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Democratic Dividend: Economic benefit from political competition
Liberty Institute, India Monday, March 5, 2012

Barun Mitra
In 2012, developmental issues have firmly emerged at the top of the agenda of most major political parties. Yet, barely a decade ago, many believed that India was paying a “democracy tax”, that political pluralism was at the cost of economic well being. Today, increasing political competition has opened new opportunities for the voters not only to demand performance but drive the economic changes as their aspirations rise. This is forcing politicians to explore new ideas that might meet these demands, writes Barun Mitra.

Seven states will go to poll in 2012. This time developmental issues are firmly on the political agenda of all parties. Yet, this was not always the case. India, many believed, was paying a “democracy tax”, that political pluralism was at the cost of economic well being.

Could the intense political rivalries among various political parties create an environment conducive for economic development?

While India earned her political freedom in 1947, many believe that 1991 marked beginning of the journey for economic freedom.

The balance of payment crisis did provide the impetus for the economic reforms undertaken in 1991. But what has not really been understood is the political context of the economic changes. The increased political competition can be seen from the fact that not a single political party has been able to win a clear majority of Lok Sabha seats since 1989.

The conventional wisdom has been that coalition dharma will hinder economic progress. In reality, one could argue that increased political competition has, for the first time, made many leaders and parties aware of the political need to perform, improve governance and the economy. Otherwise, they would have to bear the wrath of the electorate.

The accompanying graph brings this facet to life. While India was politically very stable in the first 40 years, except for the 1975-1979 period, but the economy stagnated at the so called “Hindu rate of growth”. But as the coalition politics became the norm after 1989, the economy began to pick up. As political competition increased, and ruling parties increasingly faced the prospect of losing an election, both at the state and national level, the growth picked up even more after 2000.


Election Outcome codes
(-)1 Ruling party defeated
(+)1 Ruling party re-elected
(+)0.5 Ruling party with coalition
(-)0.5 New Ruling party with coalition
Sources: Handbook of Statistics on Indian Economy, RBI, and Election Commission of India
Note 1: Economic Growth data on 1993-94 prices
Note 2: For the purpose of coding, UPA and NDA coalitions are seen as one political party.

It would seem that the economic context in India is changing, quite irrespective of any particular political outcome in the elections.

The attached graph plots political outcome against its economic growth rate. The annual GDP growth rate is calculated on the basis of 1993-94 prices on the Y-axis. And political path is measured not by the victory or defeat of any party or coalition, but whether the ruling combination is re-elected (+1) or defeated (-1), on the second Y-axis on the right. Given prevalent coalition politics, two other categories are also used to depict electoral changes. If the ruling coalition is re-elected broadly with the same features, it is given +0.5, and if it is defeated, -0.5.

The INC lost power in 1977 to the umbrella coalition that made up the Janata Party in the aftermath of the excesses committed during the Emergency Rule of the previous two years, in which elections and civil liberties were suspended.

The leadership of Janata Party, in their zeal to defeat the Congress, attempted to prove to the people that they were the true socialists, and the Congress was only a pretender.

By the end of 1970s, the economy had tanked, and showed that economic reality does not respect political ideology. While it is true that man does not live by bread alone, it is even truer that he cannot live by ideology alone.

The new Congress administration seemed to have learned at least one lesson - that the economy needed more attention than politics. For instance, rather than nationalising the struggling Maruti car company, foreign investment was allowed to inject a new lease of life.

While the economy was picking up, political fragmentation continued through the 1980s. The spread of insurgency in Punjab and in north east India made the country feel very vulnerable.

Political fragmentation in the 1980s and 1990s was characterised by identity politics. With every party trying to consolidate its own social base, none was in a position to ensure victory based on any narrow identity, particularly at the national level.

Political pundits coined the term ‘anti-incumbency’ to reflect the popular mood to bring about political change through the ballot. The alternatives did not necessarily perform any better, but the desire for change was almost irresistible.

In 1991, politics was in turmoil and the economy was facing its most serious crisis. The prevailing wisdom is that the economic crisis necessitated the reforms adopted by the then Prime Minister P.V. Narsimha Rao and Finance Minister Manmohan Singh.

While the 1990s was politically tumultuous, by the end of the decade it became clear that identity politics had run its course. This allowed for a degree of political consolidation, with the emergence of two major political formations, the UPA and the NDA, with a few smaller state level parties charting their independent paths.

As the credibility of political alternatives on offer increased, the agenda slowly shifted towards developmental issues as most major political parties realised that mere rhetoric would  be insufficient to gain or hold power. It was during this phase that Bijli, Sadak, Pani, entered the political lexicon.

The current 2G scandal illustrates this phenomenon, most effectively. Whoever may have been involved in this scandal, their personal gratification did not significantly block the spread of mobile services. Today, there are more than 700 million mobile connections. But the economic empowerment coupled with political competition has led to the huge outcry over the alleged wrongdoings in the telecommunication sector in the past few years.

Contrast this with the situation two decades ago. With barely 30 million telephones in country of over 800 million, with access to telephone services completely controlled by the administrative and political agencies, and bribes being the norm rather than the exception. Yet, there was no major political outcry. And there was little political competition, at that time.

In, 2012, there are no big emotive issues to colour the state elections and all the major contestants, are aware of the intense competition, and therefore focusing on the development plank.

With greater political competition, the need for economic policies that work becomes critical for retaining credibility with the voters. So it appears that this competition has created the condition for economic reforms that in turn encouraged competition and improved economic growth. This is clearly a key part of the political narrative in India since the 1990s, as illustrated by the upturn in the trend line in the graph.

Despite the current sense of policy paralysis, India is clearly changing. Increasing political competition has opened new opportunities for the voters not only to demand performance but drive the economic changes as their aspirations rise. This is forcing politicians to explore new ideas that might meet these demands.

Increasing political competition has opened new opportunities for the voters not only to demand performance but drive the economic changes as their aspirations rise. This is forcing politicians to explore new ideas that might meet these demands.

If economic competition was beneficial to the voter, then political competition is turning out to be even better. Six decades after Independence, perhaps the time has come to reap the economic dividend from a truly competitive political democracy.

Ms Nitu Maurya helped with the research and analysed the data.

This article was published in the Liberty Institute on Monday, March 5, 2012.
Author : Mr Barun Mitra is the director of Liberty Institute, an independent public policy think tank in New Delhi.
Tags- Find more articles on - democratic dividend | economic growth | Indian democracy | Indian election | Indian politics | political competition | political economy

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