Why India’s good economics is corrupted by bad politics

Three current events in Delhi reveal widening cracks in the 'liberal' ideology that has ruled the country's economics since the 1991 economic reforms: the upcoming elections in Delhi; the national Budget; and the Central government conceding, reluctantly again, that it must negotiate with farmers objecting to the imposition of 'free market' agriculture reforms and demanding that the government ensure they get fair prices for their produce.

The strategy of all political parties competing in the Delhi elections is to promise more 'freebies' to citizens. This may be good politics, but it is bad economics, lament economists advising the Finance Minister, who must balance the Budget without increasing taxes on corporations and the rich.

The government finds it hard to agree with the famers because their demands run counter to the ideology of liberalisation of the economy, which is minimum government and maximum governance by the 'invisible hand' of capitalist markets.

The government's overall strategy to make India a 'developed country' by 2047 is to increase the GDP more rapidly, with the expectation that the top line growth of wealth of the rich will trickle down to the bottom line of incomes for people in the lower half of the economic pyramid.

Before pressing harder on the liberal reforms' accelerator to boost the GDP, the policymakers must pause and objectively examine how well the Indian economy has done since the 1991 economic reforms.

Economists on the liberal right side defend their theories by comparing the performance of the pre-1991 'socialist' economy with the post-1991 'liberated' economy. By this yardstick, liberal economists of both the UPA and the NDA can agree that the economy has been on the right track since 1991. They disagree only about whether employment and incomes increased faster whenever their side was in power, a contest they are trying to settle with dubious statistics.

A scientific way to settle the ideological debate about the best economic strategy for India is by a comparison of how much growth of the GDP has increased incomes of the poorest people in other developing economies since the 1990s.

Compare India and China, two countries with over a billion citizens, both of whom were very poor until the 1980s, both opening their economies around the same time to increase foreign trade and private investments. And Vietnam, which was even poorer in the 1980s, and has now emerged as another Asian tiger, competing with India to draw away investments from China, where labour costs have increased with its remarkable economic success.

The box above illustrates the comparative growth in GDP per capita of China, Vietnam and India from 1989 to 2023. It shows that Vietnam and China experienced significantly higher increases than India during this period.

Why have China and Vietnam's economies done six times better than India's in lifting incomes at the bottom over the same period? India's economy reformers should examine this scientifically and non-ideologically.

For one, China and Vietnam did not give up the communist-socialist moorings of their economic policies after the collapse of the communist Soviet Union in 1991, when the Washington Consensus around liberated financial capitalism swept the world. Russia was persuaded by US economists to switch from communism to capitalism with a 'big bang', with disastrous consequences. Crony capitalists gouged the country's wealth, became extremely wealthy, bought mansions in London and yachts in the Mediterranean and corrupted Russian politics. China and Vietnam joined the global economic system on their own terms in the 1990s.

Deng Xiaoping adopted 'Socialism with Chinese Characteristics', incorporating features of capitalism into central planning to enhance the welfare of the people. US economists complain China cheated when it was admitted into global markets because China did not give up socialism and state planning. It protected its public sector and nurtured private sector giants, now being sanctioned by the US — the champion of free markets — which is destroying multi-lateral trade and financial institutions to protect its own domestic producers!

Vietnam followed the Chinese precedent of economic reforms with minimum political reform of its single-party governance system. It declared it would also adopt a 'market economy with a socialist orientation.' Consequently, the US refuses to recognise Vietnam as a 'market economy' even though Vietnam has implemented 17 free trade agreements with the EU, the UK and other countries.

'Communists' and 'socialists' are considered threats to the US consumptive way of life and dangerous for the nation's security. US ideologues are allergic to 'socialist' systems, which require governments to look after the welfare of citizens with a visible hand, as existential threats to their own system of privatised financial capitalism, in which an 'invisible hand' supposedly looks after everyone fairly.

'A rose by any other name would smell as sweet,' Shakespeare said. Instead of wasting precious political space debating whether the word 'socialism' should be removed from the Constitution, India's leaders should get down to the fundamentals. The success of economic policies must be measured by how much they increase incomes, affordable and accessible health and education and social security of citizens, not by how much the GDP increases and the wealth of the one per cent on top balloons. India's billionaires are already world class in their consumption.

After 35 years of India supposedly liberating economic reforms in 1991, Indians in the lower half of the economic pyramid have yet to catch up with the living standards of Chinese and Vietnamese citizens, who were as poor or poorer before, and whose economic conditions have improved six times faster since then.

India's theoretical economists complain that good economics is corrupted by bad politics. Rather, bad economics is corrupting good politics for the people in India. India's economic reformers should not remain beholden to free market ideologies, corporate lobbies and sentiments of fickle stock markets.

Before embarking on the next major reforms, they should pause to learn more from socialist countries in the East than from capitalist countries in the West, where too movements are rising from both right and left sides of the political spectrum, shaking up neo-liberal economic theories.