10 growth episode, and that relying only on greater infrastructural spending or more economic reforms will not suffice to revive
economic growth. Our analysis suggests that the high growth episode of the 2000s contained the seeds of its own destruction, and that it was inevitable that the growth boom of the first decade of the 2000s was bound to end. The policy paralysis in the national government that one observes in the 2011-14 period is simply an outward manifestation of a closed deals environment falling apart, with the increasing challenge from the middle class and other social groups and actors and the interventions of rule of law institutions in India.

A second implication of our analysis is that it is necessary to return to the ordered open deals environment observed in the  1990s to revive and sustain economic growth. For this to happen, a reconfiguration is required in the settlement between political and economic elites (who straddle both rentier/power broker and magician/workhorse sectors, such as business groups in natural resource extraction, telecommunications, and retail trade). In this reconfiguration, economic elites should see an interest in moving from closed to open deals, as the rents available from the closed deals diminish over time.

Simultaneously, the political elites should be more interested to invest in the state’s capacity to regulate and discipline these economic elites and allocate licences with greater transparency. In addition, there needs to be a more open deals environment for the few magician sectors in India (such as IT and
pharmaceuticals) to grow, and new magician sectors in exportoriented labour-intensive manufacturing need to be created. At the same time, the relationship between the political class and the private sector on the one hand and accountability groups such as the professional middle class and civil society actors on the other needs to be realigned. In this realignment, there must be the recognition that “ordered deals” between the state and the business sector are essential for economic growth to return as long as these deals do not lead to outright corruption or to the exploitation of socially marginalised groups such as tribal populations. 

One seriously doubts if any of this is happening. The closeness between the two is only increasing, Just look at the annual awards by top pink newspapers in the country. Most have already started to reward the new political elites and just dumping the old guard. And all this in just 200 days of governance. Despite stock markets rising to such highs, the economic elite remain unhappy with the political elite for not doing enough. Enormous pressure is being put on the govt to keep hearing and working on the agenda set by the economic elites.

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