Blurb: A detailed comparative analysis of countries that have promised cuts in emissions shows that China is promising a near zero cut over business as usual.
It is well understood that vis-à-vis climate policy, every country must do what it is in its own self-interest - and in the interests of the world community. As preparation for the Copenhagen climate talks, and as a sign of commitment, at least 11 countries/regions, had announced emission cuts for 2020. Unfortunately, the promises come in all sizes. The European Union has promised a cut of 20 percent from the emission levels prevailing in 1990; the Brazilians have a larger number – 36 percent cut – but the fine print states that it is from “projected levels in 2020”. Indonesia has promised a 26 percent cut but from “forecast trends”. US announced a paltry cut of 17 percent from 2005 levels, and China signed on with the biggest promise of all – 40 to 45 percent cut, but this cut was stated in intensity levels i.e. the ratio of CO2 emissions to constant GDP in 2020 would be 40 to 45 percent lower than the same ratio in 2005. India has just joined with seemingly a much lower cut - 20-25 percent over 2005 levels in 2020.
Predictably, and lamentably, the response of “expert commentators and climatologists” has been along well worn Cold War lines. According to the dictates of this ancient wisdom, anything that the West does, especially US, is suspect; anything that the developing country set does is “good”. Thus, the 17 percent cut by the US is denounced as pitiful, while the Chinese cut is hailed as the emergence of the “Brave New Order”.
But maybe the Cold Warriors are right. The only way to establish the veracity of the ancient warriors is to convert all promises onto a common scale. Because of high physics that is involved in the climate debate (are the glaciers really receding? Is the temperature really high?) the assumed assumption is that simple numbers about emission cuts are really intractable. Else why would senior ministers engaged in possibly the most important decision regarding our lives go to such lengths to obfuscate? Agreed that negotiations are involved, but the fact remains that data pertaining to emissions and output and trends are readily available for most countries of the world.
There is a straightforward method to convert all promises into a common metric. There is a reasonably tight relationship between CO2 emission and GDP. It is different for different broad ranges of income, but a good fit nevertheless (for the econometrically inclined, the R-squared is close to 90 percent). Assuming a trend rate of growth in GDP can yield broadly agreeable estimates of GDP till 2020. These growth rates are likely to be close to 8 percent for both China and India, and close to 2.5 percent for the Western world. Thus, one obtains estimates of GDP and CO2 emissions for 2020, estimates that all reasonable women can agree on. There is one further twist – what about technical change, where technical change is defined as gains in the CO2 intensity of output? Here again, past trends are a useful guide for the future. Reductions in intensity have been near universal for the last 20 years, and over the next 20 years, with heightened sensitivity and increased policy action, reductions in this intensity will be larger, hopefully much larger, than those observed to date.
Assuming the past trends in technical change is therefore a conservative assumption. With this input, one has all the data one needs to compare all of the commitments. Given that past is past, what the whole world will watch is what happens in the future – in 2020 or whatever the target date. The table reports each of the committers and explores their commitments. Columns 2-4 report on emissions for 1990, 2005 and 2020; columns 5-7 the intensity of emissions i.e. ratio of emissions to GDP (in constant 2007 PPP $ - the choice of a constant series does not matter); column 8 is the targeted intensity of emissions in 2020. Column 9 is the Chinese metric i.e. percentage decline in intensity in 2020 from 2005 levels.
Contrary to the impression that China was offering the most cuts, it is offering the least – and by a wide margin. China is promising to cut the intensity of its emissions by only 10 percent from the level that would have happened anyway. And as mentioned above, this is according to no change in conservation policies over the next decade – an unrealistic assumption. In English, China’s offer is that it will contribute zilch to the CO2 reduction over the next decade. If the world’s biggest polluter is offering this as its negotiating position, then Copenhagen is dead on arrival.
The star performer is Norway with a promise of a 60 percent decline. Contrary to the impression in the media (especially Cold War media), the European and American positions are near identical – a 20 or 18 percent reduction in intensity. Australia, Brazil and Japan are clustered around the high 30s reduction or a promise whose worth is almost 4 times that of China. India’s announced reductions of 20-25 percent means that it’s promised emissions in 2020 amount to almost a zero amount of burden sharing. But note the fact that India’s emission ratio, at 19 in 2020, is among the lowest in the world and almost half that of China. Clearly, the giant twins have less in common than commonly believed.
Contrary to China’s official position that “developed countries must shoulder most carbon emission cuts” (a position followed meekly by leading developing countries, including India), it is the case that the developing nations are promising cuts about three times the level promised by China. The moral of the story – don’t jump to conclusions about a cat just because its color matches your ideology. Look at how many rats (CO2) the cat can catch.
Table: Deconstructing Targets for CO2 Emission Cuts in 2020
Emissions, CO2 (bil tons)
Intensity of Emissions
1990
2005
2020
1990
2005
2020
Target 2020
Burden Sharing
China
2.2
5.1
11.1
86
49
31
28
-10
USA
4.9
5.8
5.8
58
43
31
26
-18
India
0.59
1.15
3.39
33
26
19
20
5
Europe
3.2
3.3
3.2
35
28
20
16
-21
Russia
2.2
1.5
2.3
119
76
39
30
-25
Indonesia
0.14
0.33
0.60
21
27
21
16
-26
Canada
0.43
0.56
0.62
55
46
36
26
-29
Korea
0.23
0.47
0.69
42
39
29
21
-30
Brazil
0.19
0.33
0.55
16
18
16
11
-36
Japan
1.1
1.2
1.3
30
29
23
14
-37
Australia
0.26
0.39
0.46
60
52
40
25
-38
Norway
0.03
0.04
0.04
26
20
15
6
-59
Notes: (1) 2020 numbers are forecasts based on trend assumptions.
(2) Intensity of emissions is the ratio of CO2 emissions (in kg) to GDP (in 2007 PPP $) multiplied by 100. Total PPP GDP in the world was 67 trillion in 2005, and CO2 emissions 26 billion tons yielding an average intensity of 0.38 or .38*100 = 38.
3) The target for 2020 is the official target of CO2, however stated, converted into intensity in 2020.
4) Burden sharing: This is the “sacrifice” that each country is making when it announces emission cuts – it is the percentage decline in intensity of output from business as usual estimates of intensity (estimate of emissions in 2020 as a ratio of GDP in 2020).
This article is part of a paper “Climate Change – What’s it all about and what is to be done” , forthcoming and available, with past articles, at www.oxusinvestments.com.
Blurb: When it comes to climate, change and promise may only be in the eye of the beholder.
This has been a hot week for climate talks. The two laggards, China and the US, both departed from their no commitment stand to boldly announce the following: the US to reduce its carbon emissions by 17 % over 2005 levels, and China to reduce the intensity (CO2 emissions per unit of output) by 40-45 percent. Europe has already promised a 40 percent cut in per capita terms. (The terminal date for these promises is 2020 or 2025).The US promise is not as little as it seems, and the China promise not as large. In per capita terms, the US is promising about a 30 percent reduction (population will increase by 15 percent or so between now and 2025), and 50 percent reduction in intensity of output (output expected to increase by 50 percent or so over the next 18 years).
The headlines are suggesting that it is India’s turn to act. India has consistently avoided making any commitments on CO2 reduction. Its’ belief, and argument, is that the first commitment of India is towards poverty reduction; such poverty reduction can only come about through sustained economic growth; and sustained economic growth means that carbon emissions have to go up. Hence, India’s promise to keep its per capita emissions below the level of the developed world.
In the previous article, (India: Need for Change in Climate, Business Standard, Nov 7th), I had argued that the per capita promise was not in our best interests. Indeed, a better negotiating position for India would be to say that the intensity of our output will not exceed some norm that all countries agree to. Countries whose intensity of output is worse than this benchmark should be required to cut emissions first; those with intensity less should follow in a pro-rata fashion until the world target of total emissions is achieved. Such a stance would be consistent with the negotiating position of both the big polluters China and the US. And it would protect India’s growth prospects more. (This is pursued in the next and final part of this three part series on climate policy).
Various countries have promised various targets for various years – absolute cuts, per capita cuts, intensity cuts etc. How can these different efforts or different burdens or different promises or different sacrifices be compared? For that, one needs to have a metric of “sacrifice”. For example, assume I belong to a heavily developed economy which is in the post-industrialization phase. This economy will have lower energy needs than an economy that is in the early stages of industrialization (LDC). The former will be naturally reducing the intensity of its emissions (energy used per unit of income or output); the LDC is likely to go through a phase of first increasing this intensity. Analysis of over 130 countries for the period 1990 to 2007 suggests the following pattern: emissions per capita increase by 1.5 percent for each 1 percent increase in income for income levels up to 2007 PPP$ 2700 per capita; by 1.3 percent for the income range 2700 to 20000, and by only 0.7 percent for incomes above PPP $ 20,000 per capita. These response coefficients are higher for countries whose share of industry in GDP is higher than average e.g. China, and lower for those whose industrialization, ceteris paribus, is below average, e.g. India. (For comparison purposes, the per capita 2007 income levels for India, China and the US were PPP $ 4800, 9800 and 47000, respectively).
There is another stylized fact about emissions intensity – they have been falling over time and for countries at all ranges of income. This is on-going technical change. For the last twenty years, the average worldwide fall in intensity has been around 1.5 percent per annum. The table reports these intensities, and related data, for selected regions and countries of the world.
Two business-as-usual (BAU) scenarios are reported. Given a set of per capita growth rates, and a traditional growth with emissions model, one can compute the expected use of CO2 emissions in 2025 – this is BAU. This level is computed without allowance for technical change as has already occurred, for different countries at different rates, over the period 1990 to 2007. This technical change is computed simply as the weighted average of the (log) percent change in intensity, with a higher weight (.65) for the more recent period (2000 to 2007) and a lower weight (.35) for the 1990 to 1999 period. If this trend increase in technological change is assumed to continue for the period 2007 to 2025 (a conservative assumption) one arrives at an estimate of BAU* i.e. the best that can be expected from each country given its level of development. BAU* can also be considered as a “no sacrifice” level. (Note that the total CO2 output with the technical change assumption is 48.3 b tons – still considerably higher than the 30 billion tons target – again, a matter explored in the next article).
The intensity of output for each of the three years 1990, 2007 and 2025 is also reported. The final column reports on the reduction in intensity from 2007 levels. The following three conclusions are immediately apparent. First, India’s intensity of CO2 use is among the lowest in the world (and equal to that of Europe in 2007), and China among the highest. Second, India’s trend decline in intensity is comparable to the world average. Third, China’s promise to cut the intensity of emissions by 40 percent is good, but really, it is just what would have been expected given the nature of technical change; actually, it is a few percentage points lower! There isn’t any “sacrifice” or any extra effort. The implications of the results on intensity for country targets, technology transfer, and climate aid will be explored in the next article.
Table: CO2 Emissions and Intensity: 1990 - 2025
Emissions (bil tons)
Actual
Forecasts(2025)
Intensity of emissions (CO2/GDP)
1990
2007
BAU
BAU*
1990
2007
2025
% change in intensity 2025 vs 2007
Regions
Developed
9.8
11.3
16.5
11.5
0.44
0.34
0.24
-30
Europe
3.2
3.3
4.6
3.2
0.35
0.26
0.18
-31
FSU and EE
4.7
3.2
11.5
5.2
1.06
0.58
0.25
-57
Developing
5.9
13.4
45.8
31.7
0.43
0.37
0.25
-31
World
20.4
27.9
73.8
48.3
0.51
0.37
0.25
-33
Countries
Developing
China
2.2
6.1
23.6
13.4
0.86
0.47
0.27
-43
India
0.6
1.3
6.9
4.7
0.33
0.25
0.17
-31
Brazil
0.2
0.3
0.7
0.7
0.16
0.17
0.16
-8
Developed
Japan
1.1
1.2
1.7
1.3
0.30
0.28
0.21
-26
Germany
1
0.8
1.1
0.7
0.48
0.31
0.20
-36
UK
0.6
0.5
0.8
0.5
0.41
0.26
0.17
-36
USA
4.9
5.8
8.6
5.9
0.58
0.41
0.28
-31
Notes: (1) Intensity is defined as CO2 emissions per unit of GDP; the final column is the change in intensity in percentage terms and corresponds to the commitment made by China (40 percent reduction).
(2)BAU and BAU* are 2 business as usual forecasts for 2025; BAU is a straight extrapolation based on the historical relationship of per capita CO2 emissions and per capita income (measured in 2007 PPP $). BAU* incorporates the effects of technological change (decline in intensity of emissions per unit of output) that have taken place across most countries over the last two decades; a weighted average (65 % weight for the 2000-2007 period and 35 % for the 1990-1999 period) of this annual technical change is assumed to continue for the period 2008 to 2025. Population extrapolations are from UN and income forecasts are based on expected income growth rates in different countries.
This article is part of a paper “Climate Change – What’s it all about and what is to be done” , forthcoming and available, with past articles, at www.oxusinvestments.com.
Blurb: India should heed the Aesop dictum: “Be careful what you wish for, lest it come true”
The Environment Minister, Mr. Jairam Ramesh, struck several chords when he suggested, via a leaked letter to the PM, that the time had come for a gear shift in India’s policy towards climate control. The traditionalists roared disapproval, and the climate control negotiators seem satisfied that order was restored. But there just might be more to the leaked letter.
I find it hard, perhaps impossible, to believe that the letter could have been written without the PM’s consent. The reason? Assume for a moment that the A climate team decides to change its view. How should it, how can it, change a major point of view? An obvious choice is a leaked letter. This way no one has responsibility;the Pandora’s box gets opened, the old can of worms disperse, and the policy gets changed. So, in my scenario, the whole change in policy was planned!
And for good reason. The old policy had outlived its usefulness, and it was somewhat inappropriate for a new world order, and a new India. There were two pillars to the old policy. First, the developed countries caused the problem in the first place, so it was their moral responsibility to clean up the atmosphere and to fund the developing countries in their efforts. Any connection between the “moral” argument and the hackneyed, and obsolete, arguments of the “non-aligned” movement is not coincidental. Many had believed that India had graduated from moral posturing, but alas, that is (was?) news to our climate team.
It is true that developed country growth, since the Industrial Revolution, has been a cause of climate change. But this growth occurred at a time when there was zero knowledge in the world that industrial growth would cause the problem. Even Einstein had not commented on this aspect. So how can anyone be held accountable? Now the specious argument is often made, primarily by Indians, that ignorance of the law is no excuse. But we are not talking about any law here; by definition, when a law is formulated, the nature of the crime is known. In the case of the climate change, the ex-post crime was not a crime; indeed, it was an ex-ante virtue. Indeed, that is what development and poverty reduction is mostly about – gains in per capita income, and gains traditionally came through intensive energy use
The second foundation of India’s climate policy rests on its pledge to never exceed the per capita emissions level of the developed countries. In 2007, India’s per capita emissions were 1.2 tons per capita, just one tenth of the average for the developed countries. The Indian position seemed like a “no brainer” a no cost commitment for the future. While there may be an argument for changing our outdated moral stance, there seemed to be little reason to change the “commitment not to exceed” etc. Then why the attempt by the government of India to change its stance? The argument made by the traditionalists (paradoxically, in India most traditionalists are of the left persuasion) is that Jairam Ramesh was caving in to pressure from the West, especially America.
When in doubt, kick America and you cannot go wrong. And though it might change, America is the bad boy on climate change, along with India’s major non-aligned ally, South Africa. But India’s commitment is not to exceed the developed country average, which at 11.7 tons/capita of CO2 emissions, was only 60 percent of the average for the US (19.1 tons/capita). Even then, the commitment not to exceed a level ten times as large seemed “reasonable”. Not really.
The popular misconception is that emissions are proportional to per capita income. Not so. The rate of change of emissions per capita with respect to income per capita is less than unity. This occurs because as countries become rich, they move out of industry and into services; the latter is much less energy intensive. For example, a Wall Street trader needs precious little energy input besides a broad band. An automobile factory needs considerably more energy. So as the US moves out of car production and India moves into car exports, the energy uses of the two economies will tend to converge.
The importance of this convergence is illustrated by the figures in the Table. For 2007, actual data are reported; for 2025, the UN population projections are used along with forecasts of growth in per capita income. These forecasts are based on the growth experience of each country over the last five years 2004 to 2008. The world figures are the aggregates of about 140 countries. The model explaining emissions per capita (time-period 1990-2007) has the following explanatory variables – (log) per capita income, the square of this to capture non-linearity, the size of the middle class and the size of the rich class.
The model does not incorporate any explicit emission control policies, something that most parts of the developed world are committed to. The figures are for a “business as usual” situation. And in this scenario, India’s per capita emissions rise to 7.4 tons/capita by 2025, very close to the global average and about half the developed country average of 15.2 tons/capita. But note that this is a business as usual model; the Europeans are committing themselves to an 80-95 percent reduction from 1990 levels by 2050 and a 30 percent reduction by 2020. In 1990, the developed country average was 7.5 and in 2007, 9.0. A thirty percent reduction of even the latter figure would mean that the CO2 emissions from developed countries will be less than 5 in 2025 (5.25 in 2020). India, at that stage, with growth and development and reduction in poverty and a high moral quotient will be at 7.4, almost 50 percent higher than the developed country average!
No matter what the assumptions, or the math, or the model, the traditional Indian policy towards climate change is untenable. This is perhaps what the “leaked” policy was trying to convey. It is time the traditional climate establishment saw the writing on the wall.
Business as Usual Model for CO2 Emissions
Population
(billions)
Per Capita Income
(PPP $)
Per Capita Emissions (Actual)
(tonnes)
Per Capita Emissions (Predicted)
(tonnes)
2007
2025*
2007
2025*
2007
2025*
2007
2025*
Regions
World
6.7
8
9,100
19,300
4.2
5.6
3.6
7.9
Developed
1.3
1.3
23,500
40,300
11.2
11.7
9
15.2
Less Developed
5.4
6.6
5,600
15,100
2.5
4.3
2.3
6.4
Countries
Germany
8.2
8.1
24,800
33,900
9.7
4.5
9.7
15
Japan
1.3
1.2
27,200
39,300
9.7
14.6
10.5
21.6
United Kingdom
6.1
6.4
25,700
37,400
8.5
4
9.3
15.6
United States
3
3.5
36,800
47,300
19.1
20.1
12.3
14
Brazil
1.9
2.2
8,100
14,600
1.8
2.7
3.1
5.1
China
1.3
1.5
7,700
27,000
4.6
10
3.6
9.1
India
1.1
1.4
3,800
15,100
1.2
2.2
1.3
7.8
South Africa
4.6
4
9,900
22,600
7.6
11.9
3.8
6.1
Notes: * predictions for 2025 come from various sources; “actual” per capita emissions for 2025 are based on past growth patterns; “predicted” for all the years is based on a model. for population and per capita income (and the size of the middle and rich class) see Bhalla, Surjit S, Second Among Equals: The Middle Class Kingdoms of India and China, under review for publication, Peterson Institute for International Economics, Washington DC; 2007 draft available at www.oxusinvestments.com
The model for emissions relates per capita emissions to log per capita income, log per capita income squared, size of the middle class (in %), size of the rich class (in % of population); model estimated for all non-oil exporting countries, 1990-2007; data from International Energy Agency
There is as much difference between Lashar-e-Tayyiba and the Maoists as between Al-Qaeda and the Naxalites. This recognition is important if the system has to defeat the terrorists
Over the last few weeks, there has been a ratcheting up of the Naxalite/Maoist violence to bring truth and justice to the Indian democracy. A parallel movement has occurred over the same period – a campaign by “liberal intellectuals” (I am sorry but that is the most accurate description, though Yasser Arafat would have added so-called) to cleanse the ever increasing flow of blood. We are told, in breaking news terms, that the violence can only be stopped with “development”; that unless progress is brought to the poor tribals, arresting the violence will be of little consequence.
We are also told that it is not only incorrect but unfair to characterize the N&M’s as terrorists. The reason not? Because unlike genuine terrorists, the N&Ms are genuinely interested in development and helping the poor. For example? Well, a Maoist leader and a leading member of their Politburo, Mr. Kobad Ghandy, has been glowingly reported as a development junkie. His movement, we are told, has been operating in poor villages for decades; they have been talking and cajoling the poor tribals to use boiling water, something that the official authorities presumably haven’t done.
How does one differentiate the N&Ms from all the NGOs that have devoted their lifetime to helping the poor, and in many more ways than just communicating the importance of boiled water? For that matter, how does one distinguish the N&Ms from Bill Gates’s foundation, or for that matter from international organizations like the World Bank? Before we get all syrupy about violent protesters having a heart of gold, we need to understand, and define, the limits to action in the name of the poor. If media reports are to be believed, the N&M violence is often against the poor, only they are a different kind of poor. They are the local police, or local government officials. Other times, the violence is against “ordinary” poor people.
One of the main complaints of the N&Ms is that development often does not reach the poor, that it gets eaten up by the state, as official help travels from the center to the hinterland. This is a complaint that is widely echoed by the liberal intellectuals, as they staunchly defend their defence of the N&Ms. The defence, therefore, has two components; first, that the violence is perpetrated by the Maoists because they have little option; the state has in many instances behaved badly, and is massively corrupt, so corrupt that it would steal from the poor. Second, that the N&Ms are really like any other NGO, going to remote areas where the middle class does not dare to tread, and helping the poor by telling them about the importance of boiled water.
Criticism of the non-beneficial nature of the state, and its innate corruptness, is not the monopoly of the N&Ms or their defenders. This claim has been made by most; indeed, the first person to concretize this proposition was no less an establishment figure than the former Prime Minister of India, Rajiv Gandhi. And he made that claim – that less than 15 percent of government expenditures meant for the poor actually reached the poor – in 1985, when the present day M&Ns were mere toddlers.
There are other people who resort to violence when they feel that they are unjustly treated by the state, or by art. India’s leading painter, Mr. M. F. Hussain, has been in exile for several years. His crime? That he dared to paint nude Indian goddesses. There was protest violence, though not as violent as that by the N&Ms. Yet, no one has come to the defense of these vandals – nor they should. But by any count, these “morally right” lumpen proletariat has done less violence to the poor than the N&Ms. So why are the latter defended and the former vilified?
Throughout history, there have been several champions of the poor; these champions came to power in the name of the poor, and soon destroyed the poor and the nation. There was Stalin, and more recently Pol Pot of Cambodia. Look into their histories – it is the same sad movie over and over again. They say the system is rotten; the intellectuals support them, because the terrorists are also smart enough to realize what resonates with the “intellectual” elite. Then they come to power and when they leave, the system, and the poor, is a lot worse off than when they started.
Above, we had discussed the question of differentiation of those who do good. The flip-side question is equally important. How does one, nee should one, distinguish between those who do bad? To put it starkly – there are few people (except the mandatory some) who defend the actions of a terrorist group like Al-Qaeda. Since these “some” reside in India, let me restate the proposition – how many Indians would defend the perpetrators of 26/11? Did I hear any? No. Now what is the difference between the 26/11 terrorists and Al-Qaeda ? None; indeed, the financing for the two organizations most likely comes from the same source. What do these terrorists have in common? Much; for starters they have the same cause: fighting for the poor, and the oppressed. And why are they fighting for the poor and the oppressed? Because the system has failed, the system is corrupt, and only the valiant in the name of the poor terrorists can right historical wrongs. Honestly, there is as much difference between Lashar-e-Tayyiba and the Maoists as between Al-Qaeda and the Naxalites. This recognition is important if the Indian system has to defeat the terrorists.
First things first. In RBI’s semi-annual monetary policy announced yesterday, Governor Subbarao did not put a foot wrong. And he got several feet right. The policy marked a departure from traditional RBI approach in several respects. There are two criteria by which the policy can be evaluated. Was what was done appropriate? Was what was not done correct? Let us examine both.
What was not done: The RBI kept the repo rate, and the CRR level, unchanged. This doing nothing policy best illustrates the likely new approach at the RBI. The monetary hawks were out in force, and echoing the demands of their compatriots in the developed world, contended that India must begin to rebalance and hike interest rates. After all, Israel and Australia had shown the way, and the RBI must also follow. Our repo rates were at lows induced by the crisis and this imbalance had to be redressed. If the RBI had followed, it would have struck a false note. Why? Because India’s monetary policy should not be about matching what other countries have done, or are doing. Each country’s monetary situation can be different. Prior to the crisis, India had one of the highest real interest rates in the world. If what Australia does is relevant, why weren’t our rates reduced in 2007?
One long lasting impact of the financial crisis of 2008 is likely to be a new real interest rate approach to monetary policy in India – all for the better. According to this approach, real interest rates in India were inordinately high in India prior to the crisis. Adjusting back to those levels is neither desirable nor appropriate. For too long Indian policymakers have followed a biased and mechanical monetarist policy in setting interest rates. If money supply growth was just one percentage point above the assumed target, rates were hiked. A good monetarist respects symmetry, but that is not what the RBI did in most of its post-reform history. If money supply growth was below target, it said it needed to cool the ostensibly overheated economy and/or to cool inflationary “expectations”. If above target, wham. No more. Reading between the lines of both the review of the economy and the policy announcement, it now appears likely that the money supply growth policy indicator will go the way of the telegraph. In this email world, sooner is not soon enough. But better late than never.
What was done: The RBI increased the SLR requirement from 24 % to 25 %, and raised the risk weight on loans to real estate. The former would fall in the category of “tone”; prior to the crisis the SLR was 25 %, so we are back to “normal”. However, since banks are already depositing close to 27 percent (lazy banking again?), this policy will have zero impact on monetary tightness. There is enough, and appropriate, noise about the possibility of asset bubbles, especially after the crisis of last year. If central bank governors do not genuflect to pricking of asset bubbles, they can be accused of not caring for the poor! There are two kinds of policies which can be used for ex-ante bursting, and in the past, Indian policy makers have followed both i.e. selective, targeted, policy at a sector, and a general across the board increase in interest rates. The latter policy is akin to swatting a fly with a sledge hammer – all that happens is that the glass table shatters, and the fly escapes to the wall. My personal view is that as a rule, policy makers should beware of pricking asset bubbles; but in extreme situations, when the weight of evidence is overwhelming, then targeted policy of the kind used by Subbarao (and also used by Reddy earlier) is appropriate.
What about inflation? A significant pointer to the “no raise in rates” policy was contained in RBI’s macroeconomic review released a day earlier. The RBI was at pains to make two valid points: first, that consumer price inflation stayed at elevated levels, and stubbornly so. Second, that most of the inflation that had occurred over the last year was due to food price inflation. Indeed, the gap between WPI manufacturing inflation and overall WPI inflation has been the highest in recent memory. To be sure, central bank governors have to be concerned about inflation; but there is no law of economics that says that monetary policy tightness can address drought induced inflation. So not to attack windmills was another rightful RBI step.
The drought is behind us, and so are elections. The government can now get back to managing the economy rather than managing political campaigns. It is reasonable to expect that food price inflation has run its course; given the slack economy worldwide, it is also reasonable to expect that demand side pressures will take a while to emerge. So the future of inflation looks much better than the past. Given this expectation, a hike in rates to counter inflation and/or to anchor “inflationary expectations” (read I don’t know what causes inflation but the headline number states that it is there!) would have been highly inappropriate, if not downright wrong. Another right RBI step.
The RBI has faced criticism over the years from the single objective advocates. According to these post-modern monetarists, a central bank should only consider a single objective – controlling inflation or “anchoring expectations” presumably whichever comes first! According to these modernists, exchange rate should fluctuate with supply and demand, and growth should be left to take care of itself. The RBI has consistently distanced itself from narrow economics, and Subbarao continues this tradition. Where I differ with RBI is in their forecast of economic growth; only 6 percent they say, while I maintain that we will end fiscal year 2009/10 with a growth rate closer to 8 percent. But this difference does not translate into hiking interest rates because Indian GDP growth would, even at 8 percent, be somewhat lower than the potential growth rate of around 9.5 percent. If so, then don’t look for the repo rate to move much beyond its present level of 4.75 percent, though the reverse repo rate might be expected to close the gap (presently the reverse repo is at 3.25 percent).
Blurb: Fiscal policy is forced to be expansionary in India because monetary policy is failing to perform its assigned role.
The RBI governor, Dr. Subbarao, recently announced that he was seeking discussion and perhaps even criticism from within his organization. This is definitely newsworthy and Dr. Subbarao should be applauded for taking this initiative. The RBI is perhaps the last of the feudal organizations in India (along with all the political parties) and this attempt at an entry into the 20th century is laudable. I wish Dr. Subbarao luck; having worked on two RBI committees a decade apart (in 1997 and 2006, under the chairmanship of former Deputy Governor and a true-blue RBI man Mr. Tarapore) I can say with some experience that the RBI does not take lightly to anti-feudal forces.
No sooner had Dr. Subbarao made his plea for dissension, the empire struck back. In its quarterly review on Tuesday July 21, the RBI viewed the economy in a dour manner (why so serious?). It kept tight monetary policy tight (highest real interest rates in the world if one uses the GDP deflator) and warned of impending inflationary dangers. Believing full throttle in this gloomy stagflation outlook, the RBI lowered the forecast for GDP growth for 2009/10 from 7.5-8 percent (made in Jan. 2009) to 6 percent. Correspondingly, it raised its forecast for WPI inflation in March next year from 3 percent to 5 percent. (See table). These pronouncements are put into focus by noting three facts. First, internationally, India is the only economy that is lowering its GDP forecast, while most are debating not that GDP will be higher in 2009, but how much higher. Second, while all expect inflation to be higher than zero inflation, there is no central banker of a non banana republic (that I know) who is forecasting this high inflation.
The third fact is perhaps the most damning. The table shows the past forecasts and the errors on both. Note that it is nobody’s contention that the forecast errors should be zero. That would be like forecasting the past. What is desirable is that the forecasts have a randomness to them such that over time the errors add up to zero. Unfortunately, nothing of the sort occurs with RBI forecasts. Very consistently, the RBI under-estimates GDP growth by about 1 to 1.5 percent - it gloriously missed the entire growth acceleration between 2004 and 2007. In May 2004, the growth forecast for 2004/5 was 8.1 percent, but in October it got lowered by 2 percentage points. Which means that the RBI was expecting GDP growth (in Oct. 2004) to average only 4 percent for the next two quarters! It turned out to be twice that rate.
In 2008, perhaps the RBI noted its erroneous ways and started forecasting higher GDP growth for the great crisis year of 2008/9. At the peak of the crisis (July 2008), it forecast GDP growth of 8 percent. A month later, year on year industrial production was reported to be negative – the very first negative number in the developing world, suggesting that the great Indian slowdown of 2008 was almost entirely a home-grown affair (note that the world collapsed a full three months after the Indian collapse and after Lehman in September).
The inflation forecasts are no better, and in many respects shockingly worse. [That this might have something to do with the deeply flawed quantity theory of money model that the RBI uses has been commented upon ad nauseum in these columns]. The data are from quarterly reports of the RBI. In end January 2009, which is two months before the target of the forecast (March 2009), the RBI’s considered assessment was that year on year WPI inflation would be 3 percent. At that time, the WPI index was 229.6 and the March 2008 WPI figure was 225.5. A 3 percent year on year increase would mean an index level of 232.3 in March 2009. Which means that in just two months the RBI was expecting the index to rise by 1.2 percent or close to 7 percent at an annual rate. (If seasonal factors are incorporated into the exercise, which they should, but which the RBI adamantly refuses to incorporate into its thinking, the “performance” would be worse). This when the world was rightfully talking of the genuine possibility of a second great depression worldwide.
Maybe the RBI will be right this time; and maybe only the RBI will be right and the rest of the world wrong. Maybe. It is equally possible that we need to assess the RBI forecasts by a different yardstick, namely not research but ideology. Consider for a moment that the RBI belongs to a strict monetarist school and only looks at the quantity of money supply. Consider also that as a central banker it believes in always erring with tightness. Consider also that its ideology prevents it from being open-minded about different explanations for economic phenomena. If so, then the RBI will act exactly as it has acted.
Unfortunately for India, this is not a defunct economist’s debate. Monetary policy should not be a domain for idle researchers/policy makers/commentators to have “fun”, or for some feudals to dictate policy. What the RBI does affects policy on interest rates, and interest rates affect the nation’s economy and even the poor. Dr. Subbarao complained about bad fiscal policy in his policy statement (ironically, until a year ago, he was making the same fiscal policy). It is hoped that as part of dissension (which he is unlikely to receive from within) Dr. Subbarao will accept the following – the reason that fiscal policy is expansionary in India, more than it needs to be, is precisely because he and the RBI cannot be trusted to do a good job on monetary policy. Fiscal policy has to masquerade as monetary policy; very easily, monetary policy can be less tight and fiscal policy more. But that is hoping for Godot – or for dissension within the RBI.
Blurb: Don’t get misled by the schizophrenic stock market – Budget 2009/10 is a very good Budget, among the two best since 1991.
It is relevant to understand the background to Budget 2009/10. Hope and despair is how I would describe it. Hope because the government finally had a political mandate, a vote much beyond its own optimistic expectations. “No more excuses” was the Congress’s future. One would now know for sure whether the Communists within the Congress party really held sway over policy decisions. Five years of inactivity can dull anybody, and the Congress was getting geriatric in every possible way. Good men, bad ideas had turned into formerly good men, worse ideas.
But in a flurry of pre-Budget activity, came some announcements. The government was not averse to financing leaky public expenditures (note that I don’t say the fiscal deficit – more on this later) by selling shares in government owned companies. Salman Khurshid, the minorities minister, made some very intelligent noises about the need for affirmative action - and the rejection of reservations, in education and jobs. The education minister, Mr. Sibal, announced his intentions of transforming the education sector. Now I think that one national exam is a terrible idea, but he is to be applauded for admitting that the education system is broke, very broke. More than repair it needs reconstruction, and Kapil’s pronouncement was a genuine uplifting of the reform spirits. Next, in a signal that the government finally will begin to concentrate on leakages in delivery of social services, Nandan Nilekani was appointed as czar to bring in a unique identification card for all citizens – honestly, to serve the poor better. Then before one could say Wow the government announced its intention of scrapping Article 377, a law which defines homosexuals as criminals. The law is even older than the Congress party and the fact that it had continued to exist was more than shame for our much vaunted democracy.
But before one could say Hooray, the government started to backtrack. Religious sentiments are hurt and other nonsense was used as an excuse. The Communist conservatives in the Congress (C 3 for short) in charge again? What possible loss could the Congress suffer by scrapping Article 377? Didn’t the party realize that it was voted in because it was considered the “liberal alternative” by a large segment of the population, by a large proportion of the young and bulging middle class? As events turned out, we will never know the answer but for its own benefit, and future, the Congress party should scrap within it those that favored a business-as-usual cautious attitude towards long overdue reforms, social or otherwise.
Prophetically on the same day, July 2nd , 2009, the Economic Survey and the Delhi High Court came to the rescue. The Ministry of Finance’s own document on the economy came out of the closet with a wide ranging analysis of the Indian economy – and a comprehensive listing of needed reforms. Quite easily the best Economic Survey ever produced in India (in style, presentation and content), this document gave optimism a good name. The Court did what the C 3 had pushed back – it made homosexuality legal. India was back on track; did one dare hope for Budget day?
Hope was rewarded, despair contained. The budget speech brought in some potentially major reforms in a by the way manner. Fertilizer subsidies would now be nutrient based; the farmer would finally get the subsidy rather than inefficient government and private companies. Great for the economy, and the farmer, and bad for fertilizer companies. Decontrol of oil prices, after a study group meets and decides (a formality in my opinion), is another mega-reform. But the reform moves don’t stop there. There is a 45 day limit on coming out with a “new” tax code, a tax code which will stop the obsession of Finance Ministers (and juniors in the Finance Ministry) to constantly tinker with tax rates, not to mention the plethora of cesses, surcharges and other taxes bordering on the fringe. Plus the GST is on schedule for April 2010; most expected this to be pushed back to 2011. So a major tax reform, direct and indirect, over the next year. Fringe Benefit tax was abolished, and service tax imposed on lawyers, a community that the previous finance minister, a lawyer, had self-indulgently exempted. An undoing of past mistakes, without apology. So both on tax and expenditure, major initiatives and intent, Budget 2010 is a winner.. What else could one have hoped for from the Budget, which after all is a tax and expenditure statement?
What about the fiscal deficit? What about it? Compared to the interim budget, subsidies are higher by 10,000 crores; the overall fiscal deficit is up by 0.1 percent, from 6.7 to 6.8 percent. Even the fiscal vigilantes should be cautiously happy. And did anybody seriously expect the fiscal deficit to be brought down in a recession year? How pray do you do that – by raising taxes so that you get even less revenue? By lowering expenditures so that you get even less growth?
There was one genuine disappointment – the Budget failed to give a figure for disinvestment. This was not at all unlike the Congress attempting a fudge on Article 377. It failed on that count – it will fail on this fudge too. The government can always argue, correctly, that it can bring disinvestment into policy anytime. It most likely will.
An economist’s steering hand is visible; Budget 2009/10 has a well thought out reformist touch. Previous UPA budgets had meandered, lost purpose, and too consumed by high economic growth which they did nothing to make happen. In a welcome departure, this Budget proposes, and intents to deliver, a full set credible second generation reforms. All in all one of the best budgets I have seen in a long time; actually among the two best Budgets since 1991, with Sinha’s BJP 1999/2000 budget, and not the so-called dream budget of 1997, being the other very good Budget.
Blurb: There are few parallels in history for the rapid ascent of the Communists in 2004, and its deep plunge into near oblivion in 2009.
In the run-up to Election 2009, I was struck by the number of politically correct chatterati-glitterati who voiced the following: the Left may not be good for the country, but they are the conscience of India. Or that we need someone to speak for the poor of India, and so let’s give the Communists a big hand. How can a party that pays homage to Stalin on a daily basis at its headquarters in Kolkatta be considered anything but morally repugnant is a mystery to me. As is the fact that consistently, and throughout history, the communist parties have erred on the wrong side of patriotism. The latter is a crime in many countries, but some view it as a badge of conscience in India.
But that was in the past; the future is as bright as the Northern star. For Election 2009 posted one mega result: the Left is history. There is an unwelcome side effect of this joyous news - we are not going to have the Left to kick around anymore. The facts documented in the table have all the confirmatory evidence.
But as is common knowledge, the Left is not just the combination of communists (political parties CPM and CPI). A large element of the Congress party has beyond leaning Left elements. So there is a large interest group which will want to paint the magnitude of the communist loss as “normal”, or par for anti-incumbency (what do you expect after 30 years of rule etc). Echoing this sentiment, political scientist Atul Kohli writes “The proclaimed demise of the Left may turn out to be premature. In spite of losing seats, both the CPM and the CPI maintained their relative shares of the popular vote between 2004 and 2009.” (Indian Express, May 19, 2009).
The table shows the historical record for the CPI, CPM and joint performance since the time of the first parliamentary election in 1952. (I have deliberately not tried to calculate the seats for the Left since that is an amalgam of parties and correct counting would demand that the Left within the Congress also be identified!) Two facts are obvious – the communists never had it so good as in 2004, and have never, ever, had it so bad as in 2009. In 1952, the Communists won 16 seats out of 39 contested; in 2009, 20 seats out of 130 contested. The joint vote share – 6.8 percent – is less than at any time in history since 1952. Note the steep decline between 2004 to 2009 – this just doesn’t look like an ordinary election event. From winning more than half the seats contested to winning just 15 percent – the previous lowest percentage of seats won by the communists was 21.2 percent in 1962.
There can be debate about what caused this decline, but the fact that the left is fast on its way to extinction is quite clear. The left faces some clear decisions, and introspection. So far, except for expelled member Somnath Chatterjee, the Communists madly believe that there is nothing to worry – elections are lost, there always is the next election. That “communism” may be appealing to a rapidly shrinking fringe element is something the leadership is loathe to see; in contrast, its bête noire the BJP already admits that identification with its own parallel fringe was one of the major electoral lessons in 2009. To the extent they can, the BJP also admits to a failure of leadership. In contrast, the Left feels it saw no evil, and definitely did no evil.
The choice for the last remaining communist party on this planet is clear. (Did you know that they and they alone celebrated the 90th anniversary of the October 1917 revolution. I would appreciate being corrected on this fact i.e. was there any other official celebration, anywhere, celebrating this “occasion”.) It either reinvents itself, as its brethren around the world have repeatedly done. Or it walks off into the JNU sunset.
If the left is out of the way for the Congress, what remains? We have all assumed that May 16 2009 was a historic moment in Indian democracy – the beginning of the end of the two-party system, and the beginning of true, responsive middle class democracy in India. By the end of this week, Manmohan Singh will announce his cabinet, and the selection of his team will give verification, or rejection, of the “history in making” hypothesis. No matter how it is camouflaged (continuity, experience, wise old men at the helm etc.) , if the team is the same old men then I am afraid all bets are off. India, yet again, would have lost an opportunity, and Manmohan Singh would have lost his chance to make an indelible mark on the Indian polity, and history. He will always be fondly remembered for his stellar role in jointly making history with Narasimha Rao in 1991; the last five years are best forgotten by the Congress. Let’s chalk it up to party building. Fair enough. But what now – who are the cabinet members, the team, to lead India (and the Congress) forward. Will the Congress continue to rely on feudal politics for its leaders, or will it begin to bank on middle class professionalism, and entrepreneurship? If the former business as usual model is chosen, then it will be confirmed to all that the Congress did not win this election, but that the regional parties, the Left and the BJP , lost it.
If the latter, and ex-ante there is a 50 percent chance of this happening, the team is A class, relying more on merit than on caste, sex, age, religion, and party experience, then there is a very high chance of May 16 being mega historic. It would mean that the Congress has become forward looking, and that it was on its way to shedding its left past, and on its way to fulfilling Nehru’s (and all of our) dream of achieving our destiny. The changed world order places a high premium on whether India can provide the necessary leadership at beyond the Prime Ministerial level. Look no further than the Sensex’s reaction once the Cabinet is announced. If euphoric, India will make new history. If tepid, then it may not be even the case of Good men, bad ideas. It will be bad, bad… And Rajiv Gandhi’s commendable efforts to rebuild the party will slowly turn into failure. The Congress won because it appeared to promise something different from the Left, from the BJP, from caste, from regionalism. It promised a middle class democracy – let us hope the solemn promise is fulfilled.
The Inverted V of Communism in India – Gained in 52 years, lost in 5
Year
Joint Vote
Joint Seats
Joint % seats won
Number of Seats won by
%
(number)
(seats won/seats contested)
CPI
CPM
1952
3.3
16
32.7
16
N/A
1957
8.9
27
24.5
27
N/A
1962
9.9
29
21.2
29
N/A
1967
9.4
42
25.0
23
19
1971
9.8
48
31.6
23
25
1977
7.1
29
20.1
7
22
1980
8.7
47
42.3
11
36
1984
8.6
28
23.5
6
22
1989
9.1
45
39.5
12
33
1991
8.7
49
48.0
14
35
1996
8.1
44
37.3
12
32
1998
6.9
41
31.8
9
32
1999
6.9
37
27.2
4
33
2004
7.1
53
51.5
10
43
2009
6.8
20
15.4
4
16
Notes: Joint refers to the combined share of CPI and CPM.
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.
