Blurb: History may well remember 2009 as the beginning of the historic end of regional party politics in India.
Today, May 16th, 2009 is likely to be remembered as C D and E days. C for counting, D for a major event day (as made famous by the Allied troops for the date of the invasion and the beginning of the final assault on Germany, June 6 1944) and E for elimination. Of what, one might ask? Of regional politics in India. Most likely elimination is too strong a word; so let us make it the beginning of the elimination process – a BCDE formation, if you will.
In my previous article (Middle Class and Democracy – I, Business Standard, May 14th, 2009) I had suggested that a large force was emerging as an important parameter in Indian elections – the role of the middle class. Further, that the values, aspirations, and goals of the middle class were universal across the world (and across time). And these values left little room for narrow parochial considerations, whether such considerations were based on religious beliefs, or extreme ideological beliefs, or differences in language, etc.
A strong prediction of the middle class and democracy thesis is that the two major parties outperform the regional parties. The table documents the vote share and seats of Congress and the BJP in each Lok Sabha election since 1989 (individual, not coalition, data). Barring 1991, the joint seats achieved by the two parties has been in the narrow range of 282 to 323; the joint vote share 47.9 to 52.1 percent, with 1999 as the peak and 2004 as the trough. The two major parties have been able to garner only 50 percent of the seats and votes, hence the extended era of coalition politics in India. If this is also the future, then the “middle class election hypothesis” will be discredited.
Alternatively, this election could mark the beginning of the end of narrow parochial politics of (outdated) ideology, caste and religion. The emphasis is on the beginning. And a good beginning will be marked by any one, or all of the five signals noted below:
1) Congress + BJP jointly get close to the previous “peak” of 323 seats
2) The Left gets around 35 seats, perhaps even less than 30.
3) The caste based parties in UP (Mulayam and Mayawati) get less than 50 seats, perhaps even less than the half-way mark of 40;
4) Caste based parties in Bihar fail to make a mark.
5) Regional, caste, and idelogical parties from Assam to Kerala do badly
6) What would be consistent with the above is that the regional parties in Tamil Nadu also are booted out; this is not possible in 2009, but if some of the above come true, this will be a genuine possibility in the future.
But there is another implication of the strong role that the middle class will play, and this time it pertains to the two major parties, Congress and the BJP. For the Congress, the warnings are clear. The decline of the Congress started because of the devastating mixture of dynasty and dictatorship. Dynasty remains, and the fact that politics and governance has become a family affair for all shades of politicians should be of little comfort to the Congress. To his credit, Rahul Gandhi realizes the drawbacks of dynastic leadership and is courageous enough to openly talk about it. The Congress has also begun to walk the talk with Manmohan Singh being unquestionably supported for a second term. If the Congress wins and lasts out the full second term, then India would have had the first Prime Minister (since Nehru in 1962) to last two successive 5 year terms. Leadership without dynasty – very possible, and whether middle class India applauds will be known shortly.
The message for the BJP is equally blunt, especially if the BJP stays stationary at the 2004 level and the Congress accelerates to beyond 170 seats. This widening gap is the result of communalism (as opposed to regionalism and leftism – what the middle class dislikes more is a good quiz question). The BJP will have to move away from its fringe elements, even though they may be good at getting out the vote and creating mayhem. For pointers, they just have to look at the destruction of the Republican party in the US, which relied a bit too much on the fringe. It should be a no-brainer that most of society has little respect, and even less admiration, for the fringes. Mr. Vajpayee fully realized this, and it remains an open question whether the NDA would have won in 2004 if Godhra 2002 had not happened.
What if the Congress and/or the BJP are not as smart as the middle class hopes? Then here is a forecast to which yes, I can be held “accountable”! There will be the emergence of a third national party, a party whose initials will be MC. It will be a party representing basic and universal values: the near zero role of religion outside of one’s home (as traditional India always had – until 1947 and beyond); the recognition of human rights, equal opportunity, merit and the allocation of resources according to choices that individuals, not bureaucrats or the state, makes. This party will be able to recruit farmers, and teachers, and nurses, and lawyers, and businessmen. Only one criteria will be applied – are you in politics for your family and for life, or do you want to be a politician because the work appeals to you, and you feel qualified to do the job? None of this “I am in politics because I want to serve the people” humbug. No – just as some people seek out to be doctors, there are others who want to become politicians. They like the work, the application of policy to problems. That is as it should be and, Insha Allah, it will.
Middle Class Votes: Revival After Stagnation
Election Year
Seats Secured By
Share of Votes Secured By
BJP
INC
BJP+INC
BJP
INC
BJP+INC
1989
85
197
282
11.4
39.5
50.9
1991
120
244
364
20
36.6
56.6
1996
161
140
301
20.3
28.8
49.1
1998
182
141
323
25.6
25.8
51.4
1999
182
114
296
23.8
28.3
52.1
2004
138
145
283
21.7
26.2
47.9
2009*
140
175
315
23.0
28.7
51.7
Forecasts based on a voting model, and adjustments.
Blurb: The surprise in this election is that one of the two major parties will reach past 170 seats – my bet is that it is the Congress.
In a justly celebrated phrase, Barrington Moore declared “No bourgeoise – no democracy”. Translating, he meant that an essential characteristic of the middle class is its demand for democracy. Political scientists have enjoyed discussing the mystery of India – a poor country, yet a successful democracy. That was then. Today, sixty two years after independence, India is a full fledged democracy, and one with close to 40 percent of its population as middle class.* (My definition of the middle class is applicable to all societies, and time – it is the poverty line in the Western countries, which in today’s prices, is roughly 10 PPP dollars per person a day or around Rs. 90. For a family of five, this translates into Rs. 1.65 lacs a year. ) Further, if one adds the aspiring middle class of around 10 to 20 percent (at least), a reasonable case can be made that the middle class is about to assert itself – perhaps even today. In a two part article (with the final part to be published on counting C Day, May 16th) I want to discuss the consequences of this phenomenon.
What does the middle class want, and not want? It wants affirmative action, not reservations. It believes in merit, provided there is equal opportunity. It considers glorification of poverty (as often done by political parties in India) as the antithesis of leadership. It is revolted by Indian leaders, for political purposes, consistently viewing India and its citizenry, and its poor, as unchanged from 40 years ago. For example, we still have the same poverty line as formulated in 1973. Isn’t it time that the poverty line is raised to conform to a newer richer, and considerably less poor, India?
The middle class believes in a level playing field and doesn’t mind if the end is unequal. It considers studies of inequality as the economics of envy, but strongly believes in as close as possible equal starts in life. And not least, perhaps out of self-interest, perhaps out of value structure, it considers the nexus between politicians and industrialists and the bureaucracy as the major bottleneck for economic development. Consequently, it believes in transparency, accountability, and considerably enhanced governance (and correspondingly less corruption). (Perhaps a cliché, but it is an easy call that Obama was the middle class choice, a universal middle class representative). The middle class demands have implications.
This election has already seen several middle class firsts. The entry of professionals, as independents, in the election battle. It does not matter whether they win or not. They have made a statement to the major political parties – unless you reform, there will be consequences. Look at the manifestos of Nitish Kumar and Chandrababu Naidu. Both talk about radical change in the traditional “in the name of the poor” programs of government subsidies. As is more than well known, these programs are designed for maximum leakage, designed to benefit anybody but the poor. A major characteristic of such programs is the violin play – they are meant to really help the poor, but end up really really helping the political and bureaucratic elite (and their middle henchmen) which administers these programs. One Kafkaesque example is the Indian food subsidies program. Rather than have straight cash transfers, or food stamps (a pilot program in this regard was rejected three years ago by none other than the West Bengal CPM!) we have an elaborate mechanism to feed the non-poor.
As articulated by middle class leaders (also known as reformers) like Naidu and Nitish, this elaborate food subsidy program is to be replaced by a cash transfer scheme for the poor. The money does not go to a person, it goes to a bank account. And the account is in the name of the head woman of the household. In days to come, look for this scheme to be expanded in scope and regions. Children will need to be sent to school, kids will have to be vaccinated. The past for some countries is the present and future of India. The middle class does not believe it has to always invent the wheel, or persist with the bullock cart, as is the fashion of our leaders. It will accept good ideas, as long as they entail transparency, and accountability. The Right to Information Act represents the beliefs of the middle class, as do Nitish-Naidu cash transfers. The food for work program represents the old order of corruption and lack of transparency – and the “communist” view that all the poor do is waste money on alcohol so we need to give them money in an extremely round about way – so round about that the poor never see the money. Rajiv Gandhi, an astute observer, noted twenty five years ago that these in the name of the poor schemes yielded only 15 paise of transfers from every rupee. While astute, and far-sighted, Rajiv Gandhi was also a wild eyed optimist. The actual amount reaching the poor is less than 15 percent, often around 10 percent. (See Middle Class Kingdoms..)
What about refrains that the middle class is useless because it does not vote. Given that the middle class as a percent of the population has increased from about 2% of the population to 40 percent today, and that the turnout ratio has stayed broadly constant, it is a bit hard to swallow the logic of Pappu not voting. South Mumbai is another story, and one that could, should, bring about reform in the administration of elections. Why not hold elections on Sundays, as done in Germany?. Why do we have to give a special holiday to vote? Something for the Election Commission (EC) to consider. While on that subject, is it just me or do other people also believe that the EC has gone out of control. Banning exit polls (how can they matter so much if everyone believes they are wrong!) and worse, banning release of official government data like the consumer price index are indications that the EC is overstepping its bounds, and way overstepping its welcome.
There are even more profound implications about the rise of the middle class. It is that the middle class believes in unity in diversity. Translated into real politik, this means that we might very well be witnessing the beginning of the end of regional politics. Such parties no doubt served their purpose, but their sell by date has most likely passed. Is there a future for caste or regional divisive leaders like Lallu, or Mulayam, or Mayawati, or the Left. Add to that the MK variants in Tamil Nadu (all of them). These parties belong to a different era, belong to a time when India was trying to find itself, economically and politically. They had a role in history, and history has passed them by; very soon, perhaps this week, the voters will pass them by as well.
A side-effect about being a political junkie is that one cannot avoid the temptation of making forecasts. So before you shout “Where is the forecast? Where is the forecast?” here goes. With the usual caveats that the forecasts are in the spirit of analysis – and fun. The national level forecast for Congress (174 seats) is based on Voting with the Economy published in 1999. I have also benefitted from journalistic field trips and discussions with noted psephologists Prannoy Roy and Dorab Sopariwala. Errors, of course, are mine alone. Part II will discuss the consequences for parties and policies.
*Both Second Among Equals: Middle Class Kingdoms of India and China, draft 2007, and India Elections ’99 – Voting with the Economy, Aug. 1999, are available at www.oxusinvestments.com; the former is forthcoming as Middle Class Kingdoms of China and India, Peterson Institute for International Economics, Washington DC, forthcoming 2009.
Elections 2009 – Congress Ahead
State
Number of Constituencies
Congress
Actual Forecast*
2004
2009
Andhra Pradesh
42
29
16
Assam
14
9
10
Bihar
40
3
3
Chhattisgarh
11
1
4
Delhi
7
6
6
Gujarat
26
12
9
Haryana
10
9
6
Himachal Pradesh
4
3
1
Jammu & Kashmir
6
2
2
Jharkhand
14
6
3
Karnataka
28
8
10
Kerala
20
0
11
Maharashtra
48
13
14
Madhya Pradesh
29
4
8
Orissa
21
2
9
Punjab
13
2
9
Rajasthan
25
4
13
Tamil Nadu
39
10
6
Uttar Pradesh
80
9
18
Uttarakhand
5
1
2
West Bengal
42
6
7
Other States & UTs
19
6
7
Total
543
145
174
* National forecast based on analysis of incumbency, caste voting and economic performance (the forecast for the Congress share of the national vote is 28.4 percent); state level forecasts based on opinion polls etc.
Blurb: V shaped global recovery is within sight, so the bears should think about the prospect of giving ground.
You don’t ask a weatherman to know which way the wind is blowing. Analogously, you don’t ask a bear who has got the recent downturn correct to predict when the market will turn. Symmetrically, you should not ask somebody who got the last bull move right as to when the market will go downhill. Equivalently, the same rules apply for forecasting of GDP as of the stock market. And there are two primary drivers of the stock market – GDP growth (via profit growth) and inflation (via costs of production). No one is talking about inflation anytime soon. Which leaves us with the center of attention – recovery in real activity.
There have been several pointers towards the likelihood of a V-shaped global economic recovery. The first pointer was the massacre itself , Sept-Dec. 2008. Recall that until mid September 2008, the world was declining, the global recession was on, and stock prices around the world had collapsed by close to 30 odd percent. The bears were in control, and the only question was whether the decline in the lead country, USA, would exceed or not exceed the decline during the last great recession of 1980-82. A world has passed in the last six months, but the fact remains that in August 2008, the debate was whether recovery would begin by end year 2008 or be delayed by a few months into 2009.
In August 2008, the dire forecasts of world growth , (including collapsing growth in the emerging economies led by China and India), were nowhere close to target. The de-couplers were winning: yes, there was a slowdown, but not a catastrophe predicted by the naysayers-doomsayers. But then the unthinkable happened. Perhaps goaded by the bears whose forecasts needed to be correct (!), the US authorities made a catastrophic mistake – they let Lehman go. And with that the Humpty Dumpty structure of capitalism came tumbling down and the worst global crisis since the Great Depression became just the worst global crisis (the Great Depression missed out most of the non-industrialized world).
This little bit of very recent financial history is important in understanding the prospects for global recovery in whatever shape it might take. Because the decline in real activity was so synchronized and so large and so fast (e.g. industrial production down by more than minus 10 percent, exports and imports both down more than 20 percent etc), it set into motion policy responses that would otherwise have not been forthcoming.
The world, and the policy makers, soon realized what a mistake letting Lehman go had been. But rather than worry about “who is to blame” (that was left to the popular media), the talk, somewhat surprisingly led by the IMF, was to act fast with all fiscal and monetary guns blazing. And act fast they did. So the first pointer towards the likelihood of a V shaped recovery is given by the magnitude of the decline, and the magnitude of the policy response.
The second pointer is the old magazine cover conventional wisdom. We were told that this was the end of capitalism. Quotes of Marx predicting just such an event circulated in cyberspace. Journalists had a field day, from left-over Marxists to over-eager socialists. The third major pointer was from the post-Lehman correct bears; the arrogance in their certainty was overwhelming. In particular, how with each passing month, the bottom was signaled to be further and further off. And for a while, it did seem like pure genius. Each forecast, and target, was met within a month of the pronouncement.
The fourth pointer is the new vision of central bankers: a bubble free world. Apart from being a downer for the kids (no soap bubbles and no bubble gums), this wisdom is likely to be just as false as the previous god that failed – inflation targeting. Over the last twenty odd years, the world has witnessed a steady trend downwards in world inflation. The central bankers claim that this was all due to the holy practice of strict monetary control via inflation targeting. That this could not be true can be observed by noticing that all countries reduced inflation - countries that don’t have a central bank, and/or countries that did not believe in inflation targeting, and every country in between. With bubbles, the same dilemma is posed – what is the precision of the regulator in identifying bubbles? And who will regulate this regulator when it makes a mistake?
The world has only just witnessed the beginning of a possible beginning of recovery. It really is too soon for the hibernating, long-forgotten bulls, to even smell victory, let alone have it in sight in their binoculars. Given all this need for caution, what should one be looking for? At the fundamentals. That gets us into an understanding of what is similar and what is different this time around. And how different are the circumstances in the US today different than what Japan faced in the early 1990s. The argument about only an L shaped US recovery is predicated on US going the Japan way. The arguments for and against an L shaped recovery is left for a subsequent article. But the conclusions can be mentioned now. Yes, the world is different because of the emergence of China and India as important players in world growth. That was not the case even a decade ago. Second, Japan entered its period of stagnation with a highly overvalued exchange rate. The US is entering its future with a mildly undervalued exchange rate. As far as US and global growth us concerned, these are crucial differences – and differences that make a V shaped global recovery a not too distant reality.
Blurb: China and India led decoupling growth might save the world and allow a V shaped trajectory to emerge from the massacre of Oct-Dec. 2008.
There has been an interesting and intriguing response to my earlier articles (Business Standard, March 3 and 21, 2009) on GDP growth. These articles concluded that Indian GDP growth for the fiscal year 2008/9 would be much lower than the consensus estimate of around 6.5 percent. Further, that India had not been insulated by the Great Recession 2008 - the decline in Indian GDP growth from a year ago was comparable to most other developed and developing countries.
These conclusions were based on very standard seasonal adjustments to GDP data. So standard that the US does not even publish non seasonally adjusted GDP data!
That some “experts” misinterpret seasonal adjustments is par for the course and acceptable. What is irksome is that these so called experts infer future growth possibilities from seasonal adjustments. This is so wrong that it needs to be forcefully exposed. Seasonal adjustments provide a better understanding of what has happened in the past. Period. Seasonal adjustment is better accounting, that’s all. Prediction of the future of GDP, or inflation, or the weather is entirely a function of the “model” being used, psychological or otherwise. Forecasts per se have nothing to do with the use, or misuse, of seasonal adjustments.
But what has irked me the most is the accusation that I am a pessimist. The logic being that since my forecast for the past is low growth, so it has to be for the future. This is bothersome because I strongly believe that whether one is an optimist or a pessimist is really a function of one’s DNA. Now one might quibble and state that the environment in early childhood dictates which mist one enters. Possible and I would appreciate knowing about research on this aspect of human psychology. For the moment, I want to emphasize that barring accidents and unusual events and all the usual caveats, most of us fall into the optimist or pessimist or bull or bear camp as a reflexive reaction to our DNA.
In my case, that means that my bias is always to see the glass as more than half-full, to always err on the side of hope. Hence my resentment at the accusation that my outlook for the Indian economy is gloomy. Far from it. Indeed, I believe that the Indian economy will likely register close to 7 to 8 percent growth for the fiscal year (April to March) 2009/10. Am I letting my DNA get the better of me? Perhaps - you be the judge. Fair is fair.
The international organizations (driven by the DNA of their lead forecasters?) have gone beside themselves in arguing that the world is not only in deep trouble (true) but is likely to be in this morbid state for the next few years (not so obvious). Today, an optimistic forecast is that the world records negative growth in 2009 with the lead player, the US, recording around – 2 percent.
These forecasts are based on an unstable post-Lehman world and this might be the Achilles heel. When all the data are in, the quarter Oct-Dec 2008 will probably be the worst world GDP quarter ever. Yes, I am including the period of the Great Depression. Output fell off a cliff, froze, dropped dead – use whatever metaphor, you get the same reality. The quarter was a classic Black Swan event – unpredictable in magnitude, but nevertheless real, too real.
How deep into output, and psyche, will Oct-Dec 2008 penetrate? A simple answer – very deep. Why? Because the US is the engine of growth, the US consumer the lead savior. History should repeat itself and we all have to wait until both the housing sector in the US stabilizes and the US consumer begins to at least tiptoe back into the malls.
This extrapolation makes the coupling mistake. Oct-Dec has made us all couplers – the entire world is led by the American Pied Piper. We saw what happened, didn’t we? Some of us had argued for decoupling and since October we have been welcomed by jeers. How could we be so foolish to believe that the world had changed? China and India to lead the world out of this deep recession? Hah – optimists going wild. Don’t you know that China and India together have a GDP of close to US $ 5 trillion, much less than the US GDP of 14 trillion?
But recovery (or decline) is not about levels of GDP, but change in the levels. If US grows at 2 percent it adds $ 280 billion to world output. The same is achieved by the China-India juggernaut growing at “only” 5.6 percent. Between 1980 and 2008, these economies grew at an average rate of 8 percent per annum; in the last eight years, even higher. This high growth rate has had an effect. In 2000, China and India accounted for only 17 percent of US output; today, they account for exactly double. So what might have been unthinkable eight years ago is very thinkable today.
By repeating the refrain of coupling, and by concentrating too much on the Black Swan induced Western economies, the experts may be missing out on a genuine possibility. Led by China and India , and all the monetary and fiscal stimulus packages (not India whose policy makers are always reactive) the world might actually see a V like economic recovery. What every expert and lay person and everyone in between has given up on maybe the new Black Swan event of 2009! And precisely because the output cut in the Lehman quarter was so deep. Bottom line: my admittedly risky forecast for Indian and world growth for 2009: both China and India to grow at around 7 to 8 percent, and the Western world joining the recovery bandwagon by end 2009.
The fiscal year 2008/9 is about to end, and everyone is cheering its demise. Though we won’t know for another couple of months, but the news(conveniently after the election results are out!) will not be good.
There is a rumour going around, (actually several related rumours) about the Indian economy. The most important rumour pertains to GDP growth in India: in particular, that because of some nimble and astute policies followed by the monetary authorities, GDP growth in India has suffered manifestly less than other countries, and perhaps even the least.
Emboldened by the lack of any questioning by the experts (including those in government, the media, this newspaper!) of my conclusion that there was a Rs. 112,000 gap in government expenditures and reality
The Budget has come and gone, and if you missed it, you missed nothing. But it did provide heretofore unpublished data on subsidies, expenditures and taxes, and for that one is grateful.
There are, alas, only two instruments that a government has to tackle a negative or a positive bubble – monetary and fiscal. Alas, also, the Indian authorities seem to be only aware of positive asset bubbles.
