The Hindu Business Line : Compulsions of coalition will decide future of reforms

WE ARE heading for a coalition government. Coalition governments headed by Morarji Desai, Charan Singh, V. P. Singh, Chandra Shekhar, H. D. Deve Gowda, I. K. Gujaral and the first two governments of Atal Bihari Vajpayee have all been shortlived.

The only two coalition governments that survived for nearly the full term are the one headed by P. V. Narasimha Rao and Vajpayee. These two survived because the lead party had a substantial strength and no single party could have brought the government down.

Unfortunately the government we are about to have is not likely to have a dominant party. The Congress is most likely to form the government with the support of many parties.

What are the costs of instability?

The premature fall of a government is preceded by weeks of political manoeuvring and followed by months of uncertainty.

During this period, government suffers a paralysis and even routine decisions are postponed. Initiation of new policies or policy reforms is unthinkable. It creates uncertainty about extant policies as they may be changed by the new government.

The costs to the Indian economy of short-lived governments and their fall are very high. The uncertainty leads to postponement of investment decisions, both by domestic investors as well as foreign investors. Foreign direct investments get postponed too.

The paralysis of governmental decision-making also delays public investment. Naturally, one would expect economic growth to slow down. The economic impact can be quite sizeable as is reflected in our experience.

Thus, the fall in the annual GDP growth rate over the growth rate of the previous year was 10.7 percentage points during 1979-80 when Morarji Desai and Charan Singh governments fell; 4.6 per cent in 1991-92 when V. P. Singh and Chandra Shekhar governments fell; and 2.8 per cent in 1996-97 when the Deve Gowda regime fell.

These numbers are large, but not surprising. A three-month postponement of half of total investment means a 16 per cent fall in investment. This could easily result in lowering of growth rate by one percentage point. In today's terms, this is an income loss of roughly Rs 15,000 crore. If the political uncertainty lasts longer, the loss would be higher.

This is the immediate loss. When its future effects are accounted for, the value of the loss would be many times more. Hopefully, the new government would be more stable and we would not have to bear this cost.

Apart from the cost of instability, what economic impact can we expect? This election has shown that development matters and that the voters demand performance that reaches them and not just a select group. If India of the cities shines but the Bharat that lives in villages wilts, the government has a price to pay.

To this extent whichever party forms the government one would expect it to be more sensitive to the needs of Bharat and the common man in urban India. More attention will be paid to health, education and Bijli-Paani-Sadak.

Yet the experience of Mr Digvijay Singh in Madhya Pradesh should caution politicians that without growth, improvement in health and education does not translate into increase in welfare and votes. Mr N. Chandrababu Naidu's experience in Andhra Pradesh teaches us that economic development without an emphasis on health and education does not lead to inclusive growth. And voters do not like that. Thus while a spurt in populist policies can be expected, the government should not neglect economic development. What can we expect in terms of reforms?

The broad thrust of economic policy of both the Congress and the BJP is similar. Still the pace of reforms will depend on the compulsions of keeping the coalition together. Some slow down in reforms is to be expected.

This would be sad as the important pending reforms of labour laws and small-scale reservation can stimulate labour intensive growth and employment that the voters demand.

Let us hope that we get a stable government that can pursue policies it would really like to pursue.

(The author, Professor Emeritus and former Director, Indira Gandhi Institute of Development Research, is Chairman, Integrated Research and Action for Development.)