Looking back at India’s economic history since 1991, it is evident that some of the most audacious and visionary changes implemented by coalition governments set the groundwork for the country’s comeback.
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For the first time in history, the NDA has won a third consecutive term at the centre, although the BJP has failed to secure a majority of 272. That suggests that a coalition government in the truest meaning of the phrase will exist.
The one feature of the last two Lok Sabhas that set them apart in terms of economic governance was that, for the first time since the commencement of economic reforms, a single party, the Bharatiya Janata Party (BJP), was granted a majority mandate. This was expected to positively impact India’s economic reform trajectory.
Ever since India was compelled to abandon the planned economy model in 1991 and open its economy, all of its administrations have been coalitions in which even the leading party has deviated far from the 272 per cent majority mark. According to former Deputy Chairman of the Planning Commission Montek Singh Ahluwalia, India has always had “a strong consensus for weak reforms” because of the visible weakness of the governing party, be it the Congress, BJP, or the so-called third front.
Put differently, the ruling coalition’s parties diverged when it came to determining the precise parameters of economic changes, even if they all agreed that they were necessary.
A Review of Past Coalition Governments
The most notable example is the plethora of changes implemented by the mostly minority government led by P V Narasimha Rao. It abolished the license-permit raj, discarding centralised planning and opening up the Indian economy to global integration. Additionally, the nation joined the World Trade Organisation. It lowered tax rates on personal income tax, corporate taxes, and customs duties and showed confidence in Indian taxpayers.
India developed the Fiscal Responsibility & Budget Management (FRBM) law for fiscal rectitude and limited the government’s capacity to borrow within prudential limitations under the Atal Bihari Vajpayee-led National Democratic Alliance (NDA) government. Through the PM Gramme Sadak Yojana, the Vajpayee-led coalition concentrated on improving rural infrastructure and connectivity while pushing for the disinvestment of loss-making PSUs. The Information Technology Act, which was introduced by the first NDA in 2000, set the groundwork for India’s current e-commerce behemoth status.
Many are reminded of coalition governments before 2014, which were infamous for their corruption, inflation, and lack of progress on policy. Subsequently, Prime Minister Manmohan Singh stated that his friends were posing a challenge to his ability to lead the administration. However, the coalition administration of Atal Bihari Vajpayee before 2004 is renowned for taking audacious measures like disinvestment.
Will the allies who want to sabotage Modi’s ambitious reform plan yield pressure from the Modi government, which has employed forceful policy intervention as a vehicle for economic growth? Will a coalition government’s internal tugs and pushes cause policy paralysis?
What is Policy Paralysis?
One of its most obvious aftereffects—which was also the most difficult to quantify—was the pervasive sense of uncertainty in the economy, which the Indians have nicknamed “policy paralysis.” India’s business climate was severely damaged by this uncertainty, which also prevented investment completely and resulted in the country’s poorest growth performance in 25 years. The top priority for the incoming administration ought to be relieving this feeling of uncertainty.
According to Carnegie, India’s policy gridlock has many underlying causes. The main actors were split leadership in Congress, investment and tax policy blunders, and corruption scandals. The state-private capital relationship broke down and was difficult to mend, particularly when India’s democratic safety nets—the judiciary, the press, and civil society—began to function.
