Budget deliberations in the world’s largest democracy are a contentious affair. With an increasing fiscal deficit, stubbornly high inflation, and growth at its slowest since 2008, there is broad displeasure with New Delhi’s 2012-13 Budget, announced last March.
At the centre of the criticism are the government’s extensive subsidies and poverty alleviation programmes, lambasted as populist and ill-executed. In the Eleventh Five-Year Plan, the government allocated over Rs. 1.8 lakh crores to 13 social programmes, and it will continue to spend Rs. 40,000 crores annually on fuel subsidies with little to show for it. When conjoined with inefficiency and corruption, the programmes have scarcely managed to reduce poverty by 1% a year. Agricultural growth remains weak at 2.5%, while subsidies mostly support a powerful minority of Indian farmers—none of whom pay taxes.
Most unfortunately, even as the number of Indian billionaires identified by Forbes magazine has reached 48, India remains home to the largest number of the world’s poor and hungry.
A similar mix of fruitless populism and macroeconomic imbalances has crippled many countries in the past, most notably in Latin America. Now it seems India is treading down the path that once led to Latin America’s economic collapse.
Latin America is a connoisseur of populist politics. Populism hit its peak during the 1920s through to the 1970s, when the working poor united behind icons like Brazil’s Getúlio Vargas and Argentina’s Juan Perón over their dissatisfaction with industrialisation. Populist governments granted immense benefits to the poor and select special interests—often paying for this with inflationary financing. [i]
By the 1980s, uncontrolled public spending resulted in excessive fiscal deficits, unsustainable public debt and intractable inflation. Latin America’s ‘Lost Decade’ followed. Growth, at 5.6% in the 1970s, shrunk to 1.3% and stagnated for another decade. By the 1990s, inflation had reached 1,000% in countries like Brazil, and the poor suffered exponentially. Large economies including Mexico, Argentina and Brazil languished, and up to half of Latin Americans slid into poverty. [ii]
India could be tempting its own lost decade with populist profligacy—and it is jeopardising its long-term growth trajectory. As Finance Minister, Pranab Mukherjee had set a goal of reducing the fiscal deficit to 5.1% of GDP in 2012-13, from 5.9% in 2011, but his last budget offered few sustainable means to accomplish this. Meanwhile, the largest poverty alleviation program, the proposed Food Security Bill, will add over Rs.1 lakh crores to expenditures with no plan for an equivalent increase in revenue.
It is not certain that the Public Distribution System, the engine to execute the Bill, will be able to efficiently deliver food to needy families; even less so, any other new vehicles of distribution. Although the Food Security Act is an important and necessary step to ensuring this basic social protection, it remains unclear whether without strong leadership and management this or other social programmes will reduce poverty and hunger.
So what can India do? Populist or not, an emphasis on inclusive development is essential. Perhaps the path that Latin America pursued to lead itself out of populism and into policies that are now pragmatic, but also pro-poor, can be an example. The key to its success has been responsive and responsible leadership. In the last decade a new cadre of leaders has risen in Latin America, advocating economic pragmatism alongside progressive social agendas.
The most famous of these leaders are former President Luiz Inácio Lula da Silva of the Workers Party of Brazil and his successor, Dilma Rousseff. There is also Chile’s Ricardo Lagos and Michelle Bachelet, José Mujica of Uruguay, and Peru’s Ollanta Umala, among others. Their blend of redistributive social policies combined with a more disciplined, market-friendly economic approach has given birth to a New Populist Consensus for Latin America.
Latin American governments increased social spending from 12% of GDP in 1990 to 18% in 2008 and introduced new social programs, including direct cash transfers, which have been adopted in 17 countries in the region.
These programmes have been executed while keeping inflation at bay and while maintaining economic stability. Chile, for example, implemented stronger banking regulations and financial safeguards, plus a counter-cyclical savings plan after the crisis in the 1980s. In 2009, it was invited to be part of the OECD, a group comprising the world’s economically developed countries. Similarly, aided by improved terms of trade, many Latin American countries have reduced public debt and maintained surpluses for much of the past decade. The region has experienced healthier and higher growth rates and historic rates of poverty reduction.
However, there are two types of populism at work in the region. As Mexico’s former Secretary of Foreign Affairs Jorge Castañeda points out in Latin America’s Left Turn, one is mature and pragmatic, representing a real break from the past. The other is rather repressive, nationalist and amnesic about the pitfalls of unbridled populism. Relying on high oil revenues and high short-term prices of raw materials to finance steep expenditures, Venezuela, Ecuador and Bolivia are examples of this second type of populism.
What is striking is that although both have increased social spending, the pragmatic left has enacted more redistributive and transparent social policies. Brazil’s famous conditional cash transfer programme, Bolsa Família, is a powerful example. It has helped Brazil achieve the U.N.’s Millennium Development Goal of reducing extreme poverty and hunger by half and at a relatively low fiscal cost—about 0.5% of GDP. This is evidence of a well-managed social policy.
India can follow a similar pragmatic path if its leadership is prepared to demand results-driven social spending. A solid, technical framework needs to be in place to ensure the efficiency and sustainability of programmes before they are implemented or expanded. When Brazilian President Lula came to power in 2003, he expanded cash transfers nationally, but soon realised that an emboldened approach was not enough to catalyse concrete improvements. His government then simplified the programme. It merged overlapping schemes, set a single registry to identify beneficiaries, and created rules and incentives to promote efficient service delivery. [iii]
In contrast, India’s Food Security Bill has confusing cut-offs for poverty levels, lacks reach, and will depend on an already weak distribution system that lacks accountability. The risk of failure runs high. It would be better to simplify the Bill before adopting an inflexible framework into law.
Populism is a term often used pejoratively. But modern Latin America illustrates that it can be a positive phenomenon if channelled to produce tangible and sustainable results. When an economy shows signs of weakness, criticism of populist policies becomes most damning. Yet Latin America has so far shown that prudent economic and progressive social policies are not mutually exclusive.
India will do well to bring the experience of its distant peers closer to home. After all, when populist measures stop reaching the poor, they soon also cease to yield political dividends.
Estefanía Marchán was a Researcher, Latin-America Studies, at Gateway House: Indian Council on Global Relations, Mumbai. She is currently studying International Relations at the Fletcher School of Law and Diplomacy at Tufts University, U.S. A.
This article is part of Gateway House’s Democracy in Motion report.
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[i] ‘The return of populism.’ 12 April 2006. The Economist . At: http://www.economist.com/node/6802448
[ii] Moreno, Luis Alberto. ‘La década de América Latina y el Caribe: una oportunidad real.’ Inter-American Development Bank (May 2011)
[iii] Marchán, Estefanía. ‘India-Brazil: New models for cooperation.’ Gateway House: Indian Council on Global Relations (February 2012)