The Hindu Business Line : Micro-level reality blanks macro illusions

THE verdict was dramatic and stunning. Who would have expected that the `feel-good' factor would sour so decisively for the ruling alliance? If the exit polls got it wrong, it was not in the direction, but only in the magnitude.

The margin of victory as reflected in the final seat tally, however, does overstate the actual margin of votes. It is often seen, as is evident from recent State Assembly polls, that a swing of 3-4 per cent votes can swing more than 50 per cent of seats. This is an unfortunate peculiarity of the first-past-the-post electoral system, badly in need of reform.

As such only half of all eligible voters cast their vote, of which, most winning candidates got only 20-25 per cent of the total eligible vote, edging past their nearest rivals by narrow margins. Even then, this is a decisive mandate.

This was a historic Lok Sabha election, the first fully electronic, the first with extensive disclosure about candidate backgrounds, and with the highest number of first-time voters reflecting India's young demography.

How will this electoral verdict affect the economy? Here it is worth reminding that the Indian economy has grown at a trend rate of close to 6 per cent a year for the past 24 years — that is, a span of seven elected Parliaments, ten prime minister terms, and more than ten finance minister terms.

And this long period was marked by many economic, political and economic adversities — droughts, earthquakes, riots, oil price shocks, balance of payment crisis, nuclear sanctions, East Asian troubles and cross-border conflicts.

So it is fair to say, growth occurs not so much due to the government, but in spite of it. Governments also tend to maintain continuity of direction of economic reforms and, hence, growth is change-proof.

Economic reforms of the early 1990s unleashed high growth initially, partly because the reforms unshackled major constraints — such as industrial licensing, an overvalued and protected currency, an over-regulated financial sector and very high import tariffs.

Subsequently growth plateaued and awaits the so-called second-generation reforms. These are not easy, not big-bang, and, most important, will depend on initiatives from individual State governments. They are harder because they require tough political decisions. An example is labour laws.

The current law, which is supposed to protect labour, has ended up thwarting formal sector employment growth totally.

India's fundamental challenge is how to move 60 per cent of the labour out of an activity which is adding only 25 per cent to GDP, that is, agriculture.

Agriculture is also a State subject. The challenge is how to facilitate more investments and productivity — without increasing subsidies.

Since the Central Government has limited influence on States' policies, it remains to be seen how the new government boosts agriculture.

A third example is value added tax (VAT), which is a Central Government initiative, but ineffective if there is no consensus from States. VAT has had many false starts.

Some disinvestment activity will undoubtedly slow down — but the manner in which disinvestment was hurried through in March indicated that it was done more to meet fiscal deficit targets rather than increase efficiency of capital.

The inherent resilience of the economy and its capacity to grow at 6-7 per cent will be unaffected by the change in government. Indeed the new government has also to contend with global uncertainties, especially on oil prices and interest rates.

In some ways this electoral mandate has arisen out of the macro-micro or urban-rural disconnect.

While macro indicators of the economy are robust, the micro-level reality is frustrating — be it electricity, water or civic services.

Similarly, the disparity of incomes and employment opportunities, across rural and urban areas has increased.

Perhaps, the voter is reminding the government that India is a welfare state, and growth without some equity and redistribution is unacceptable.

(The author is Chief Economist at the Aditya Birla Group.)