The roots of populism

The Budget for 2008-09 has been severely criticised for its populism. Economists are worried that it will have a hugely adversely impact on government finances and banks. Other are worried that the loan waiver of a whopping Rs 60,000 crore will encourage willful default by borrowers. The argument here is the same as was used for the voluntary disclosure of incomes schemes. A third set of criticisms is about the complete absence of even an intention to reform. And so on. On the other hand, there appears to be a huge degree of approval from the people themselves. When all the layers of argument are peeled away, and the heat and dust settles, we get to the main issue: if populism is so popular and since politicians seek popularity, what are the limits to such populism? We have already seen a whole raft of populist schemes over the years, starting with subsidised rice and moving on to free saris, free electricity and recently, even free colour TV sets!

The question of populism has to be viewed beyond its usual electoral-cum-popularity context, in a different way. Basically, the question that needs to be examined is whether, in democracies, populism is a consequence not just of electoral jostling but also, more significantly, of phases of high economic growth. Could it be that the latter, because it necessarily involves a worsening of income distribution, invariably leads to populism? The political problem that arises from increasing income inequality can only be addressed by politicians by direct methods. They think that this will help them win elections and so they indulge in it with alacrity. This convergence of economic and political interests gets heightened either towards the end of a boom period and or at the approach of an election. When both occur together, the effect is lethal.

Both the Indian and the international experiences, at least in properly functioning democracies, are instructive. Compared to the previous hundred years, when the Indian economy grew by 1 per cent per year, the 1950s and half of the '60s were periods of relatively high growth "" an annual average rate of 4 per cent. The resulting worsening of the Gini coefficient (the usual indicator used to measure inequality) is what led to the famous attack by B S Minhas on the government, that it was ignoring the poor. The politicians had already been sensing this and this is what led to a decade of populism in the 1970s. The first eight years of the 1980s again witnessed a period of higher growth and this led to the populism of the late '80s. After the reforms initiated in 1991, and especially since 2003, the Indian economy has performed remarkably well "" with the expected consequences for income distribution, which (the evidence before our eyes tells us) has worsened very significantly even though it does not show up yet in the formal numbers. It should come as no surprise, therefore, that the politicians have once again opted for populism.

Another name for the same thing is inclusive growth, because it necessarily involves a trade-off between efficiency and popularity. The same phenomenon can be seen in the Western democracies as well, albeit in a different form. They have evolved better institutional structures for tackling the needs of the less well off. In other words, there is a cause-and-effect relationship between high growth and greater inequalities on the one hand, and enhanced populism on the other. Viewed in this way, the dread question is not what next steps the populist impulse will produce but whether continued rapid economic growth can be accompanied by some form of social security that covers a large number of people. That is the only thing that will stop populism in its tracks.