Election economics

Drawing lessons for economic policy from election outcomes in India is an extraordinarily difficult task.

For every outcome, which seems to conform to our conventional notions of the link between economic performance and political success, there is an equally prominent one that turns those notions on their heads.

Nevertheless, economists would be abdicating their responsibility if they gave up in their efforts to look for policy signals in election results.

Ultimately, policy design is as influenced by political saleability as by theoretical consistency.

I see three things that stood out about last week's election outcomes, which, I think, have direct implications for economic policy at both the central and state levels over the coming years.

First, other than Delhi, the pre-election surveys generally called the outcomes wrong; the typical anti-incumbency factor that has dominated outcomes in so many recent elections was deemed to be insignificant this time around.

The disparity between the forecasts and the outcomes suggest a very important role for campaign end-games. Last minute efforts to sway undecided and wavering voters seem to have paid off very well.

Of course, end-games in most contexts are typically more opportunistic than strategic, and all the team's resources are brought into play because it serves no purpose holding anything back.

So, all of the 'non-economic' issues that have played prominent roles in one or the other campaign understandably made their appearance, with varying levels of intensity.

Caste considerations, the significance of rebel candidates and so on unquestionably played a role in some of the outcomes.

But, eventually, a massive swing against the incumbent governments is more likely to result from a set of tangible measures that the Opposition party in the state can take credit for.

The highways and rural roads programme is one such measure. Both are closely associated with the prime minister.

The former is fully financed and implemented by the central government and the party ruling at the Centre will obviously take credit for it.

The latter is financed by the Centre, but the greater responsibility for implementation lies at the state government level, so failure rebounds on it. Road construction is amongst the most employment-intensive activities around.

Even though the road covers only a limited part of the state, it probably generates enough jobs to attract people from all over.

In many pre-election surveys, the lack of employment appeared to be among the top two concerns of those responding.

Whoever could claim credit for the positive impacts of the programme would clearly reap the political dividend.

And that, in a nutshell, is what the end-game is about -- putting all possible resources to play to take advantage of the position that the opening and mid-game strategies have got the team into.

Second, the winning side, having benefited from the eventual anti-incumbency wave, has tended to attribute the outcome almost entirely to economic factors.

The dominant interpretation of the result is that the losing governments simply failed to live up to minimum expectations of delivery of power, water and transportation on the one hand, and security of livelihoods on the other.

This interpretation is music to the ears of people who would like such 'rational' considerations to dominate the political process.

It locks the new governments into a high level of commitment on these indicators, making them that much more vulnerable to anti-incumbency the next time around. The stakes of failure to deliver on the economic front are that much higher now.

Having gone so far out on a limb to emphasise the role of economic issues in the outcome, the policy framework for the new governments is virtually determined even before they come into office.

The one principle they must keep their focus on is that there are no free lunches.

Delivery commitments of the kind they have explicitly and implicitly made are going to require huge increases in the level of resource commitments as well as huge increases in the levels of efficiency with which they are used.

This means significantly stepping up revenue collection efforts, both through greater exploitation of the existing potential tax base and through imposition and collection of user charges.

It also means a far greater degree of facilitation of private provision of infrastructure and public services than has apparently been achieved so far.

Finally, it requires an effort to utilise all the resources which are available to the state from the Centre, which brings me to my final issue.

The third characteristic of the outcomes is really a conjecture. The conjecture revolves around the following question: if a particular party is in power at the Centre, is the resident of a state better off with the same party in power in the state?

This may seem like a hypothetical question and far removed from the instinctive and intuitive decision-making that the individual voter makes.

But, this time around, there was a sense in some of the state campaigns that a failure of coordination between the central and state governments -- financial, administrative, whatever -- was partly responsible for the inability of state governments to deliver on their promises of basic services and security.

The degree of discomfort that arises from having different parties in power at the Centre and the state is a function of the degree of financial dependence that the state has on the Centre.

The more prosperous states have relatively better-developed revenue bases and are therefore less dependent on resource transfers from the Centre.

The less prosperous states, on the other hand, meet a far larger proportion of their resource requirements from the Centre.

This is true of both untied transfers, which are not linked to specific schemes and tied transfers, which are related to specific investment projects and programmes.

The point is that, in the states that are more dependent on the Centre for funds from various sources, the costs of friction in terms of unutilised resources, unfinished projects and inadequate service delivery are that much higher.

So, to summarise the key economic implications of the recent election outcomes: winning campaigns are more likely those that are built on a foundation of tangible economic achievements; campaigns that emphasise the economic failure of incumbent governments lock new governments into very high levels of commitment on not just delivery but also resource-mobilising efforts; states which are more dependent on central resources are more likely to look for congruence in the parties in power at the Centre and the state.

The writer is Chief Economist, CRISIL. The views expressed are personal.

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