The Hindu Business Line : Coalitions and economic stability

It is often argued that unstable coalitions are bad for the economy. However, the Indian and international experience with coalition governments indicates that there is no simple relationship between multi-party regimes, political stability and economic development, says Paranjoy Guha Thakurta.

Cookies of party symbols... How will they pack?

INDIA IS by no means unique among democratic nations in having coalition governments, some of them short-lived and unstable. In France, which has a system of proportional representation, and in Germany, which has a combination of proportional representation and constituency or seat-based direct elections, coalition governments have been more the rule rather than an exception after the conclusion of the Second World War in 1945. In both these European countries, coalition governments have not usually brought about political instability.

For instance, in Germany, there is a legal provision that an incumbent government cannot be voted out of power without simultaneously voting in an alternative government in between general elections. In recent years, especially since April 1999 when the second Atal Bihari Vajpayee government lost a vote of confidence in a 543-member Lok Sabha by a single vote, many have suggested that India could adopt a similar system to avoid frequent elections that are expensive too conduct. Those opposed to this suggestion have argued that even if political instability results in frequent elections having to be conducted, this is a "small price" to pay to ensure the existence of a vibrant and dynamic democratic polity.

If the experience of countries like Germany and France shows that coalitions and instability do not necessarily go together, Japan and Italy are proof of the fact that even unstable coalition governments do not automatically result in economic progress being slowed down. Japan has had a series of coalition governments since 1976, when the Liberal Democratic Party lost its monopoly on power for the first time after the Second World War. That certainly did not prevent Japan from marching swiftly ahead of most of the world to become arguably the strongest economy in the world after the US, till the slowdown of the 1990s robbed it of some of the sheen.

The Italian experience is even more remarkable. In the 58 years since the World War ended in 1945, Italy has had as many as 54 governments. Thus, a government in Italy lasts on average barely a year. Yet, Italy today is among the five most industrialised countries in the world. This, if nothing else, should make us wary about drawing any facile conclusions about the effects of political instability on the economy.

There has been a gradual convergence of political opinion on many economic issues cutting across party lines — with the exception of the Left — notwithstanding the fact that this consensus among opposing parties and formations has periodically broken down and keeps breaking down on particular issues. Within the two largest political parties in the country — the Congress and the Bharatiya Janata Party — there has been internal divergence of opinion on economic policy issues.

The two major political formations that are opposed to the broad direction of the economic reforms and not just the details are the Left, comprising mainly the two Communist parties, and the Swadeshi Jagran Manch , an offshoot of the Rashtriya Swayamsevak Sangh. Both have had to compromise on economic policy issues because of over-riding political compulsions. While the Left may not have liked the direction of economic policy formulated by the United Front government, it could not threaten to withdraw from the UF coalition since that would have meant helping either the BJP or the Congress. A similar factor constrained the SJM in its Opposition to the policies followed by the BJP-led National Democratic Alliance government. Thus, the ideological pulls and pressures on economic policy issues have often taken place — and continue to take place — within political parties and their ideological fraternities rather than merely among them.

It can, therefore, be argued that instead of a genuine consensus on economic policy issues what is often witnessed is an illusion of consensus. This is on account of the fact that there are a number of similarities between the economic policy prescriptions espoused by the BJP and the Congress. Both parties now apparently reject the "socialist" policies that were put in place since the 1950s by India's first Prime Minister Jawaharlal Nehru (although, of late, there are signs that the economic programme of the Congress, or more precisely its rhetoric, is veering Leftwards).

During the 1980s, under the influence of individuals like Nanaji Deshmukh, the BJP used to claim that the party believed in what it called "Gandhian socialism". In 1991, after Dr Manmohan Singh initiated his policies of economic liberalisation, there were quite a few BJP leaders who argued that the Congress had "hijacked" its economic agenda. Today, the Congress is arguing that the BJP is claiming that India is shining after following policies initiated by successive Congress governments.

The fact of a political party opposing another's policies for "the sake of opposition" is also illustrated by the turnaround in the BJP's "swadeshi" rhetoric. Before the party came to power in March 1998, it had asserted that the economic reforms process had till then not been sufficiently pro-Indian. The BJP's slogan used to be: "Reforming the reforms" and the party argued that reforms had been overly sensitive to the needs of foreign investors and had not provided a level playing field for Indian industry. The BJP, the party's pre-election manifesto had proclaimed, would aim at an India "built by Indians, for Indians". Six years later, most economic analysts would agree that the NDA government's economic policy thrust has not been substantially different from what a Congress government would have followed.

While coalition governments have sought to change economic policy priorities, these attempts have met with mixed success. Moreover, the proposition that coalitions have not been able to significantly change the course of economic policies in India does not run contrary to whatever one perceives to be the relationship between political uncertainty and economic development. It seems logical that uncertainty of any kind, including political uncertainty, is not good for economic development. There are others who would, on the contrary, argue that a period of economic adversity spurs the political leadership to take tough decisions that it may not otherwise take. True, the period of coalition governments in India has witnessed considerable political uncertainty. But it is far from clear that political instability has been bad for the economy.

It is often argued that on account of a growing political consensus on many economic policy issues, the overall direction of economic reforms would not change even if there be political uncertainty or upheavals. Even if this is the case, what is apparent is that the momentum of economic reforms can never be sustained without political consensus. Thus, in the absence of such a consensus, the government will find it extremely tough to open the country's doors wider to foreign investment, significantly lower interest rates on deposits in the employees' provident fund, implement a new value added tax regime or expeditiously privatise profit-making public sector undertakings. The point worth emphasising is that while it may be fine to talk about the need for sustaining the pace economic reforms, this laudable objective cannot be realised until and unless there is a broad-based political consensus within and outside the government to achieve such a goal. That consensus is still often elusive.

In a paper entitled "Electoral cycles and economic policies of governments of India" by Kaushik Chaudhuri and Sugato Dasgupta (India Development Report 2002, Indira Gandhi Institute of Development Research, Oxford University Press), it has been indicated that more investments take place when coalition governments are in power. One reason why this happens is because various regional interests are held together by "generous distribution of infrastructure projects".

Economist Dr Surjit S. Bhalla wrote the following words in the week before Mr Yashwant Sinha presented his second Budget on February 27, 1999: "Political instability does not matter. The conventional wisdom is that political wisdom is bad for the economy... There is a different, more compelling view. Political instability is actually good for economic reform. The contention is that lack of political dominance means that politicians in power will make the extra reform in order to fight for marginal votes in a future election. And if political stability is present, the politicians are unlikely to make an effort because of their inherent `short-sightedness', or complacency."

These views can be countered since at the heart of the issue is what constitutes "real" economic reforms. Dr Bhalla's praise for the BJP's heightened concern for high government borrowings or high deficits in the same article turned out to be premature. No politician would agree entirely with the thesis that governments act only when pushed to the corner, that political instability would invariably lead to economic reforms. Some amount of instability may be good for keeping those in power on their toes and preventing them from becoming complacent.

How much political instability — or how little — is desirable is a far more difficult question to answer. As is evident, merely talk of reform is not enough. If these reforms are not perceived to be improving the lot of the majority of Indians, the electorate would throw out those who initiated them. Witness the humiliating defeat that was suffered by the Congress party in the May 1996 elections. Even if at least one out of four Indians live below the poverty line (whichever way one may choose to define it), the electorate of the country has shown time and again that it is capable of taking mature, considered decisions regarding those who claim to represent it.

(The author is Director, School of Convergence, International Management Institute, New Delhi, and a journalist with over 25 years of experience in various media. This article is based on a section of a book co-authored by him and Shankar Raghuraman entitled: `A Time of Coalitions: Divided We Stand,' published recently by Sage Publications. He can be contacted at paranjoy@yahoo.com.)