Coalition Politics and Economic Progress

TK Arun

Stock market jitters over economic prospects under coalition rule are misplaced.

The stock market’s volatility index has doubled, from the level seen on April 23rd, as traders worry about a BJP majority. In fact, traders should appreciate that the economy is guaranteed to do well, whoever forms the next government.

There are three possible outcomes: the BJP gets a majority on its own, as in 2019, the BJP falls short of a majority and becomes dependent on fickle allies, the BJP falls so short of a majority that the Opposition India Alliance gets to form the government. Most people equate a government by a single party that enjoys a majority in Parliament with political stability, efficient decisionmaking and living happily ever after. In this view, coalitions carry the risk of instability, erratic policy and economic woes.

India’s own recent history shows that such views are unfounded. Coalitions create and sustain pro-growth policy and governance, while the benign effects of single-party rule can be exaggerated.

The period 1980-89 was one of stable governments with rock-solid majority support in Parliament. Yet, it was a period of extreme political instability—Assam witnessed a violent anti-foreigner agitation, Punjab saw separatist terrorism, the Tamil separatists of Sri Lanka were killing one another in Tamil Nadu and later turned against the Indian state, going so far as to kill Prime Minister Rajiv Gandhi on his re-election campaign, Kashmir was drowning in militancy and counter-insurgency violence, and an organized campaign to bring down the Babri mosque at Ayodhya was sparking Hindu-Muslim riots across North India.

The Narasimha Rao government that took office in 1991 was a minority government to begin with and acquired a majority half-way through with the help of bribes. But that government launched India’s economic reforms, held elections in Kashmir and Punjab, and gradually stabilized the polity, after ructions in the wake of the Babri mosque demolition and anti-Mandal agitations. The United Front that led the next government was a fractious coalition with two political lightweights as successive prime ministers during its two-year tenure. But it carried forward the economic reform programme.

Dematerialisation of shares, expansion of the scope of foreign institutional investment in the stock markets, a New Exploration and Licensing Policy for hydrocarbons, overhaul of tax rates to bring income tax rates to their lowest ever levels, setting up of the Telecom Regulatory Authority of India – these were significant reforms, and these were carried out by the short-lived coalition that depended on outside support by the Congress and a section of the Left.

The succeeding two coalition governments led by Atal Bihari Vajpayee carried the reform programme forward, bringing down import tariffs, setting up statutory regulators for insurance, pensions and electricity, ending the mess in indirect tax rates by clustering them within three bands and narrowing the gap between the bands, and starting the rural road building programme. It set up the National Pension System, made new recruits to the central government join the NPS and allowed states to voluntarily migrate their pensions to the NPS as well. It opened up insurance to foreign investment, with support from the Opposition Congress, gave fresh banking licences, revamped the Unit Trust of India and reset telecom policy.

It allowed telcos to migrate from licences awarded to those bidding to pay the highest fees to a regime of licence fee as a share of the revenue. Then, it regularized Reliance Telecom’s backdoor entry into mobile telephony, in the process introducing one, intense, tariff-shrinking competition that made mobile telephony affordable by the masses, and, two, the more spectrum-efficient CDMA technology as well as the principle that regulation should not inhibit exploitation of a technology’s full potential merely to spare incumbents additional competition.

The BJP needed the support of its allies within the National Democratic Alliance for the Vajpayee government to survive. This did not prevent that government from adopting pro-growth policies.

The two UPA governments that followed were also true coalitions, given to unseemly political squabbles but still capable of delivering the highest compound annual growth rate sustained over a decade in India’s history till now of 6.8%. It secured and defended the nuclear deal with the US, ending a period of technology denial and strategic isolation by the West, carried out a massive telecom revolution and brought down poverty, maternal and infant mortality rates, innovated public-private partnership in large infrastructure projects, set up the National Payments Corporation, created Aadhaar and the India Stack of APIs that underlie India’s public digital infrastructure, and launched a process of defence modernization, including through local production with foreign direct investment.

Nor is it true that ultra-stable governments take brave decisions and carry through with them. The first Modi government made the economically disastrous decision to demonetize high-value currency notes, killing swathes of small enterprises. It tried to push through changes to the land acquisition law, but withdrew in the face of opposition. In its second term, the attempt to reform agriculture through new farm laws was hamhanded, invited stubborn opposition and was abandoned.

Do not fret about the economic policy of the new government. Worry, if you must, about how inclusive or divisive it would be.

TK Arun is a senior journalist.

The article was first published in The Sanjay Report as Downsides of coalition govt are as exaggerated as virtues of single-party rule on May 15, 2024.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

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Acknowledgment: This article was posted by Aasthaba Jadeja, a visiting researcher at IMPRI.