Aam Aadmi Party: Is there an economic story in the plot?

Pluck and impetuosity are good servants in war, but bad masters - George Bernard Shaw.

The AAP's honeymoon appears to be over just as it has just taken command at Delhi. It is not about the potential internal rift or the contradictions involved in the swearing in ceremony. While the critiques of its governance so far can be taken with a pinch of salt, the broader issue that has come to the fore relates to its approach or lack of approach to economic policy. AAP came to power primarily on the plank of corruption and spoke a lot of the common man, which was effective as an ideology to get votes. But now that it is in power, and would certainly pitch for the Lok Sabha with a lot of encouragement, it would be necessary for the party to have a coherent economic policy. In fact, there needs to be a think tank that brings in the policy script. In the absence of a cogent framework and the continuance of it present approach, things do not look too cheerful for such a form of governance.



In India we have all kinds of party ideologies from the far left to right, and frankly there is nothing wrong in such beliefs. But it should be well thought of, transparent and adhered to so that all market players know what the government stands for. There are basically two issues which have come up since the AAP took command which shows that their approach has been amateurish. As a corollary, they need to revisit the same issues as they set precedents for the future not just for their own rule but also for other governments. These relate to giving cheap power and water and the decision to keep FDI out of retail in Delhi.

Giving cheap or free power to the citizens is an unwise move considering that we are tinkering with the market mechanism. The problem is two-fold. The first is that we are completely distorting the production process as well as cost-price matrix in this segment. The power sector restructuring which is being attempted is to rein in these losses of distribution companies and the amount involved could be anywhere between Rs 2.4-3 lakh crore across states. By forcing them to sell at a lower rate, we not only exacerbate their commercial plight but also jeopardize the efforts to revive the power sector.

This leads to the second prong of this issue- competitive reduction in these popular rates. The AAP's strategy of promising lower rates worked in Delhi and therefore other states too are in the mood to follow; and Rajasthan, Maharashtra, Haryana etc. would not like to be left behind. The logic is simple. If promising lower than cost electricity helps to win votes, why allow only AAP to draw such benefits. This will help during the general Elections. This is a natural corollary.

There is a counter argument to this question that if the UPA also has done similar things with the FSB (Food Security Bill) and NREGA (rural employment guarantee) what is wrong with this move? The ultimate justification for taking such absurd steps is that others have done it - hence every such action becomes a precedent for a similar reaction elsewhere.

But there is a difference here. When we give subsidies or cash payments to farmers to do futile jobs like digging for the sake of digging to be paid a wage, these are cash payments which do not affect the market mechanics. True, the provision of a minimum support price to farmers and open ended procurement does distort the price of wheat and rice, but still given the variety differences dealt with, it is not as serious as the power issue which is a commercial venture.

Therefore, it would have been more sensible for the AAP to have simply paid a fixed sum to all the common people that voted for them for this reward. But for this they need to have a handle on the Budget and the problem becomes complicated because they need to meet the FRBM (Fiscal Responsibility and Budget Management) rules. Giving money through the budget has to be matched by revenue, especially taxes, which they cannot raise once they are committed to the common man. It is much simpler to throw the onus on the discoms. Have they considered these implications?

Quite clearly such moves should not be encouraged or else we go back to the pre-reforms era where all prices were regulated by the government. Using this as a precedent, AAP or any other party could ask banks to give cheap loans to the common man for buying a cycle or for education or any such purpose. Even interest rate subventions are supposedly compensated by the government through the budget (though banks say that it takes just too long to get this from the government). This would be catastrophic for the relevant state economy.

The issue on FDI is again reminiscent of the dangers of new governments going back on their commitments like the retrospective taxation case. If an earlier government has agreed to have FDI in retail, then changing the policy would once again send the signal to the world that India cannot be trusted and that any legislation made is susceptible to change when the government changes. This again would be disastrous for the country as the logic of saying that the common man would lose his job holds for any sector. Using this logic the AAP can stop firms from layoffs or stop the process of land reforms on grounds that the common man gets affected. Or on the high moral grounds, existing contracts can be cancelled saying they were improper. In fact, given the scare of telecom towers, there could be a ban on all such structures in Delhi on grounds of them affecting the common man. Where can we draw a line?

All this means that the AAP should seriously reconsider their economic approach and probably induct the right people to formulate policies on various issues rather than have policies based on sentiment. Every such disastrous step has the power to come back to haunt the present or, probably worse, the future governments.

To quote Shakespeare, 'We still have judgment here, that we but teach Bloody instructions, which, being taught, return to plague the inventor.'

Updated Date: Dec 21, 2014 02:56 AM

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