Why does the Congress hate the Middle-Class?
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Sabke sab saale chor hain’ remarked a friend. We both were having a conversation on politics at the peak of Anna Hazare movement and I was unsuccessfully trying to convince him that being apolitical is not an option.

Is there really any difference between the two parties – the Congress and the BJP? What are the issues that each party stands for respectively? Why does the Congress hate the middle-class?

Congress kaa haath garib ke saath

This used to be the slogan of the Congress until recently when it was slightly modified to woo the middle-class using Manmohan’s appeal:

Congress kaa haath, aam aadmi ke saath’

While the slogan may have changed, going by the priorities and policies (NREGA, Food Security, etc) it is quite clear where its heart lies.

This is a three part series of articles which will try to examine the above questions and will try to highlight the major differences between the two major political parties of India. The objective is to attempt an understanding as to what India can expect if there is a UPA 3 or an NDA 2 in 2014.Every effort has been made to make the language and content devoid of any jargons.  This is primarily going to cover economics and governance policies.

Part 1: Economics

“It’s the economy, stupid” – widely used phrase from Bill Clinton’s successful presidential campaign in 1992

So how is BJP’s economics different from the Congress? A simple answer to that question would be – it is directly opposite, one stands for socialism while other stands for capitalism, one stands for short-term vote bank politics while stands for long term inclusive development. Here is how:

1. Outlays vs Outcomes

The following story appeared in a Hindi newspaper some two-three years ago.

  Naxal’s ousted from a village without firing a shot

The story was about a village in Andhra Pradesh affected by Naxals. The DGP of the area managed to convince the local MP for constructing a road to the village connecting it to the neighboring areas. The village was situated close to AP –Maharashtra border. The road meant that goods could come in and out of the village. In a matter of just two years, the village economy boomed and Naxals vanished.

While the lessons from the above story may not be applicable as it is everywhere, but one thing is quite clear, infrastructure is an absolute must. If the Govt has to bring development, whether it is food, education or health, it cannot bring it without roads. Just like roads, in the modern era electricity and broadband are equally important because they can facilitate in delivering development much more efficiently and help in plugging leakages.

So what should be our priorities?

The two main national parties have opposite views regarding this. In its six years at the Centre, the Vajpayee Government paid special attention to the infrastructure development. Golden Quadrilateral, North-South and East-West Highways were conceived and executed at lightening pace of 14 kms a day. Compare that to less than 6 kms a day during the UPA.

Pradhan Mantri Gram Sadak Yojna launched in 2000 was another ambitious scheme aimed at improving the rural road infrastructure. Similarly NDA introduced reforms in the Telecom (1999) and Power (2003) sector reforms.

Congress on the other hand believes in launching pro-poor policies and spending the money directly for the poor like NREGA and the upcoming Food Security Act. There are obvious differences between the two approaches. BJP’s approach is more financially viable but brings results over the longer term while Congress’s approach brings results in the short term but hurts the country in the longer term.

Another key difference between the two parties is that BJP is much more outcome oriented party while Congress concentrates more inputs/outlays. For e.g., the Pradhan Mantri  Gram Sadak Yojna had an elaborate arrangement of online monitoring of the on-going projects. There was also focus on training of contractors and engineers.

On the other hand, there are no such provisions in NREGA. The focus is more on the giving employment to the poor and hence the act mandates no use of machinery. As a result while the poor may have benefited to an extent, the assets however created by NREGA labor have hardly lasted more than a year.

Moreover there are humongous leakages in the system and the plan to plug them using UID came only as an afterthought in 2009 when the act came into being in 2005 and UID is not expected to make any difference for another 2-3 years. Despite this the UPA Govt is going ahead with its Food Security Act expect to cost 1 lakh crore a year (NREGA will cost 40,000 crores for 2011).

So come 2014, an NDA-II is likely to continue investing in infrastructure while the UPA-III is likely to launch more pro-poor schemes.

2. Centralization / Central Planning vs De-centralization

Centralization, unless greatly circumscribed, must lead to inefficiency. This was sure to occur even in homogeneous states, and above all in a country like India where there are to be found more diversities of race, language, religion, customs and economic conditions.

In such circumstances there must come a point at which the higher authority must be less competent than the lower, because it cannot by any possibility posses the requisite knowledge of all local conditions.

BR Ambedkar in his PhD thesis (Source)

Congress is centrally run party. Its chief-ministers are decided at 10, Janpath. On the contrary, BJP is much more democratic party. The policies of the two parties reflect their party structures.

Central Planning is a classic feature of socialism. And there isn’t even a single socialist country (non-oil exporting) that is developed. Socialism thus has an inherent design flaw.

In India, most taxes are collected by the Centre. Planning Commission makes policies for the entire country, irrespective of the local needs. Of course, it takes inputs from all states, but it is impossible to create policies that will work in every part of the country.

How Central Planning hurts: RTE – An illustration

Right to education (2010) was launched by the Congress led UPA in 2010. It is a centrally sponsored scheme with an aim to provide education to every child in the country.

The funding pattern of the scheme was 65:35, which meant 65% would be contributed by the centre and remaining by the state.

What is the basis of this funding across the country?

  • How can Bihar and TN have the same funding pattern
  • TN is one of the most urbanized, while Bihar is one of the least
  • Tax to GDP ratio in Bihar is very low as economy is unorganized and essentially agrarian. Agriculture is not taxed in India.
  • Demographics of states is substantially different – In South India, population growth rates have slowed, hence fewer children. This means these states can afford to spend but what about states like Bihar and UP.
  • Usually its poorest states who are unable to make their contribution and hence the amount gets unspent.

Can the centre really plan for states without being aware of ground realities?

Nitish Kumar recently asked for stopping of centrally sponsored schemes.

You (Centre) develop policy and broad roadmap. Leave the decision on schemes for states. Stop Centrally-sponsored schemes. You give us task…you decide a target and help and monitor us but why going into minute details?

A poor state like Bihar with low tax to GDP ratio has little left to spend. A large portion of its budget is eaten away by centrally sponsored schemes leaving little for the state Govt to spend on its own.

BJP versus Congress

Dynasty demands centralization (concentration of power). Centralization and economic development are mutually exclusive’      – @rmantri (on Twitter)

Let us look at some of the Central policies launched by BJP led NDA.

  • Pradhan Mantri Gram Sadak Yojna  (Source1, Source2)
    • 100 % sponsored by Central Govt
    • Envisaged providing all-weather roads to every habitation with 500 or more population across the country. For hill districts, this parameter was 250 or more.
    • Funding: Union Cabinet decided that 50% of the Diesel Cess would be set apart for Rural Roads and made available to the Ministry of Rural Development.
    • De-centralized implementation:
    • Works to be executed by the State Governments.
    • Project proposals are to be based on the District Rural Roads Plan
    • District Programme Implementation Units (DPIUs) to be created for implementing projects
    • District Monitoring and Vigilance Committee
    • On-line Management & Monitoring System
    • Elaborate strategy for training of Engineers and contractors
  • Sarv Shikha Abhiyan (Source)
    • 85% sponsored by Central Govt and 90% for North-East states as per IXth five year plan. Remaining amount to be funded by the states.
    • If was reduced to 75% as per Xth plan
    • De-centralized implementation:
    • Only a broad framework, but no guidelines
    • To allow states to formulate context specific guidelines within the overall framework
    • To encourage districts in States and UTs to reflect local specificity
    • To promote local need based planning based on broad National Policy norms
    • To make planning a realistic exercise by adopting broad national norms.
    • Achievements/ Drawbacks
    • 98% of the habitations have a school within 1km (Source)
    • Quality of Education however remains an issue

Compare this with Congress policies:

  • Sarv Shikha Abhiyan
    • Started by NDA but was modified by Congress
    • As part of XIth plan, Central contribution reduced to 65% for first two years and 50% to the remaining years
    • Reducing centre’s contribution has meant states particularly poorer states haven’t been able to contribute. The money was left unspent.
    • It has been now merged with Right to Education since 1st April, 2011
  • Pradhan Mantri Gram Sadak Yojna now part of Bharat Nirman (Source)
    • Re-packaged by the UPA regime with special focus on covering habitations with 1,000 or more population
    • It is stuck — because of a crippling shortage of funds.
    • The agency implementing PMGSY “put on hold” clearance to any new projects. There has been no improvement after this year’s budget.
    • The only exception made is for roads in Naxal-affected areas, in border regions and some leftover projects.
    • As opposed to this, under NDA 50% of diesel cess was set apart for rural roads.
  • Right to Education (Source)
    • Contribution of Centre is 65%, rest to be borne by states. This funding pattern is a major dampener.
    • Excessively input focused, tries to define everything:
    • Teacher salaries have been fixed at Rs.20000 per month rather than payment of local wage.
    • It defines what a school constitutes which includes that it must have a playground.
    • Thus it also penalizes private schools for lacking the infrastructural facilities. These schools, which are extremely cost efficient, operate mostly in rural areas or urban slums
    • Officials have said that implementation of the RTE will face hurdles as there is a “scarcity of land for construction of new school buildings”
    • Mandates providing employment within 15 days, else an allowance is to be paid.
    • No machinery or contractor to be used.
    • Centre to pay for 100% of labor charges and 75% of material charges
    • State to pay for unemployment allowance, 25% of material cost and administrative cost
    • Clearly, the act provides little long term benefits for the states.
    • Delaying funds particularly to the non-UPA states has resulted in states not utilizing their quota.
  • Food Security Act (Source)
    • Though the final bill is not out, a draft is out.
    • The draft does not talk about its funding pattern but a couple of provisions caught attention.
    • The Central Government may, from time to time, give such directions, as it may consider necessary, to the State Governments for the effective implementation of the provisions of this Act and the State Governments shall comply with such directions.
    • Upto 75% of rural households and 50% of the urban households will be covered.
    • When the Govt is ready to give dirt cheap food to such a large % of population, the results will be catastrophic. It will reduce people’s urge to work and thus push the labor costs further
  • GST (Source)
    • This is an important and much needed reform.
    • However, some provisions are against the federal structure.
    • “Though the proposed Article 279A contemplates the setting up of the GST Council as an advisory authority which will take decisions through consensus, the GST Dispute Settlement Authority proposed under Article 279B will have an overriding authority on the states, as its decisions are binding on the states. This means the states virtually lose their authority to fix rates, which is unconstitutional and not acceptable in a federal set up” (Source)

So come 2014, an NDA-II is likely to focus on decentralization while UPA-III is likely to launch more centralized schemes and push India towards Central Planning, classic feature of socialism.

3.Populism or Fiscal extravagance:

India spends 8000 crores daily only on paying interests on the loans it has taken

In simple terms, fiscal deficit means spending more than you earn. Even a housewife managing her home expenses knows that spending more than you can afford is a recipe for disaster. When a Government spends more than it earns through taxes, it needs to arrange this money through other sources. This can be done through two ways – by printing money or domestic borrowing.

Printing money: First way for the Govt to finance its expenses is to simply print extra money. How does printing of more money affect us?

‘What happens if all of sudden a huge oil reserve are found in India? Price of oil, i.e. relative value of existing is oil reserves are likely to come down.’

Likewise, when the Govt prints more rupees than the size of the economy, the value of rupee will come down. Value of rupee is nothing but the amount of goods it can buy. If the value of rupee comes down, it means it can purchase lesser goods. In simple terms, printing of more money leads to inflation.

This is precisely what is happening at the moment, high fiscal deficit is fueling inflation.

Domestic borrowing: The second way of financing is borrowing money. This money is borrowed through State owned banks like SBI.

So how does a Government loans affect us?

‘What happens when the demand of oil increases but supply remains the same? Its price increases

  • Banks have limited money to lend. If Government’s loan increases, it means banks have less money to lend, which means that price of loan increases. Price of loan is nothing but interest rate.
  • When the interest rates increase, it means ordinary people will have to pay higher EMI for their homes. Hence, less people can afford a home.
  • Interest rate increases, means businessmen and entrepreneurs find it difficult to raise money. It means private investment, new job creation slows down. It means despite the availability of cheap labor, Indian businesses cannot raise money to invest and prefer to invest abroad.
  • Among the worst hit is the infrastructure sector (roads, highways, power, etc) because of long gestation period (long time to build, long time to recover money). All new infrastructure projects get severely hit.
  • Small businesses are also hit hard because they don’t have deep pockets o survive the high interest period. It must be noted that small business are usually more labor intensive. Hence a slowdown in this sector also has tremendous effect on job creation.
  • Our country tends to become more and more Government owned; a shift towards socialism.

This is again precisely what is happening at the moment, high interest rates have hugely impacted growth and investments by Indian businesses have completely slowed.

Does that mean all Government loans are bad?

The answer is no. It depends. Almost every middle-class Indian who buys a home, takes a loans. But every sane person will tell you to keep your credit card bill in check. Using credit card to buy stuff may give short term pleasure, but you are spending your future income.

So the key difference is that home loan is an investment for the future while credit card is just short extravagance. When the Government is taking loans, is it using it for short term policies to get votes such as NREGA or Food security or is it investing for long term gains. Gujarat’s debts (loans) have also increased quite a bit in the recent times, but all of it is actually capital investment.

Are there any examples of Government spending which results in long term gains?

Yes. Mid-day meal scheme in schools, first started in South India is one such scheme which resulted in huge jump in enrollment as well as retention rates in schools. Another example would be Nitish Kumar’s free bicycle scheme for all students.

Congress’s core economic philosophy

Congress kaa haath garib ke saath

This used to be the slogan of the Congress until recently when it was slightly modified to woo the middle-class using Manmohan’s appeal,

Congress kaa haath, aam aadmi ke saath’

While the slogan may have changed, going by the priorities and policies (NREGA, Food Security, eyc) it is quite clear that it still talks only of the poor and has no place for the middle-class. The core philosophy of Congress remains socialism.

Even the 1991 Congress manifesto was full of socialism. However, due to unfortunate events Narasimha Rao became head of the party and the rest is history. It is no surprise that the party does not acknowledge his contributions. Instead the pliable Manmohan is given credit.

Congress needs the poor to survive. Without the poor, the existence of the Congress is meaningless. Therefore the party would try to do everything to keep them poor and to stop urbanization.  It would continue to launch pro-poor schemes even at the tremendous cost the long term prospects of the country. The party has been launching such schemes since the 50’s but has hardly made an effort to plug the enormous leakages that happen.

NREGA – a scheme to slow urbanization

Some of the provisions of NREGA are:

  • It mandates to provide work within 15 days,
  • No machinery or contractors can be used

Some obvious questions that arise:

  • What sort of work can such a scheme provide without any use of machinery?
  • Can any long term project planned at such a short notice of 15 days?

All assets created under NREGA are known not to last beyond one year. NREGA has created an artificial labor shortage and has artificially pushed the labor costs in a country that should otherwise enjoy the benefits of cheap labor.

Even the agriculture ministry recently requested to discontinue NREGA during the harvest seasons because agriculture is getting severely impacted due to labor shortage. NREGA is a classic example of fiscal extravagance, a single scheme that is worth Rs 40000 crores per year (this does not include expenditure by states) and it is essentially throwing money down the drain.

India’s economic mess

A 2005 article by International Herald Tribune stated that subsidies amounted to 14% of GDP. This figure today will be much higher considering the phenomenal rise in oil prices, 6th pay commission implementation, NREGA costs, etc. This figure would be closer to 18-19%. What’s the result:

  • India spends less than 3% on education
  • Spends less than 3% on health
  • Spends Less than 2% on defense
  • Subsidized fertilizer is smuggled out to countries like Bangladesh
  • Subsidized kerosene is mixed with petrol
  • NREGA funds end up in the hands of the Maoists
  • And many more, the list is endless.

In simple terms, India hardly spends anything for its future.

BJP’s economics

BJP is a centre-right party that believes in free market economics, liberalization and fiscal prudence (spending within its means).

Through the FRMB Act, passed during the NDA administration, it was mandated  that GOI reduce fiscal deficit by 0.5% every year.The idea behind this act was to force the Government to not launch any extravagant schemes without any long term benefit. Only the existing schemes would be continued. It was hoped that as economy was growing at that time, the deficit could be reduced completely in a few years. All of this has gone down the drains.

This also meant that the Govt would be forced implement reform and raise money through other sources like disinvesting Govt owned enterprises.Unfortunately, it has not been followed by Cong which has launched schemes like NREGA and bankrupted India. Additionally, oil prices have increased significantly during the last seven years, India’s has been bleeding enormously.The Government of India pays Rs 8000 crores (daily) as interest (for its loans). That amounts to Rs 29 lacs, 92 thousand crores every year. Or to put this figure into perspective, this figure is 16.5 times the money lost in the 2G scam. So basically we having SIXTEEN 2G scams, and that’s EVERY YEAR. Such an enormous amount is being wasted instead of being invested in creating long-term assets.

A UPA-III is likely to continue with more extravagance while the NDA-II is likely to continue its longer focus.