Whoever wins the next polls, there are only hard choices left for the economy

The coming general election in April-May will be a good one to lose. Whoever wins will struggle to hold on to power; whoever loses will get an inside edge at the next elections, which may come as early as 2011.

Why? It's the economy, stupid. The UPA is leaving behind a right royal economic mess and the next government will be spending most of its time with a bucket and mop, trying to keep a listing boat from capsizing. That's assuming we have a halfway decent coalition, where the partners are at least on talking terms with one another. If that doesn't happen, it's finito.

First, a bit of economic theory is in order. Contrary to what you may believe, economic growth and slowdown follow a cyclical pattern. You can accentuate or retard a cycle, but you cannot reverse it till it is willing to be reversed. In the last five years, ending around mid-2008, we had a global upcycle. It began in the last year of the NDA, and continued for the first four years of the UPA. The NDA celebrated too soon, and declared that India was shining after just one year of fast growth. It fell flat on its face.

The UPA, on the other hand, has hung on for one year too long. It would have been better off losing the vote of confidence over the nuclear deal last year, for the dramatic slowdown came well into the third quarter of 2008-09. Like the NDA, the UPA, too, was too clever by half. Having held on to power for close to a full nine months after the downturn surfaced, it cannot now distance itself from the after-effects.

The boom of 2003-08 was aided by the easy money policies of the US Federal Reserve and George Bush's tax cuts. As capital flowed like water across national boundaries, India was one of the major beneficiaries. The capital markets boomed on FII inflows, and domestic investment soared, giving growth two legs: growing consumption and growing capital investment.

It was the global economic boom, rather than the UPA's enlightened policies, that gave the India story a true lift. Now that the fizz has gone out of the global economy, our own economy is flying low on a single, sputtering engine: government spending. The Rs30,000 crore third stimulus package announced by Pranab Mukherjee on Tuesday is not going to deliver electoral dividends, even while it does fiscal damage.

While we should be grateful for any help government can give, there is a downside to it. The party cannot go on forever. Once government spending crosses prudential limits, we will see inflation and interest rates rising. In a slowing economy, governments can spend only by borrowing more and printing money. These acts invariably stoke inflation, leading inevitably to another slamming of the brakes when things get out of hand.

As things stand now, the fiscal deficits of the centre and states are at their highest levels since independence, at around 10.5 per cent to 11per cent. The fiscal deficit is the amount the government needs to borrow to make ends meet, and currently it is swallowing Rs11 out of every Rs100 the country earns.

It cannot go on endlessly. Sooner or later, excessive government borrowing will work against business growth. Banks will find it safer to lend more to government (since there is no risk of default) and less to companies. So jobs will be cut and salaries pared. We are already close to this situation, and most businesses are being choked for want of liquidity.

Economist Kaushik Das of Kotak Mahindra Bank estimates, in a recent newspaper article, that the next five years will see growth faltering globally and in India. External capital will be tough to find, and domestically the government is crowding out private borrowers by running high fiscal deficits.

In this scenario, the next government will struggle to maintain growth. It will be ill-equipped for taking the tough measures that alone can ensure a quicker turnaround. Remember, the UPA failed to take simple decisions like hiking oil prices when the economy was growing robustly. When growth slows, economic decision-making will be even more politically constrained.

The 1999 Kargil war enabled the Vajpayee government to put together a stable coalition. It could also take tough measures like pushing through some reforms and higher oil prices. The economic boom after 2003 allowed the UPA to survive without having to take a single hard decision. The next government will not be so lucky. The economy is shaky, and the political climate slippery. The only way for it to survive is to invent a war. But that is a terribly short-sighted thing to do, for it will leave the economy in worse shape than before.

The next coalition can deliver the goods only if it focuses on good economics rather than bad politics. Whoever wins will have to deal with the winner's curse.

R Jagannathan/ DNA-Daily News & Analysis Source: 3D Syndication