How freebie culture is killing our economy

The “gasping elephant” is how HSBC, the global banking giant, described the state of the Indian economy. The analogy could not have been more apt. It is easy to picture an elephant struggling to pull an ever-increasing load piled on by the country’s cruel political masters. The elephant is now gasping as well as flagging.
The problem is that the elephant’s mahouts are unable to maintain equilibrium between its pulling capacity and its ever-increasing load of budget deficits, subsidies and freebies. The load has been growing faster and faster thanks to the culture of free lunches nurtured by the country’s political leadership.
Every indication suggests that the elephant is slowing, if not headed for a grinding halt. Latest economic statistics show that the country’s growth rate has plummeted to 5.3 per cent in the quarter January-March 2012, which is the slowest in nine years.
It is not only the ruling coalition at the Centre that is alone to blame. The culture of freebies has become a dominant democratic practice in India. Today, no political leader wants to tell citizens that they must eventually pay for economic goods they consume and, that too, at the real price of commodities like cooking gas, diesel, petrol, electricity, cereals, fertilisers and so on.
State governments are unable to provide their citizens roads, electricity, quality education and health services. Instead, they woo them with free laptops, free electricity, saris and free loans. Politicians are busy announcing one scheme after another to please their potential voters; and they do not care how much it costs because in the end it is the taxpayer who foots the bill.
So as budget deficits soar — it is currently estimated at a whopping eight per cent of GDP for states and the Centre combined — so does inflation; people have less to buy with their money. The cost of free laptops, saris, subsidised fuel and cultural celebrations eventually have to be paid by the nation as a whole and the poor end up suffering the most.
But guile comes naturally to the modern-day politician; eventually they make the state pay for their political munificence and once in power reap profits for themselves. This is a hugely successful business plan that has been replicated all over India by virtually every political party.
The problem is that this cannot go on for ever and every economy, just like Greece, must face harsh reality sooner or later. The sad part is that ultimately it is the citizens who get economically devastated. As politicians feed with one hand, inexorable economic processes take with another.
A course change is virtually impossible because the average Indian citizen has become addicted to subsidised goods. Politicians know this and cynically exploit it for political gains. The Opposition-sponsored anti-petrol hike agitation was yet another example of this dynamic.
There will be political agitation against the hike of every government-controlled price whether it is bus fares, fuel prices or electricity tariffs; farmers will agitate if they are told to repay their loans; commuters will burn buses on the streets if bus fares are hiked and transporters will shut down if diesel prices are raised.
Politicians have not told citizens that the country cannot produce enough fuel, that it must be imported at high cost from abroad. They do not educate citizens about how excessive spending by governments stoke inflation, which leads to interest rate hikes and a consequent decline in business activity because of increased capital cost. They do not tell students that the free laptop is not paid for by the political party that was voted to power but by the bankrupt state exchequer.
Also, politicians do not explain that unless people pay their electricity bills, regulate their power consumption and agree on periodic tariff hikes, the country’s power producers will not be able to sustain their losses, new projects will not come up and the people will have to live with power cuts for ever.
Politicians do not reveal that we are importing fuel and a whole load of other goods without being able to pay for them, which is leading to an ever-increasing surge in demand for scarce dollars. Compared to the annual 20 per cent growth in recent years, export growth after falling has picked up by a mere 3.2 per cent. This has resulted in the rupee losing a quarter of its value in less than a year, making all imports, including that of oil products, that much more expensive. Not surprisingly, a senior RBI official declared that “if the rupee is depreciating due to real sector issues, financial sector measures will not solve it.” The rupee has been losing value against all the major currencies, especially the American dollar, and has been judged the worst-performing Asian currency.
The country is staring at a huge balance of payments gap and is hoping that it will be plugged by foreign direct investment (FDI) inflows of $70 billion. Problem is that global confidence in the Indian economy is dwindling. Reuters reported that “Standard & Poor’s cut India’s credit rating outlook in April to negative from stable, worried by its fiscal and current account deficits. The decision jeopardises India’s long-term rating of BBB minus, the lowest investment grade rating.” It is not as if politicians are unaware of the gravity of the situation. It is simply that politics today is about coming to power by any means and staying there by any means, even if it implies running the economy to the ground.
No matter what happens to the economy, history has taught the Indian politician that none of them end up in penury. The last politician who did was one of India’s forgotten Prime Ministers, Gulzari Lal Nanda. This gentleman did not own any property and lived in a rented house in Delhi from where he was evicted because he could not pay the rent and moved in with his daughter. Compare
his post-retirement scenario with that of our top leaders and the picture becomes horribly lucid.

The writer is an independent security and political risk consultant

Comments

Very well written article.

Very well written article. Hits the nail on its head. Unfortunately politics is a quick ticket to becoming obcenely wealthy, just look at politicians like JReddy, Jaya, KK, etc.

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