Famous Populist, Secret Liberaliser

There is no contradiction between accelerating economic growth, being fiscally prudent and showering welfarist handouts to woo voters. An excellent example is documented in The Economic Freedom of the States of India 2011, brought out last month by the Friedrich Naumann Institute and Cato Institute. It shows that under Y S Rajashekhara Reddy (or YSR), Andhra Pradesh was the fastest-liberalising state as measured by the report\’s Economic Freedom Index, moving up from seventh to third position. This co-existed with YSR\’s populist handouts, yet doubled GDP growth. Many critics initially feared that his approach would bankrupt the state. Others were horrified by rising corruption, notably in mining leases, real estate and infrastructure deals. Yet, the state\’s average GDP growth shot up from 5.59% per year in 1999-04 under the TDP to 9.07% per year in 2004-09, even as it reduced its fiscal deficit to 2.68% of GDP by 2008, well below the prescribed 3% ceiling for state governments under the Fiscal Responsibility and Budget Management norms. This was aided greatly by halving the revenue deficit as a proportion of GDP.

So, far from being a spendthrift populist, YSR was really a clever fiscal reformer in disguise, even while handing out freebies and making millions for his patronage network. How did YSR accelerate GDP? By expanding economic freedom and making AP a businessfriendly state in ways that he chose not to advertise for image reasons. YSR\’s one-time Economic Advisor, D Somayajulu, explains that the chief minister was fully aware that to finance handouts, he needed buoyant revenues. That in turn required fast economic growth, which in turn required a businessfriendly environment that allowed the state\’s famed entrepreneurs to boom. YSR did not have the standard socialist vision of soaking the rich to serve the poor. Rather, he viewed economic freedom and entrepreneurship as essential to create a booming economy. This would not only yield revenue for handouts but also create a labour shortage and send wages booming. YSR paid no attention to Amartya Sen\’s constant warnings that fast growth can mean neglect of social justice. Rather, YSR saw fast growth itself as a means to social justice, putting him closer to the Jagdish Bhagwati camp of economics.

The share of agriculture in GDP is 30% in Andhra Pradesh , almost double the national level of 17%. So, YSR focused on rural infrastructure and irrigation. This paid rich dividends. Agricultural growth averaged a whopping 6.82% per year in 2004-09 , double the national average. This pushed up rural wages. YSR doubled the minimum wage from .60 to .120/day, yet the male casual wage rate went up even faster, from 80% of the minimum wage to 103%. The female casual rate went up from 67% to 81% of the minimum wage, showing that discrimination continues, but with a reduced gender gap. The labour shortage attracted immigrants from Bihar. Mahbubnagar district , long notorious for out-migration , starting experiencing in-migration, says Somayajulu. YSR obtained a much higher share of resources from New Delhi, and not just because he was close to Sonia Gandhi. The state was first or second in utilisation of centrally-sponsored schemes for rural roads, irrigation , rural electrification urban renewal and rural health.

To qualify for central funds, the state was among the foremost in reforms such as abolishing the urban land ceiling, reducing stamp duty, computerising government business and records, unbundling the state electricity board and reducing T&D losses to just 18%, half the national average. This reduced the fiscal burden arising from free power to farmers. With industry and services booming and increasing their share of power consumption, the share of free rural power fell substantially.

YSR\’s focus on infrastructure opened major new areas to private participation . This was tainted by crony capitalism, yet helped convert some of the state\’s companies into the biggest names in Indian infrastructure – Lanco, GMR, GVK, Nagarjuna Construction, IVRCL. The state improved its position as an IT centre, yet it generally lagged the national rate in services growth, while exceeding it in agricultural and industrial growth. The Economic Freedom Index stands on three pillars: size of the state, legal and property rights, and business and labour regulation. India is a difficult place for business notwithstanding two decades of liberalisation . The Doing Business series of the IFC/World Bank places India at a lowly 133 out of 183 countries. But, for what it is worth, Hyderabad has emerged as the second-most business friendly city among 15 Indian cities surveyed by the Doing Business series. YSR improved governance by using social audit to check leakages in schemes like NREGS.

Like other chief ministers, he did not take on trade unions to check teacher absenteeism. Instead he massively hired contract teachers. Karthik Muralidharan of UC San Diego, found that the hiring of an extra contract teacher led to significant improvements in school results , although contract teachers were paid just one-fifth of regular teachers, providing more bang for fiscal buck. State investment rose more slowly than the national average; yet, GDP rose faster than the national average, with rising productivity providing more bang for buck. In sum, YSR created a new model where populist giveaways , smelly deals that converted politicians into millionaires , fiscal prudence and economic freedom all improved together to yield accelerated economic growth. This was politically rewarding – YSR won massive re-election in 2009. This holds lessons for other chief ministers. They too would like to get re-elected , but also make millions on the side. The key is to encourage economic freedom, and combine handouts with reforms and fiscal prudence. From the public\’s viewpoint, this package will be even better without corruption , yet there may be enough in it to persuade them to reelect the rogues.