July 05, 2020
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...They All Fall Down

A logical evolution of the Indian polity? Perhaps, but coalitions are bad news for the economy

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...They All Fall Down
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Are coalition governments inherently unstable? Yes, if one goes by India's experience with central governments for the past three years. But are coalition governments necessarily bad for the country? This question will more likely polarise experts into those who find successive coalition governments a logical corollary of the evolving Indian polity and those who think coalition capers, on the other hand, are but an effective case for a stable, one-party system of governance.

What does not brook any disagreement whatsoever is that coalitions are bad for the economy, especially since most coalitions translate into unstable governments. For proof, ask industrialists, foreign investors, small businessmen. Or ask Bhaskar Dutta, professor of economics at the Indian Statistical Institute (isi), who has conclusively proved that coalition governments have been bad news for the Indian economy.

Dutta studied the pattern of fiscal policies (policies on earning and spending) followed by 15 major states for 26 years-1967-68 to 1992-93. His conclusions:

  • Unstable coalitions tend to overspend, mainly on populist policies like tax breaks, incentives, subsidies or even direct giveaways.
  • Unstable coalitions are not very keen to raise revenues other than taxes.
  • As a result, such governments tend to have a bigger mismatch in their revenue budget. That is, they end up with less profits or even higher losses from their operation of running the government.

    Says Dutta: "Unstable coalitions or governments that are not likely to remain in power for a long time are liable to induce policy distortions for at least two reasons. First, if political power alternates rapidly and randomly between competing political parties or groups of parties, then each government is unlikely to adopt hard policy options whose benefits flow after a lag. Instead, it may spend indiscriminately to satisfy the short-term needs of its support groups. This will result in a legacy of high debt to its successor."

    "Secondly, the shorter the expected duration of the government, the more difficult it will be for the members of the ruling coalition to agree on policies. And the more heterogenous the parties in the ruling coalition, the greater the lack of cooperation and in turn, the promotion of populist policies benefiting the diverse narrow interests. The direct casualty of which will be fiscal discipline since government expenditure will be excessive." The failure of the United Front government (1996-98) to agree on some major economic reforms and its contribution to a markedly higher fiscal deficit for 1997-98 prove Dutta's argument.

    The inspiration behind Dutta's study is a 1989 work by Jeffrey Sachs and N. Roubini (Political and Economic Determinants of Budget Deficits in the Industrial Democracies, European Economic Review), which analysed the pattern of fiscal deficits in oecd countries. They found a clear tendency for larger deficits in countries characterised by short average tenure of governments and by the presence of many political parties in a ruling coalition.

    Dutta classifies a coalition government as unstable if it contains two or more pivotal parties. A constituent party is defined to be pivotal if its departure converts the coalition from a winning to a losing coalition, that is, bring about the collapse of the government. (That's what brought down the bjp government. Even earlier, the bjp government's first bid to cut urea subsidy came to nought mainly because of the resistance of the Akali Dal. ) Dutta uses data on the duration and nature of state governments, the results of which are given in the accompanying chart (see 'Instability Rules'), to confirm that the more the number of pivotal members in the coalition, the more its instability. The study also reveals that the presence of defectors in a coalition heightens the inherent instability. Also, governments that are formed from minority coalitions with outside support from individuals or groups prove to be more fragile. Remember what happened to the Chandra Shekhar government in 1991, which had its lifeline in the hands of the Rajiv Gandhi-led Congress?

    Indian states had their first taste of coalitions in 1967. The elections that year meant a sharp setback for the ruling Congress in both assembly and Parliament polls, and opposition parties captured as many as six states for the first time. Since the opposition at that time was pretty fragmented, it resulted in several patchwork governments. In the next one year or so, as many as 10 governments were formed in four states-Punjab, West Bengal, Bihar and Uttar Pradesh. The bitter experiences forced coalitions to generally peter out in the seventies and eighties. But some states were notable exceptions.

    The chart shows that in 26 years, out of 133 majority governments, 96 have an index of instability of one (that is, only one pivotal party in the coalition), so are the most stable. As many as 47 of these lasted for four years or more. Also, 41 survived for less than three years. The split is probably because in some states, coalitions were not unstable. For instance, in Kerala, where coalitions have been the norm, the average duration of governments has been longer than in any other state because of the existence of one pivotal party. Similarly, in West Bengal, the ruling Left Front coalition has succeeded to the extent of putting down roots, because the cpi(m)'s majority hold on seats makes all other constituents more or less insignificant.

    Dutta, therefore, takes up four coalition-prone states to ascertain whether successive unstable governments have been populist and profligate. Using the ratios of revenue expenditure, own tax and non-tax revenue, and revenue surplus (deficit) to the state domestic product, he finds Bihar to be the best example of fragmented coalitions breaking the back of the state economy. The more unstable the ruling coalition-that is, the larger the number of member parties-the greater the proclivity of the government towards excess expenditure.

    Of course, says Dutta, there are other perennial costs associated with government instability which are not captured in the budgets. Weak governments, for instance, won't be keen to pass politically unpopular legislation if the benefits can't be captured immediately. The failure of the UF government to reform labour laws to allow staff restructuring is an obvious example. The huge subsidies on food, electricity, water and transport are also symptoms of weak governance.

    Dutta's study is a very strong argument in favour of electoral reforms, since it's clear that fragmented legislatures are unlikely to produce majority governments. In the sixties, people voted for regional parties in the states and a main national party at the Centre. But, says Dutta, the growing importance of regional politics even as the Congress progressively outlived its raison d'etre after Independence, changed electoral results forever. Says he: "The argument that regional parties should come up to voice regional interests which are often ignored in a vast democracy like India, is all nonsense. Look at what is happening in Tamil Nadu. Personality clashes are breaking up even such parties."

    The problem with India's democratic polity could be that it adheres to the first-past-the-post system. This system has obvious limitations at a time when 30 or more parties are represented in elected legislatures all over the country. Since, in India, the plurality rule has not succeeded in producing a strong two-party system, Dutta suggests an alternative-a modified Proportional Representation (PR) system. A cut-off point (say, a party must earn 5 per cent of total valid votes to earn representation in the legislature) would eliminate all small parties and independents and reduce the risk of instability. Simulation exercises using this cut-off point were carried out for the results, which did show that the PR system may produce more stable ruling coalitions than the plurality rule.

    But this requires amending the very basis of our democratic process. Which coalition government-since this seems to have become the norm in India-would be able to push that through?

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