Politics over Economics: Musings of a Pioneer

To anyone who has looked at microfinance and livelihood promotion in India, he or she would have, at some stage or the other, either heard or crossed paths with Vijay Mahajan - the social entrepreneur who founded BASIX.

In the mid-1990s, BASIX was one of the first to talk of livelihood promotion and also have an NBFC MFI (microfinance institution) under its fold and to offer micro-credit, micro-insurance, branchless banking, agricultural extension, livestock development and several other things.

In fact, if you have not crossed paths with Mahajan, chances are you would have met some who would have either worked with BASIX in the past or been a summer intern (people like Nachiket Mor, for instance, in his early day with Mahajan). If not that then, would be one who has hired people from BASIX.

Not surprising, Mahajan knows more than most about the space, having spent years on social impact issues and being on a number of government of India forums such as the Planning Commission Working Groups, the Rangarajan Committee on Financial Inclusion, the Raghuram Rajan Committee on Financial Sector Reforms and the Insurance Regulatory and Development Authority (2005-10).

However, in my many conversations with Mahajan, I started finding him getting increasingly disillusioned with the happenings in Indian microfinance, and he would tend to look more at poverty and livelihood-related issues.

After a long period of silence, it came as a pleasant surprise when I found an email from him on the talk he gave last week at the Liu Institute of Global Issues, University of British Columbia in Vancouver, Canada. The rubric of his talk seemed a hugely important subject. It read: "How realistic are the chances of India maintaining an annual growth rate of 8 per cent or more? ....Integrating Economics and Politics."

But what I found interesting was the way he has - based on the data he has gathered from various sources - drawn up a picture of some of the economic realities that India faces, and gives his take on their political implications and what that in turn those could mean on the thinking on economic issues.

Sampled below are some of them:

1. The GDP Growth rate phases of India: 1956 to mid-1970s, full of fluctuations, partly caused by high GDP share of agriculture, its dependency on the monsoon; 1980 to 1992, beating the "Hindu rate of growth" of 2-3 per cent per annum in the mid 1980s; 1992 to present: Though reforms began in 1991, the take-off came a decade later, till the global setback of 2008/09.

Political implications of these: Rising aspirations, greater disparity and higher vulnerability for those left behind, all led to the breakup of older political equations and new "aggregations of the aggrieved" emerged. Evidence: rise of the BSP (based on mass support from the Dalits/SCs) and later the BJP - aggregating those aggrieved by "appeasement" - the Hindus from the trading/service classes felt that Muslims, Dalits and farmers were "appeased" by the Congress.

2. India's GDP Growth Rate in the recent past 12 quarters (over 7 per cent) - The down phase of the economy towards the last two years of the UPA reversed by the BJP government, since mid-2014. But although the monsoon this year is expected to be above normal, the low price phase of crude oil (India's largest import) is getting over. Plus, the growth-oriented policy initiatives are mired in lack of Parliamentary upper house majority and slow implementation.

Political implication: Major reforms are stuck - GST, banking reforms. Results of recent state elections show inadequate sway of the BJP.

3. Steady decline in the share of agriculture to the GDP, falling from above 50 per cent in 1950 to about 33 per cent by 1975, trailing the services sector, and finally below 25 per cent in 1997 trailing both services and industry. Today agriculture is less than one-sixth of the GDP.

Political implication: Decline in the influence of first the land-owning classes, then farming classes, then of industry. Evidence: Subsidies to services beat subsidies to agriculture and industry.

4. Share of GDP versus share of employment - Nearly half of India's workers are in agriculture but get only one-sixth of the GDP, while a little over a quarter of the services sector workers get over half of the GDP share. What is worse is that the lowest wage earners are in agriculture - the landless labourers with per capita incomes of Rs 10,000-12,000 per annum, while the highest paid workers in the services sector have per capita incomes of 20-100 times that.

Political implication: Disparity breeds discontent.

5. Youth Unemployment Rate in India averaged 15.5 per cent between 2012 and 2013.

Political Implication: With the voting age down to 18, youth unemployment is a key election issue. The dip in 2013 was a pre-election year response by the UPA government, using programmes like MGNREGA and NSDC-STAR to boost youth employment in the short run. More recent data has yet to come to check if these issues was tackled for good.

6. Paradoxically, the more a young person studied, the more were his/her chances of being unemployed.

Political Implication: Massive disaffection among the youth who constituted the most numerous voters' segment by age. Since formal /government jobs are few, "skill training" became the new panacea since 2009.

7. Status of women - Literacy: 85 per cent of rural women and 59 per cent of urban women workers were illiterate or literate up to primary level; only 15 per cent rural women workers went beyond primary education. Occupational sectors: 73 per cent of all women (83 per cent in rural areas, 19 per cent in urban) are engaged in the primary sector, mostly agriculture and livestock rearing. In urban areas, low-end manufacturing, retail trade, hotels and restaurants, and social and personal services were the main employers; Unpaid Work: 74 per cent of rural and 50 per cent of urban self-employed women did not get paid as they were "family" workers; access to land, assets, credit, skills, technology and market remained low and restricted; crime against women, domestic violence, having to cope without the male in the household due to migration, and alcoholism among men and are major issues for women and have often led to political mobilisation.

Political implications: Women have increasingly been seen as a vote bank. This accounts for the political patronage of savings and credit programmes and the so-called self-help group movement, because by extending low- or zero-interest loans, politicians can appear to favour this vote bank. Coupled with 33 per cent reservations in Panchayats, women are a target of politics.

8. For the first time, the percentage of households self-employed in farming (cultivation, livestock rearing and other agricultural activities) accounts for slightly less than 50 per cent of the total (147.9 million agricultural households, as per NSS 70th Round 2013/14); agriculture ceased to have the largest share of GDP since 1975/76 and now even agricultural (cultivation, livestock and other farm work) activity in rural India is no longer for over 50 per cent households; the NSS does not include agricultural labour households among "agricultural households". That number was 53.7 million as per the Socio-Economic Census, 2011.

Political Implication: Farmers are no longer as important a vote bank as they were earlier. Evidence: Lowering subsidies for farmers and importance of the landless rising. Evidence: National Rural Employment Guarantee Act, Food Security Act, Forest Dwellers' Rights Act, Financial Inclusion and Skills programmes - all came up during the UPA regime, but are being maintained by the BJP.

Finally, (some points around, what he calls, the dilemma between good economics versus populist / crony politics and his expectations on the GDP):

- The more investment needed, the higher have to be either domestic savings or foreign investments (FDI).

- If savings are high, consumption and government expenditure will be lower, so growth will slow down.

- If it has to be made up with foreign capital - FDI, then the resulting competition that tends to come with FDI is unpopular with the established industry leaders who are often also note banks; the pursuit of a higher domestic savings rate based on lower household consumption or lower government expenditure, unpopular with both the vote and the note banks, can at best can be done for another year till 2017 - two years before the 2019 elections.

So, the BJP Government is left with difficult choices. Which ones will it make? Can good economics prevail over the demands of electoral politics? My conjecture is that in his quest to get a second term, Mr Modi will pitch for the latter, and so India will not see a steady 8 per cent plus growth rate.