Thursday, Jan 27, 2022
For The Record

Economic Policy-Making In A Coalition Era

In the case of the NDA government, as it approached the end of its tenure, it appeared to me like a football team that kicked and pushed the ball aimlessly while waiting for the referee's final whistle. I do not, however, believe that all coalition g

Economic Policy-Making In A Coalition Era
Economic Policy-Making In A Coalition Era

Text of the Ninth JRD Tata Memorial Lecture by Finance Minister 

It is a privilege to be invited to deliver the 9th JRD Tata Memorial Lecture. Although the founder of the Tata group of businesses was Shri J.N Tata, the best known Tata in India was Shri Jehangir Ratanji Dadabhoy Tata, and there was good reason for that. He assumed the chairmanship of the Tata Group (in 1938) at a young age of 34 and for nearly 53 years he was the most visible face of the group. 'Jay' to his close friends, 'JRD' to most readers of newspapers and magazines, and simply 'Tata' to the common man, Shri JRD Tata's contribution to the development of modern India is too well known to merit repetition. From airlines to hotels, trucks to locomotives, soda ash to cosmetics, steel to software, coffee and tea and financial services, there was not an area of business that the Tatas did not venture into. He demonstrated to his countrymen how, driven by a sense of purpose and vision, Indians could make a success of any venture. He was the first to build a true conglomerate in India. He was a pioneer in aviation. He showed that he could not only fly a plane but also how high the Indian economy could soar. Above all, he was a model of a good corporate citizen. No one has yet pointed out a case where Shri J.R.D Tata strayed from the straight and narrow path or violated business ethics. To many entrepreneurs of the next generation, he showed that it was possible to be a successful businessman and a law abiding citizen.

A grateful nation bestowed upon him its highest civilian title, the Bharat Ratna, in the year 1992. I take this opportunity to pay my tribute to Shri J.R.D Tata.

I was attracted by an observation once made by Shri J.R.D Tata. He said:-

"When a number of persons are involved, I am definitely a consensus man. But that does not mean that I do not disagree or that I do not express my views. Basically, it is a question of having to deal with individual men heading different enterprises. You have to adapt yourself to their ways and deal accordingly and draw out the best in each man. If I have any merit, it is getting on with individuals according to their ways and characteristics. In 50 years, I have dealt with a hundred top directors and I have got on with all of them. At times it involves suppressing yourself. It is painful but necessary."

If those words remind you of the head of a coalition government, you will not be far wrong! Shri J.R.D Tata was a quintessential democrat and, as it appears from his words, the leader of a coalition. His words have encouraged me to choose today's topic, namely, 'Economic policy-making in a coalition era'.


Economic policy is largely the result of political initiatives. The driving force behind economic policy is one or more political parties. Every political party professes a particular ideology or, in the absence of ideology, a set of policies which, for the sake of convenience, can be called a programme or a platform. The choice of one or more political parties to take over the reins of government lies with the people. In choosing a political party, it is assumed that the voter is choosing that party's platform. While this is more true in a presidential system – where the President is elected on a nation-wide vote – it is also true in a parliamentary system where Members of Parliament are returned from territorial constituencies. As long as one party was elected with an absolute majority, it was reasonably easy to predict the content of economic policy over the term of office of that government. However, when no party gains an absolute majority and it becomes necessary to form a coalition government – whether the coalition was formed before the election or after the election – policy making is a more complex exercise. Predicting the content of that policy is even more arduous and uncertain.

The first opportunity for a coalition in the government of India arose in 1977. Fearful of the consequences, the parties peremptorily merged their identities to form a new party. As it turned out, there were "parties within the party" and the experiment floundered in less than three years.

The next occasion came in 1989 when a minority government was formed, along with coalition partners and outside support, by Shri V.P. Singh and subsequently by Shri Chandrasekhar. The two governments were short-lived. Shri V.P Singh's coalition government was notable for taking the decision to implement the Mandal Commission Report, but since it was a weak and fragile government that very decision brought about its downfall.

The next coalition government was formed in 1996. The two governments under Shri Deve Gowda and Shri Gujral were coalition governments, power being shared by a number of  political  parties.

 However, the numerical strength of the parties actually in the coalition government fell far short of a simple majority and, consequently, the government's stability was always precarious. Not surprisingly, that experiment also failed in less than two years.

The NDA government that assumed office in 1998, and again in 1999, was a coalition. The combined strength of the parties sharing power gave the coalition a comfortable majority in the Lok Sabha. Although it stumbled at the end of the first year, the NDA regained its position and completed a fresh term of five years. The NDA did not depend upon, what is called, "outside" support. Its stability could have been threatened only by internal dissension among the power sharing partners; that it was not, is a testimony to its ability to manage and contain differences.

The UPA government formed in 2004 with the Congress party in the lead is also a coalition. Many parties share power. Key portfolios are in the hands of the allies of the Congress party. In fact, many of the portfolios that have a vital bearing on the economy are in the hands of allies of the Congress – for example, agriculture, railways, roads, ports, telecommunications etc.

The key difference between the NDA government and the UPA government lies in the fact that the parties actually sharing power in the UPA government, unlike in the case of the NDA, do not command an absolute majority in the Lok Sabha.

The other difference is in the nature of "outside" support. In the case of the NDA government too, there were parties outside the government which voluntarily extended support to the government; however, they did not have a common ideology. In the case of the UPA government, the four principal parties among those extending support from outside share a common political ideology.

It is important to keep these aspects in mind while examining the question of economic policy-making in a coalition government.

Come 30th September 2006, the UPA government would have presided over the economy for 30 months or ten quarters. The most striking feature of the economy in these ten quarters is that there has been uninterrupted growth in the GDP in every quarter. The rate of growth has also been impressive. Except in Q2 of 2004-05 when the GDP grew by 6.7%, in every other quarter of the last ten quarters (including the quarter that will end on 30th September 2006), the growth rate has been over 7%. It may not therefore be assumed that a coalition government cannot deliver high growth.

Several other indicators are extremely positive. Tax revenues have increased by an average of 20% in each of the years 2004-05 and 2005-06, and are projected to increase by another 20% in 2006-07. The tax to GDP ratio has increased from 9.2% in 2003-04 to 9.8% in 2004-05 and to 10.5% in 2005-06; and it is projected to increase to 11.2% in 2006-07. Merchandise exports and imports which stood at about $146 billion in 2003-04 rose to $260 billion in 2005-06. We added $28.55 billion to the foreign exchange reserves in 2004-05 and another $10.11 billion in 2005-06. So far in 2006-2007, we have added $13.75 billion. FDI inflows in 2004-05 were $5.652 billion and, in 2005-06, $7.751 billion. FII inflows were $8.686 billion in 2004-05 and $9.926 billion in 2005-06. Non-food credit on an year-on-year basis has increased by over 30% in the first two years and so far in the current year. The obvious conclusion is that a coalition government is generally supportive of macro economic policies that favour openness, liberalisation and globalisation.

The record of the UPA government in terms of legislation is equally impressive. The Fiscal Responsibility and Management Act, passed during the tenure of the NDA government, was notified within days of the UPA government assuming office. This Act serves as a strong anchor for the economy in the choppy waters of fiscal and monetary policy. As for fresh legislation, the UPA government has steered through Parliament the National Rural Employment Guarantee Act, the Right to Information Act, the Wild Life (Protection) Amendment Act, the Micro, Small and Medium Enterprises Development Act, the Protection of Women from Domestic Violence Act, the Hindu Succession (Amendment) Act and many others. The total number of bills passed by both Houses of Parliament since May 2004 stands at 119.

The introduction of VAT in the space of 12 months in all but two States is another example of how a coalition government at the Centre can win a broad measure of support for a major tax reform from State governments presided over by different political parties. The ownership of the reform measure is not identified with any single political party, it is seen to be shared by many political parties, hence seems to be able to secure support more willingly from all political parties.

Notwithstanding these successes and apparently smooth sailing so far as economic growth is concerned, there are still many questions concerning economic policy-making in a coalition government.

Let me first dwell on the nature of a coalition government. By definition, a coalition brings together many political parties with different persuasions. This coming together exerts a moderating influence on both the dominant and the smaller groups: while it offers a greater chance for the smaller groups to get their views accommodated in economic policy, it also exposes smaller groups to the view point of the dominant group which presumably has larger support among the people.

A coalition also brings more openness to democratic discourse. Debate does not take place behind closed doors: the debate is out in the open and has, therefore, to be conducted with great skill. It may appear that reason and logic do not win an argument immediately, but with patience and perseverance it is possible to secure victory for reason. Witness, for example, the Bill for reservation for the scheduled castes, scheduled tribes and other backward classes in higher educational institutions under the Central government. Ultimately, the Prime Minister was able to convince the allies that reservation can go hand in hand with maintenance of excellence and that, while introducing reservations, it would be wise to seize the opportunity to meet the aspirations of all sections by vastly expanding the capacity of the institutions.

Coalition also helps a government prioritise its goals. Once the priorities are determined, resource allocation becomes an easier task. The example that comes to my mind is the collection of eight flagship programmes and Bharat Nirman. Once we decided on the eight programmes and the six elements of Bharat Nirman, it was easy to allocate the bulk of the resources for the implementation of these programmes.

It might appear that as long as a single party was responsible for economic policy, policy-making was easier and quicker. This is a superficial impression. Beginning 1950, when the Congress party was solely responsible for economic policy, history records the intense debates within the party and the deep divisions that ran through the party on key economic issues. I may recall to you the great debates that took place on land reforms, licensing and control, tax rates and customs tariffs, control of exports and imports, control of foreign exchange, public sector enterprises, bank nationalisation, poverty alleviation programmes and panchayati raj institutions. Although, ultimately, the party rallied around a policy and the government implemented that policy, some policies were winners and some were losers. From time to time, people exited the Congress on grounds of disagreement with economic policy and advocated alternative policies. Some policy stances were later reversed by the Congress itself. For example, it was the Congress party which, in 1991 and afterwards, removed licenses and controls, opened up foreign trade and allowed more space for the private sector. Those outside the government, if they were from the left, criticised these moves as a retreat from socialism and, if they were from the centre and the right, praised it as a victory for liberalisation. My conclusion is that in a developing economy, policies made by a single party, while having the merit of certainty and speed of implementation, are quite vulnerable to reversal by succeeding governments. On the contrary, policies made by a coalition government – especially a rainbow coalition – have a greater chance of durability.

Furthermore, it can be argued that decision-making in a coalition government, by better factoring of the historic and socio-economic realities and public expectations from a variety of political constituencies, generally leads to an improvement in the quality of the interventions and also generates wider support. Policies in coalition politics are like very large oil tankers: they move slowly, but surely, and do not turn around easily.

It is only in a stable and mature economy that discretion in economic policy-making gets reduced and a road is well laid out and the sign posts are firmly in place. Thanks to nearly 40 years of single party governments and 15 years of coalition governments, the Indian economy has began to show signs of such stability and maturity. Henceforth, it is possible that there will be greater convergence of views on economic policy and that economic policy will be increasingly determined by the hard logic of economic development.

I am not unaware of concerns expressed in certain quarters about coalition governments. There is indeed a problem of arriving at a consensus within the coalition. While the rule in Parliament is the rule of the majority, the rule in a coalition is the rule of unanimity. The search for unanimity can lead to delays in decision making and hence wasted economic opportunities. Another concern is the presumed political instability associated with coalition governments and the consequent tendency of the government to become somewhat liberal – or populist – in its fiscal stance. These concerns needs to be addressed at some length.

A coalition runs the risk of turning into an extreme form of deliberative democracy. While extended deliberation undoubtedly reinforces the legitimacy of a coalition and a rational discussion tends to produce unanimity within the coalition, such an outcome is not necessarily inevitable. The knowledge that the final decision can be held hostage to a minority point of view, or can be indefinitely delayed, may encourage the minority to take an aggressive stand and hold up the process itself. The working of a coalition is quite akin to that of a committee, and there is voluminous literature on optimal decision making rules for a committee. The jury is still out on coalition governments in India, and I do not have the answer about the optimal solution. All I wish to do is to point out the need for an effective solution to the problem of decision making, especially a solution that combines the virtues of fairness and speed.

The second concern is somewhat more grave. When the ship of the economy appears to be cruising at a comfortable speed, or as elections approach, the attractiveness of fiscal expenditure becomes irresistible. There is a temptation to resort to higher levels of government spending and lower levels of taxation which are believed to be magnets for voters. Such a liberal fiscal stance actually shifts the fiscal cost from this generation to future generations. While more spending and lower taxes may have immediate tangible benefits, the hidden costs are not visible to the current voters. Similarly, there may be a tendency to postpone hard decisions on structural reforms. The tendency of postponing fiscal adjustments, or putting it on reverse gear and putting off structural reforms, is observed in many countries of the world. In a coalition government, the tendency may be of the acute variety. According to some observers this tendency has been observed in India in the past as well, for example, during the period 1998-99 to 2001-02, as I shall show presently.

The focal point of reforms is the Ministry of Finance. The Finance Minister is – to borrow the language of football or hockey – the playmaker. In a coalition government, the Finance Minister is obliged to share this responsibility with several other players. In the case of the NDA government, as it approached the end of its tenure, it appeared to me like a football team that kicked and pushed the ball aimlessly while waiting for the referee's final whistle. In the six years that the NDA government was in office, except in 2003-2004, it was not able to deliver a growth rate of more than 6.5% in any year. In fact, in two years it recorded much lower growth rates. The NDA government had inherited a fiscal deficit of 4.8% in 1997-98, but by 2001-2002, it had steadily climbed to 6.2%. Its record on expenditure control was very poor. It had inherited a ratio of total expenditure to GDP of 14.2% in 1997-1998; but this steadily climbed in every year to reach 17.1% in 2003-2004. From the point of view of the macro economic health of the country, the NDA government's tenure cannot be rated as a great success.

I do not, however, believe that all coalition governments are condemned to a similar fate. Norway, Iceland and Netherlands, among several countries, have had coalition governments for a very long time.


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