ECO-LATTE . It’s the politics, stupid!

Whenever finance minister Arun Jaitley tires of armchair commentators’ criticism of his government’s policies, he is given to snark attacks bristling with prickliness. In one such instance, when he was criticised for pandering to political sensibilities at the risk of slippages in his Budget arithmetic, he retorted that unlike ivory-tower academics, his government had to deal with the reality of having to face elections. On another occasion, when he faced criticism from two of his predecessors — Yashwant Sinha and P Chidambaram — over some arcane policy matter, Jaitley riposted that he did not yet have the luxury of being a former finance minister who had turned into a columnist.

Beyond the jousting and the back-and-forth, Jaitley was belabouring a larger point: That economic policies need to be framed in a political context, which any government can ignore only at its peril. In other words, good economics does not always translate into good politics.

There is, of course, a body of academic work to support that theory. Writing in the Journal of Economic Perspectives in 2013, economists Daron Acemoglu and James Robinson suggested that economic advice cannot ignore politics. In fact, there are “systematic forces that sometimes turn good economics into bad politics, with the latter unfortunately often trumping the economic good”.

The scholars’ case was not that economic advice should shy away from identifying market failures and creative solutions to them. “Nor are we suggesting a blanket bias away from good economic policy,” they wrote. Rather, their argument was that economic analysis needs to identify conditions under which politics and economics run into conflict, and then evaluate policy proposals taking into account the conflict and the potential backlashes it creates.

Real-world illustrations of electoral contests in India partly bear out the validity of that argument, although there is some evidence that that is changing on the margins. After studying elections in several Indian states from 1980 until 2012, Milan Vaishnav at the Carnegie Endowment for International Peace and Reedy Swanson at the University of Virginia School of Law wrote in a 2015 paper that there appeared to be no evidence that voters reward incumbent governments that perform well economically. The electoral experience of N Chandrababu Naidu, who projected himself during an earlier tenure as “the CEO of Andhra Pradesh”, and was feted in global investor platforms as a reformist-minded leader but who lost on his home turf, is illustrative of that.

However, Vaishnav and Swanson noted that since 2000, “there do appear to be increasing electoral returns to governments that deliver higher rates of economic growth”, which to them suggested a significant shift in Indian voter behaviour. The case of Nitish Kumar in Bihar, again in an earlier avatar, supports that hypothesis.

From all accounts, the Modi government appears to have drawn the wrong lessons from these studies. It seems to be excessively influenced by the harsh lessons from 2004, when the earlier NDA government rode high on the ‘India Shining’ campaign, but was done in during the elections by the absence of such a glitter in the countryside. It doesn’t help its cause — or its equanimity — that the economic framework today is characterised by much the same dynamics as were at play in 2004.

Indicatively, a certain restiveness is afoot in the hinterland, which the government is hypersensitive to, ever since it was taunted, early on in its current tenure, for its solicitous accommodation of the interests of the suit-boot types. And much like in 2004, banks today bear the burden of non-performing assets as the legacy of profligate lending in an earlier time. In fairness, the economy today is far more robust than it was back then, but the geoeconomic risks are also rather more stark.

Somewhat more striking is the fact that, as opposed to the Vajpayee government, which pressed ahead with reform measures even though it was in minority, the Modi government appears to have neither the courage nor the conviction to undertake meaningful reforms. On the contrary, its heavy-handed interventions have had the effect of tampering with the efficient functioning of the marketplace.

The lesson that appears to have eluded the current government is that there is a fine line between prudence and populism in economic policymaking, and when governments walk that narrow path, they may expect to profit politically from their exertions. An excess of prudence, which may manifest itself in, for instance, a preoccupation with fiscal rectitude even in grim economic times, will prove unpopular: Europe’s experiences with austerity measures bear stark testimony to that. They also establish the wisdom of introducing counter-cyclical macro policies when the growth engines are misfiring, as they are in India today.

But, in equal measure, an excess of populism also sets the stage for failure, particularly if macro fundamentals worsen and cramp the policy space for stabilising the economy in the event of a more pronounced slowdown. Going by its recent policy pronouncements in the run-up to the elections, the Modi government is some ways down that road: The risk it runs is of sliding down a slippery slope.

Venky Vembu is Associate Editor, BusinessLine.

E-mail: venky.vembu@thehindu.co.in

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