The New Delhi Consensus

The FM said recently that the consensus on economic reform is breaking down, that politicians of all parties are no longer keen on continuing down the path of liberalisation.

I have to disagree. There never was any consensus on liberalisation. What we had was a consensus on half-baked liberalisation. The consensus on liberalising was never stronger than the consensus on keeping it half-baked. Even the phrase half-baked is an exaggeration: Quarter-baked would be closer to the truth.

So what Sinha sees as a breakdown of the consensus is in nothing more than a reiteration of its quarter-baked nature. The best proof of this is a CSDS national survey which asked citizens if they had noticed any change whatsoever in economic policy. Almost 80 per cent said they had not noticed any change. Clearly a reform process that is invisible to four- fifths of Indians cannot be more than quarter-baked.

Many analysts make the mistake of thinking of India made some dramatic ideological shift away from socialism in the 1990s. This is plain wrong. Reform in India was induced by bankruptcy, not by ideology. India had no Ronald Reagan or Maggie Thatcher. Reform was a very pragmatic response to bankruptcy, undertaken more in confused sorrow than ideological fervour.

Naturally, such reform abounds in contradictions.

When India went bust in 1991 and Narasimha Rao opted for economic liberalisation, he ended the old consensus on socialism. All opposition parties accused him of selling India down the river to IMF, and swore to reverse his policies if they came to power. Nine years later, virtually every political party has been in power, and yet all have followed the new economic path. The IMF loan of 1991 has long been repaid, and yet liberalisation continues.

Clearly, economic reform is not based on blood transfusions from Washington DC.It has deep indigenous roots.

There are three main reasons for the change in the national consensus. The first and most important is that four decades of socialism bankrupted both the Union and state governments, which ran out of money to continue along the old path. Second, the collapse of the Soviet Union and success of Deng’s China showed that the answer was not more socialism. Third, when reform produced not a lost decade of development (as predicted by critics), but record economic growth, politicians of all stripes decided to stay on course.

Socialism was popular for decades not simply because of its ideological attractions, but because it suited the private agenda of politicians. Controls imposed in the holy name of socialism were used to line their pockets and build patronage networks. Since this made them unpopular, they tried to mollify voters with ever-rising public investment and subsidies. Government spending accelerated from an average of 13 per cent annually in the 1970s to 18 per cent annually in the 1980s. This spending spree was financed first by taxing everything in sight and then by borrowing from every source in sight (including foreigners).

Since the borrowed money was spent unproductively, the rising debt burden led inexorably to a fiscal crisis, which escalated in 1991 into a balance of payments crisis.

When India went bust that year, most politicians thought the problem was simply a lack of foreign exchange, and failed to see the underlying problem of governments living beyond their means. This is why opposition parties swore to reverse Rao’s reforms. But the fiscal crisis that had hit New Delhi soon hit every state capital. And since many states were ruled by Opposition parties, they too were obliged to change course.

The fiscal crisis meant that politicians no longer had enough money to keep up both public investment and subsidies. They had to choose. And, across the political spectrum, they chose to retain subsidies. These remain at the pre-crisis level of almost 15 per cent of GDP.

Since the Union and state governments no longer had the cash to man the commanding heights of the economy, they were obliged to encourage private and foreign investment to fill the breach. At the same time no party wanted to antagonise powerful interest groups like trade unions or farmers. So the evolution of the new consensus was shaped by interest groups no less than bankruptcy.

This ensured a consensus on quarter-baked liberalisation. All parties seemed to agree on four things.

We must continue wooing private and foreign investment, and so become more market friendly.

We must continue to subsidise everything in sight, and if possible create new subsidies.

We must avoid sacking a single surplus worker or closing a single sick unit if at all possible.

Since liberalisation has taken away old sources of kickbacks (like industrial and import licences), we must find new ones (like infrastructure deals).

This, then, is the mixture of opportunism and reform that India embraces. It deserves to be called the New Delhi Consensus, to distinguish it from the orthodox Washington Consensus.

So Sinha should not be surprised at the resistance he facing to the reduction of subsidies on food or fertilisers. That is very much part of the New Delhi consensus. Progress on this front will be slow.

Nor should he be surprised by the Congress party’s opposition to many sensible reforms. Manmohan Singh may be serious about reform, but his party men never have been. When in power, Singh got power ministers of states to pledge a minimum rural power tariff, yet when elections came several Congress leaders promised free power to farmers if elected. Singh said canal water rates must be raised to economic levels, yet many Congressmen on the election circuit promised free water to farmers.

Singh declared repeatedly in Parliament that within two years he would end subsidies to loss- making public sector units (which meant closing them down). In fact he was never able to end those subsidies, which continue unabated today.

So do not be surprised when legislators of all parties in Tamil Nadu protest against the privatisation of the Salem steel plant. Do not be surprised when more than 100 MPs sign a petition favouring a particular candidate to head IPCL, ignoring the policy of autonomy for navratnas. The New Delhi Consensus remains intact. So converting quarter-baked liberalisation into even half-baked liberalisation will be a major job.

What do you think?