Of Hawks and Doves

There are things that a hawk can do which a dove cannot. I refer to hawks pursuing peace with an “enemy” and not receiving the flak that a dove would for the same act. History is replete with such examples. Cukierman and Tomassi  in “Why Does it Take a Nixon to go to China”? (UCLA Working Paper)  provide interesting analysis of such hawk-dove issues. To quote them: “The history of public policy contains several episodes in which structural reforms or important economic or foreign policy shifts were implemented by parties of policymakers whose traditional position was to oppose such policies”.

As examples of hawks mimicking doves, one recalls the US President Richard Nixon reaching out to China’s Chairman Mao and Prime Minister Menachem Begin of Israel signing a peace treaty with Egypt’s President Anwar Sadat. Closer to home, Prime Minister Vajpayee met Prime Minister Nawaz Shariff of Pakistan in 1999 and signed the Lahore Declaration  just months before the Kargil war and the subsequent overthrow of Sharif by General Pervez Musharraf. Vajpayee also met Pervez Musharraf (as President of Pakistan) for the Agra Summit in 2001 barely six months before the attack on the Indian parliament. And now comes the completely unexpected, but welcome, overture to Pakistan by Prime Minister Narendra Modi in the form of an invitation to Prime Minister Nawaz Shariff to attend the inauguration of the new BJP government. Just as Nixon had established a staunch anti-communist record and image before extending a hand of friendship to China, likewise the Bhartiya Janata Party (BJP) had established its hawkish credentials with talk of “hot pursuit” in 1998 (see here) as well as the scathing attack on Prime Minister Manmohan Singh for joint statement at Sharm-el-Sheikh (see here)  among much other strong criticism of the UPA government with respect to its Pakistan policy.

It is interesting to look at Prime Minister Modi’s invitation to Prime Minister Nawaz Shariff in this context. There is essentially no substantive difference between what Modi has done and what Manmohan Singh had enunciated in Parliament in July 2009 (see here): both positions state that talks/communications/contact will go on between India and Pakistan despite terror attacks and the festering Kashmir issue. But Manmohan Singh and the Congress in general were seen as doves and were thought to have compromised Indian interests. Modi and the BJP have now taken up a dovish position after having demonstrated their hawkishness. This kills two birds with one stone.  Being originally hawkish, no one accuses them of a sell out. On the other hand, the Congress having advocated a dovish position on Pakistan cannot now criticise the BJP for inviting Nawaz Shariff for Modi’s swearing-in ceremony.

The hawk-dove position that Modi has initiated, presumably, with the full backing of his party, is a welcome development especially for those who have always advocated keeping channels of communication open between India and Pakistan: it is pragmatic and it is beneficial. Belligerent posturing can get the BJP a lot of Facebook likes but that is not how governments are run: governing imposes responsibility on the person and the party. It can only be an immature person who would continue to behave in a hawkish manner after taking over the reins of government. This sense of responsibility is something that Modi might have to drill into some of colleagues/ministers. In this context, I present Exhibit A which captures rather perfectly the stark difference between the maturity levels displayed by Modi and by Nitin Gadkari (now a cabinet minister). The street-level fight that Gadkari indulges in should be cause for extreme concern for any right-thinking Indian. Such aggressive posturing by a high-ranking BJP leader makes a mockery of the magnanimous gesture of Modi. In the absence of a firm message from Modi (who comes to the high office with a strong reputation of governing with a firm hand), it is possible that such embarrassments may bedevil the BJP government periodically.

The elections are over. Now comes the hard part…

In my last post I had wondered whether more than 272 lotuses would bloom for the BJP. The people of India have now spoken: many, many more have, in fact, bloomed. It is a resounding result that we have not seen in decades.I was under the impression that the days of one-party dominance had ended in the 1980s. The sheer demolition of the Congress suggests that one-party domination may be here to stay for quite a while.

Was I a Modi/BJP supporter? No, I was not. But, then, neither was I supportive of the Congress. In any case, after 10 years of rule, every party/coalition becomes stale. Turnover of members of parliament is essentially a good thing. Outsiders have the chance to enter the parliament while incumbents face the prospect of being voted out and losing the trappings of power. Without this churning – or electoral turnover – tyranny in the form of individuals remaining in power indefinitely is a distinct possibility. Turnover is important for a variety of reasons: creating opportunities for aspiring leaders or disfranchised groups and for permitting policy changes. In the absence of the possibility of new blood coming in, the polity would be bereft of new ideas and lead to arrogance of power. In the USA, there is concern over the lack of turnover where incumbents have a much better chance of being re-elected (see here and here). In India, by and large, it is the reverse: incumbency is a disadvantage. Incidentally, take a look at my earlier post “Anti-incumbency in Indian Elections” where I have reported some results from on-going research. Specifically, that post had stated that the higher the turnout at elections, the greater the anti-incumbency effect. That prediction seems to have been borne out: the 2014 elections saw a very high turnout and the incumbents were routed right across India.

As far as the negative vote against the Congress/UPA was concerned, I was convinced: the ruling coalition did not deserve to be re-elected. But I was not convinced by the BJP’s and Modi’s claims about the successes of the Gujarat model. Maybe I will write about that in a later post. So, while there were strong reasons to vote against the Congress, I was hard-pressed to find convincing reasons for a positive vote in favour of the BJP. Be that as it may: the nation has spoken loud and clear. And we are to have five years of BJP rule and, considering the shambles the Congress finds itself in, it could even be ten years or more.

Getting such a massive support in elections is certainly daunting and onerous. Hopefully, the BJP is fully aware of this. Living up to the aspirations of the electorate might well make the election campaign look like a walk in the park for the BJP. Let us have a look at what is on the agenda for the new government. I have created the list below by culling out significant items from the election manifesto of the BJP (see here)

• Economic revival
• controlling Inflation
• spur the process of economic growth,
• strictly implement fiscal discipline
• policy framework for investments both foreign and domestic to make them more conducive
• Developing physical infrastructure
• Making India a global manufacturing hub
• Low cost housing for all
• High priority to water security
• Growth of agriculture
• High priority to job creation and opportunities for entrepreneurship
• Skills development
• Food security
• Access to health services
• Equality of opportunity to education
• Eliminating the scope for corruption
• Institutional reform - administrative, judicial, police and electoral

It is difficult to find fault with any of the items listed above. The question is: how long will it be before we see success in the form of positive outcomes? There is no denying the pressing urgency of the first item, namely, economic revival. But there is no magic wand and there will be contradictions between pushing growth and controlling inflation. In the process of controlling inflation, the RBI has had to raise interest rates but this has had the short-run impact of subduing growth. There is an argument that over the longer term, moderate inflation will be good for growth but there has been a price to pay in the short run. The knives (or, more specifically, a single knife belonging to Subramaniam Swamy) are already out for the RBI Governor, Raghuram Rajan (see here). Replacing Rajan would be most unfortunate. Perhaps for the first time after Manmohan Singh, we have a first-rate economist in charge of the RBI. I do hope Swamy does not command any clout within the BJP and that Modi knows who is to be let loose during elections but kept on a tight leash afterwards.

Reintroducing fiscal discipline will also be a challenge. In the fight to keep at bay the impact of global recession (one component of which was the employment guarantee scheme), fiscal deficits have risen quite high. These deficits have to be reduced, but it is equally important how these are reduced. For a very long time now, fiscal deficits have been managed by curtailing capital expenditures due to the (political) inability to lower revenue-account expenditures – these are expenditures on subsidies, administration and so on. Lowering capital expenditures of the government (which includes infrastructure spending) has very adverse consequences for the growth of the economy.

Items 2-6 in the list above will require substantial investments and the results will not be visible in the short-term. Items 7-11 are vital from a social welfare point of view but again much time will pass before benefits are visible. Job creation, especially in manufacturing has been a challenge in India for decades. There seems to be a consensus that India needs to create one million jobs per month. Which sector will create such jobs? Table below shows sector wise share in GDP and share in employment

SECTOR	SHARE IN GDP (%)	SHARE IN EMPLOYMENT (%)
Agriculture	14	53
Manufacturing	15	10.5
Services	67	24.4
Other	4	12.1

Agriculture which contributes just about 14% to GDP, employs 53% of the labour force. This seems a dead end as far as employment generation is concerned. The services sector accounts for 67% of GDP (far too high for an economy at India’s level of development), but has a share in employment of under 25%. Finally, manufacturing contributes 15% to GDP, but has a share of only 10.5% in employment. So, where are the jobs going to come from? Just to get a perspective of the situation in India, share of manufacturing in China’s GDP is 35% and employs 30% of the labour force. This has allowed China to generate employment and absorb surplus labour from agriculture. Why is job creation in Indian manufacturing so low when India has such an abundance of labour? Organised sector employment in India is rather privileged and an individual, once employed, loses the job only in extreme circumstances. So, when exit from jobs is so difficult, entry into jobs becomes highly restricted. Changing this situation has been impossible for many decades now even though the problem and its solution stare us in the face.

Finally, items 12 and 13 require institutional reforms. It is not merely a question of passing a law, which can be done easily enough. From an institutional perspective, laws are only as good as their implementation. Once again, any benefits of these changes will take a long time to emerge.

Clearly, the government will have to be given enough time for it to accomplish what it has set out to do. Possibly, one term will not be enough. But will the vociferous and passionate supporters of the BJP remain patient as the party gets down to the nitty-gritty of governing? My fear is that there will be pressure on the government to show results soon but, as stated above, these will take a long time to emerge. What is the government to do in the meantime? In such circumstances, most governments fall back on populist quick-fixes. The BJP (especially Modi), in its election campaign, has scrupulously avoided any reference to the religious agenda of the Sangh Parivar. But will it be able to stay clear of this once the pressure to deliver starts to build? My fear is that it might not be able to do so. One might well see the issue of the Ram temple coming to the fore in UP. There is also the possibility that the issue of “Bangladeshi” migrants might rear its head in West Bengal. Will Modi have the sagacity to keep the fringe elements of his party under control and suppress such volatile issues? Will he have the strength to focus in a steadfast manner on the development agenda? For India’s sake, I certainly hope so.

So, Will 272+ Lotuses Bloom?

There has been a rash of exit polls as soon as polling ended on 12 May 2014 in the Great Indian Elections. Barring minor differences, all exit polls have predicted a victory for the NDA, the alliance led by the BJP.

2014 Exit Polls

Agency	BJP+	Congress+	Others
TimesNow	249	148	146
News 24	340	70	133
India Today	261-283	110-120	150-162
India TV	289	101	148
CNN IBN	270-282	92-102	72-82

On the basis of these exit polls, it seems reasonably certain that the lotus, the symbol of the BJP, will sway proudly in the wind for the next five years. With such unanimity, one would expect the final results (to be declared on 16 May) to replicate the results of the exit polls. However, in the absence of any information on the methodology adopted by the exit polls, it is difficult to evaluate them. Right now, the exit polls are like a black box: some data has been fed in and some results have been obtained but we don’t know anything else.

 Can there possibly be a slip at this stage between the proverbial the cup and the lip? It turns out that unanimity in exit polls and being spectacularly wrong has been the norm for the last two general elections in India. See the tables below for the exit polls of 2004 and 2009.

  

2004 exit polls

Agency	BJP+	Congress+	Others
NDTV	230-250	190-205	100-120
Aaj Tak	248	190	105
Zee	249	176	117
Star	263-275	174-186	86-98
Sahara	263-278	171-181	92-102
Outlook	280-29	159-169	89-99
Actual result	189	222	132

2009 exit polls

Agency	BJP+	Congress+	Others
STAR News	197	199	136
CNN	165-185	185-205	165-195
NDTV	177	216	150
Headlines Today	180	191	172
News X	199	191	152
Times Now	183	198	162
Actual result	159	262	79

In 2004, all pollsters got the victor wrong. Almost all were taken in by the exuberance of the India Shining campaign. The India Shining campaign was a grand urban narrative that did not play out well in rural India.

In 2009, all pollsters got the margin of victory wrong. Did the full roll-out of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) in 2008 have a role in giving the UPA victory? Once again, was the inflated support for the BJP and its allies more an urban phenomenon?

It is worth reading Praveen Rai (see here) for the problems with Indian opinion and exit polls. Various statistical issues, such as sampling method, sample size, response/non-response errors, measurement errors come into play. There is also a strong urban bias in the coverage of respondents while conducting the exit polls. Equally, it is not clear how the constituencies that make it to the sample are chosen.

Apart from the issues noted by Rai, the problem is compounded in India where most constituencies witness contests between numerous parties. In a two-party situation, the connection between votes polled and seats won is pretty straight forward: the party that gets more than 50% of the vote-share wins the seat. But with more than two parties, vote-shares often do not cross the 50% mark and the seat is won by the party with the highest vote-share. At exactly what vote-share percentage does a party win the seat is not easily predictable. Given that exit polls only collect data on votes cast by the voter, all that they can possibly get is an estimate of the vote-share for a party. From this vote-share to estimate to seats won is a complicated process: the functional relation between the two is not clearly understood. Errors are likely to be substantial. This is where the danger of exit polls lies.

In the last two elections, exit polls have, both, underestimated the performance of the challenger (UPA in 2004) and overestimated it (NDA in 2009). Will it be any different this time? All will be revealed on 16 May. Till then, perhaps, it might be a good idea to keep the champagne in the fridge. In the meantime, NDA and its supporters should make do with the brew – tea – that their prime ministerial nominee reportedly sold in his childhood. 

State of the Economy facing the New Government after 2014 Elections

As the sun sets on the UPA-2, it would be worthwhile to look at the state of economy that the new government would be faced with. Wherever possible, I will compare UPA-2 with the previous two regimes, namely, UPA-1 and NDA.

There has been much talk about how the economy has suffered very badly under UPA-2. A summary measure of the state of the economy is the growth rate of real GDP.  This is presented in the table below:

Regime	Measure	GDP Growth rate (% per annum)
NDA  (1999-2000 to 2003-04)	Average for term	5.7
	Last year of rule	7.7
UPA-1 (2004-05 to 2008-09)	Average for term	8.1
	Last year of rule	6.5
UPA-2 (2009-10 to 2013-14)	Average for term	6.5
	Last year of rule	4.9

There is always a debate whether one should look at the performance of a regime over its entire term or only how it performed in the last year of its rule. Considering only the last year of the rule, clearly the NDA regime had the best last year with a rate of 7.7% as compared to 6.5% for UPA-1 and 4.9% for UPA-2.  As an economist, however, I would like to take a slightly longer view and look at average growth rates over the entire term of each regime. UPA-1 shines in this respect and UPA-2 does not look all that bad. 

Of course, it is important to look the state economy the out-going regime leaves for the next one. The NDA regime left an economy with a healthy growth rate of 7.7% and the UPA-1 regime was good enough to build on that.  UPA-2 also displayed extremely healthy growth rates of 8.25% and 8.91% in 2009-10 and 2010-11 respectively. Chart below gives annual growth rates for easy reference.

So, what happened after 2010-11? This is the time all the skeletons started to tumble out of the UPA-2 cupboard. Charges of policy paralysis started to fly thick and fast. While there cannot be too much dispute that UPA-2 lost its direction in the last two years, is it fair to blame it alone for the sudden slowing down of the economy? Let us look at what happened in a few other countries over a comparable time period.

Growth rate of GDP in Brazil fell from 6.1% in 2007 to 0.9% in 2012; China fell from over 14% in 2007 to a little under 8% in 2012; Russia declined from 8.5% to 3.4%; and the USA’s growth rates, after entering negative territory for a couple of years, has now started to revive.

What is point of this comparison? The point is that most countries of the world suffered the consequences of the Great Recession that began around 2008. India, which is now far more integrated with the rest of the world than ever before, could not but suffer. Sure, the UPA government deserves a lot of blame for some of its acts of omission and commission but there were forces beyond its control that were profoundly inimical to growth.

What about the future? Will the government be seriously handicapped by the performance of the last two years? I think not. Growth will pick up over the next couple of years: my optimism stems from the fact that most economies of world are starting to claw their way out of the recession. Just as when the world economy starts to slip, it takes most countries down with it, when the world economy revives, most countries are able to take advantage of the revival.

In addition to favourable external developments, internally as well the economy is not too badly handicapped. Growth requires investments and one of the key factors in the success of China was its ability to boost savings as percentage off GDP which made it possible to increase its Investment to GDP ratio. India too has been able to do that over the last ten years.

Regime	Measure	Savings/GDP (%)	Investments/GDP (%)
NDA  (1999-2000 to 2003-04	Average for term	25.9	25.6
	Last year of rule	29.0	26.2
UPA-1 (2004-05 to 2008-09	Average for term	33.9	35.2
	Last year of rule	32.0	35.5
UPA-2 (2009-10 to 2013-14	Average for term	31.9	35.8
	Last year of rule	30.5	35.3

Real change took place during the UPA-1 regime when the savings-GDP ratio rose to 33.9% from 25.9% achieved during the NDA regime and the investment-GDP ratio rose from 25.6% to 35.2%. Unfortunately, there was no major push during the UPA-2 regime but the gains of UPA-1 were not dissipated either. Of course, any uncertainty affects investment decisions and typically one would expect such decisions to be postponed during an election year. Once a new government is installed after the elections and there is sufficient confidence that it will last the full term, a new investment cycle will likely begin and with it growth of the economy will revive. 

Indian Election Commission under attack

Just one more phase left of the marathon elections process and, I think, most would agree that the Election Commission of India (ECI) has done a fantastic job. Check out the list of complaints that have been handled by the ECI. Possibly the commission has been more busy enforcing discipline on parties and candidates in these elections than ever before. Given that most people agree that 2014 elections have been the most fractious, this is not surprising. Sadly, no party's behaviour has been beyond reproach. However, only the TMC and the BJP seem to have had an open confrontation with the ECI. After resisting the ECI orders to to transfer some officers, Mamata Bannerjee submitted to its authority (see here). The confrontation between the BJP and the ECI is more worrisome. Narendra Modi in an interview to TimesNow correctly and in a dignified manner stated: "We feel that constitutional institutions must be respected. The Election Commission should be given the utmost respect. That is why, we should not think of adopting unconstitutional means against the Election Commission". This is what one would expect from someone who might well be the Prime Minister of the country in a couple of weeks. However, the abuse being heaped on the ECI by Modi and others in the background is disconcerting to say the least. Modi has stated "The Congress must understand. The people have defeated you, the Election Commission can't make you win". This is an unfortunate attack on the sanctity of a constitutional authority and the accusation is not one of incompetence: it is an accusation of partiality to the Congress. This certainly does not bode well for the future. It has been said that hawkish positions before elections are just so much grand-standing and that, after elections, hawks become more like doves. I certainly hope so.