Why Are Coalition Governments Better at Growing India's Economy?

It is a well-accepted concept in finance that an optimum level of debt in firms improves governance and firm value. It might just be similar for coalition effects on governments.

On Monday, exit polls pointing towards a confident majority for the BJP were enough to send the stock markets soaring.

Conventional wisdom says that a single-party government with a strong mandate will have the ability to place economics above politics, and pursue the reform agenda that India needs to boost growth. Coalitions are viewed unfavourably – among pundits, financial analysts and armchair economists – as they might let political considerations trump sound economics.

Perhaps this is a reaction to the political instability of the 1990s and its frequent changes in governments. In that period, India was led by seven different prime ministers in 10 years. Yet between 1999 and 2014, India had 15 years of stable, coalition rule anchored by a major party without a strong mandate.

Comparing the economic performance of those coalition governments with recent single-party governments, a different picture starts to emerge. Average GDP growth rates under single-party majorities (including this government’s growth rates, which are highly contested) have not outperformed coalitions. In fact, they are marginally lower than the average growth rates under ruling coalitions. This holds true even when one controls for the general macroeconomic environment.

What might explain this?

First, there is the paradox of representation. In our first-past-the-post electoral system, a large majority in Parliament might actually be a reflection of the viewpoint of only a minority of the population.

Noted political scientist Samuel Finer observed that

“single-party governments, even if they enjoy majority seat support in parliament, are frequently based on only a minority of popular votes and are strongly socially biased. In other words, they are more prone to be captured by minority interest groups and to implement economic and social policies not encompassing broad social preferences”.

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In other words, a strong mandate can coexist with divisive and inefficient policies.

The 16th Lok Sabha is a case in point. While it represented the ruling party overwhelmingly, it was less representative of the country on important demographic aspects such as religious, diversity and age.

Muslims, who make up 14% of the population were represented with just 4 % of the seats in the Lok Sabha (22 seats in 2014, which is 27% less than as in the 15th Lok Sabha). Interestingly, there were none from the state of Uttar Pradesh.

Fewer young people were represented in this Lok Sabha with a greater proportion (47%) of the members being older than 55 years of age (which is up from 43% in the previous Lok Sabha).

An area in which this Lok Sabha was more representative of the country than its predecessor, is in the increase of the proportion of MPs who have not matriculated. Whether this is a good thing for our democracy is an altogether different question.

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Second, limiting the worst impulses of a ruling regime by separating its powers has been a key feature of democracies. Presidential systems of government, as in the US, achieve this by following a “trias politica” philosophy, of separation of powers between the branches of government. This necessitates negotiation and compromise between the branches of government before a law or a policy is made.

Coalitions step in where legislatures fall short

In the Indian parliamentary democracy system, especially since the passing of the anti-defection law, the legislature has limited means to act as an effective check to executive power.

Coalitions, however, help to reinvigorate the legislature and help it act as a check on executive power. Moreover, it creates the risk of real political cost as coalition partners can pull out support and cause the government to fall.

Writing for Mint, Vishnu Padmanabhan pointed out that:

Taken together, the UPA and NDA are associated with the fastest growth in Indian history (growing at a CAGR of 6.4% across their tenures). Conversely, in the first five Lok Sabhas where Congress dominated (almost 70% of seats), growth was significantly lower (CAGR of 3.6%). More than just growth, there also seems to be greater economic stability in coalition times. The standard deviation of growth (a measure of volatility) between 1989 and 2014 has been lower than earlier.

Single-party majorities face no such compulsions to negotiate and build policies, or the prospect of significant political risk if policy measures backfire. This may explain the Indian experience. Historically, single-party governments have had a greater proclivity to expend political capital on policy measures that only hurt the economy.

Prime Minister Narendra Modi with BJP and Shiv Sena leaders in Wardha. Credit: PTI

The demonetisation debacle is a prime example. The Modi government, armed with arguably a once-in-a-generation single-party mandate, embarked on a policy that virtually no credible macroeconomist would have supported. In a coalition government, more rigour would have been applied to the policy to ensure alliance partners’ support before implementation.

Moreover, the government would have faced real political risk in the aftermath. Coalition partners might well have buckled under public pressure and withdrawn support.

Similarly, the previous major single-party government, the 1984-89 Rajiv Gandhi government, is often blamed for being the root cause of the 1991 economic crisis that India faced. This period witnessed a significant increase in the fiscal and current account deficit.

Apart from economic policy, even on the foreign policy and on the domestic front, this government exhibited much hubris that would have been unlikely in a coalition. India, for the first time in the history of its foreign policy, engaged in military adventurism outside its borders and engaged a policy of appeasement of religious pressure groups that created significant polarisation on the domestic front.

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Hence, on account of better performance on objective indicators, better representation of the population, and lower proclivity to embark on destructive policies, the Indian experience suggests that coalitions are not necessarily worse than single-party majorities. They may even be better.

Financial analysts and pundits in the business world might see an analogy in a well-accepted concept in finance – an optimum level of debt in firms improves governance and firm value. The idea is that creditors, who have different interests from shareholders, discipline risk-taking by management. It might just be that an optimum level of coalition partners have a similar disciplining effect on governments.

Joseph Sebastian is an entrepreneur and a former-banker living in Bangalore. He is presently in Washington DC as part of the US State Department’s professional fellows programme on public policy and governance.