• UGI USER
  • Jun 08, 2024
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IS IT THE ECONOMY, STUPID? ANALYZING INDIA’S ELECTION RESULTS

Syllabus:

GS-3:

  • Indian Economy

Why in the news?

  • India’s recent election results, where the ruling government faced voter backlash despite strong economic growth, have sparked widespread analysis and debate.
  • This unexpected outcome challenges conventional wisdom about the relationship between economic performance and electoral success, highlighting deeper issues within the economy and governance.
source:goodreturns

Economic Puzzle of India’s Election:

  • Electoral Shock: India’s recent election results are puzzling, with voters punishing the government despite significant economic growth.
  • Unprecedented Event: The phenomenon of a booming economy not translating to electoral success is rare globally.
  • Official Growth Rates: According to official data, India’s real GDP growth rates were 7%, 7%, and 8.2% in the three years leading up to the election.
  • Economic Boom: Such growth typically signifies economic prosperity, raising questions about the disconnect between economic performance and electoral outcomes.
  • Electoral Response: The results challenge the adage “It’s the economy, stupid,” suggesting other factors at play.
Understanding Gross Domestic Product(GDP):

  • GDP measures final goods and services in a country.
  • Four engines of GDP growth: PFCE, GFCE, Gross Fixed Capital Expenditure, and Net Exports.
  • GDP calculation: private consumption + gross investment + government investment + government spending + (exports – imports).

What is the Wholesale Price Index?

  • WPI measures bulk wholesale goods price changes
  • Published monthly by Office of Economic Advisor
  • Tracks supply-demand dynamics in industry
  • Upward WPI surge indicates inflationary pressure
  • RBI no longer uses WPI for policy
  • New series updated to 2011-12 base year
  • Calculated by weighted average of basket of goods
  • Basket includes primary articles, fuel/power, manufactured products
  • Total of 697 items tracked in 2011-12 series

About Consumer Price Index(CPI):

  • Retail inflation, or CPI, measures changes in prices of goods and services for daily consumption.
  • Reflects cost of living, purchasing power, and value of currency.
  • Calculated by comparing current prices to a base year.
  • Used for inflation targeting, price stability, and economic analysis.

About Fast-Moving Consumer Goods(FMCG):

  • FMCG, or CPG, includes swiftly sold, low-cost products like food, toiletries, and cleaning supplies.
  • High-volume sales and quick inventory turnover are hallmarks of this industry.
  • India’s FMCG sector is the fourth-largest in the economy.
  • Urban sector comprises 65% sales, rural 35%.
  • Household care makes up 50% sales, healthcare 31-32%, food and beverages 18-19%.
  • Employs around 3 million, about 5% of India’s factory workforce.

What is the Production Linked Incentive Scheme(PLI)?

  • PLI Scheme: Production Linked Incentive initiated by Government of India.
  • Incentives for incremental sales from domestic manufacturing.
  • Aims to boost manufacturing, reduce imports.
  • Potential to enhance production, employment, and economic growth.
  • Rs 1.97 lakh crore allocated for 13 sectors in 2021.
  • Sectors include auto, chemicals, electronics, pharmaceuticals, textiles, etc.
  • Implementation ongoing by respective Ministries/Departments.
  • Expected to positively impact MSME ecosystem.

Measurement Issues with GDP:

  • Problems with GDP Measurement: The Indian economic community acknowledges significant issues with GDP measurement, including faulty deflators and outdated sectoral weights.
  • Lack of Publicity: Despite these issues, institutions like the IMF, World Bank, and ratings agencies have not highlighted them, affecting public perception.
  • Conflicting Data: Recent discrepancies between nominal and real GDP numbers indicate possible inaccuracies; nominal growth decelerated while real growth increased.
  • Inflation Confusion: The inconsistencies suggest implausible deflation, highlighting measurement problems.
  • Impact on Interpretation: These measurement issues are crucial for understanding the true state of India’s economy.
  • Faulty Deflators: GDP measurement in India is affected by the use of incorrect deflators, which distort the real economic picture.
  • Sectoral Weight Issues: Outdated sectoral weights fail to accurately reflect the current economic structure.
  • Informal Sector Measurement: The large informal sector is poorly measured, leading to significant gaps in economic data.
  • Nominal vs. Real GDP: The divergence between nominal and real GDP figures indicates underlying problems in economic measurement.
  • Inflation Metrics: The use of incorrect inflation metrics further complicates the accurate assessment of economic growth.

Unequal Distribution of Growth:

  • K-Shaped Growth: Some analysts suggest growth benefits have been unequally shared, favoring the wealthy over the poor.
  • Improved Living Standards: Surveys indicate that living standards for most Indians, including those at the bottom, have improved over the past decade.
  • Sectoral Imbalances: Growth has been unbalanced, with certain sectors like export-oriented services thriving while agriculture lags.
  • Export-Oriented Success: The global success of India’s services sector contrasts with the persistent challenges faced by the agricultural sector.
  • Government Policies: Policies have often favored high-skilled, export-oriented services over agriculture and manufacturing, exacerbating imbalances.
  • Inequality in Growth: Despite overall economic growth, the distribution of benefits has been unequal, leading to dissatisfaction among certain groups.
  • High-Skilled Sector Focus: Growth has primarily benefited high-skilled sectors, leaving low-skilled workers and agriculture behind.
  • Agricultural Sector Neglect: Policies have often turned against agriculture, hurting farmers’ incomes and contributing to electoral dissatisfaction.
  • Services Sector Boom: The booming export-oriented services sector has driven growth, but its benefits have not reached all demographics equally.
  • Construction and Employment: Growth in the services sector has spurred construction, benefiting some workers but not addressing broader employment needs.

Impact of Government Actions:

  • Informal Sector Devastation: Government actions such as demonetization, GST implementation, and pandemic lockdowns have severely impacted the informal sector.
  • Data Scarcity: Lack of reliable data on informal enterprises makes it difficult to quantify the full impact, but proxies suggest significant damage.
  • Manufacturing Sector Efforts: The Modi government’s efforts to boost manufacturing through the Production-Linked Incentives (PLI) scheme have seen limited success.
  • Protectionism Issues: Policies such as protectionism have counteracted efforts to promote manufacturing, limiting job opportunities.
  • Favoritism in Capitalism: Policies have favored big business houses, creating an unlevel playing field and discouraging overall investment in the industrial sector.

Reconciling Economic Growth and Voting Patterns:

  • Dynamic Growth Doubts: Growth may not have been as robust as official numbers suggest.
  • Uneven Growth Distribution: The benefits of growth have been unevenly distributed, impacting different sectors and demographics differently.
  • Ground-Level Reality: The negative experiences of those in agriculture, informal, and manufacturing sectors align with ground-level reporting.
  • Alternative Explanations: Without accepting issues of faulty measurement and skewed development models, the electoral outcome remains a significant puzzle.
  • James Carville’s Insight: The situation calls for a deeper understanding of the relationship between economic performance and electoral behavior.
  • Uneven Growth Benefits: The perceived unequal distribution of growth benefits has alienated large segments of the population.
  • Sectoral Imbalances: The significant disparity between the thriving services sector and struggling agricultural sector has political repercussions.
  • Economic Mismanagement: Mismanagement and poorly implemented policies have contributed to the economic woes of many voters.
  • Electoral Consequences: The electoral punishment of the government suggests a complex interplay between economic performance and public perception.
  • Growth vs. Perception: The official growth rates may not reflect the lived experiences of the majority, leading to voter dissatisfaction.

Challenges:

  • Demonetization Effects: The government’s demonetization policy severely impacted the informal economy, leading to job losses and reduced profitability.
  • GST Implementation Flaws: Flawed implementation of the Goods and Services Tax (GST) further hurt small businesses and the informal sector.
  • Pandemic Lockdowns: Drastic lockdown measures during the pandemic caused widespread economic disruption, particularly in the informal sector.
  • PLI Scheme: The Production-Linked Incentives (PLI) scheme aimed to boost manufacturing but has had limited impact due to other conflicting policies.
  • Favoritism and Protectionism: Policies favoring big businesses and protectionist measures have stifled competition and discouraged investment.

Way Forward:

  • Improve GDP Measurement: Address inaccuracies in GDP data to provide a clearer economic picture.
  • Balanced Growth Policies: Promote balanced growth across sectors, especially agriculture and manufacturing.
  • Support Informal Sector: Implement measures to revitalize the informal sector, considering its significant role in the economy.
  • Inclusive Economic Policies: Ensure policies benefit all demographics, particularly the lower-income groups.
  • Boost Manufacturing: Enhance manufacturing through targeted incentives and reducing protectionism.
  • Agricultural Reforms: Reform agricultural policies to improve farmers’ incomes and sector stability.
  • Transparent Governance: Increase transparency in government actions and policy impacts to build public trust.

Conclusion:

India’s electoral outcome underscores the complexity of voter behavior and the multifaceted nature of economic growth. Addressing measurement inaccuracies, ensuring balanced development, and fostering inclusivity are crucial for aligning economic success with public satisfaction and political stability.

Source:

https://indianexpress.com/article/opinion/columns/verdict-2024-economy-puzzle-if-growth-has-been-dynamic-why-have-voters-punished-government-9378852/

Mains Practice Question:

Analyze the recent electoral results in India where the ruling government faced backlash despite high economic growth. Discuss the potential reasons for this phenomenon and suggest measures to ensure that economic growth translates into electoral success.