Indian Spring
by Noam Lupu

In April, Indian Prime Minister Atal Behari Vajpayee arrogantly declared he was tired of running a 23-party coalition. In the elections he called six months early, he was certain his robust economic record would bring his ruling Bharatiya Janata Party a larger majority and thus a more manageable ruling coalition for the next five years.

It seemed a clever gamble; India's economy had been booming under Vajpayee. But he was wrong. Much to his, and the world's surprise, the elections — which last several weeks in India and ended on May 10 — ousted Vajpayee's coalition and ensured victory for the Indian National Congress Party headed by Sonia Gandhi. Gandhi (no relation to Mohandas) and her party were overjoyed. That is, until a second surprise: On May 16, Gandhi announced she would not become prime minister, offering her close advisor Manmohan Singh for the job.

Commentators have hailed both surprises as proof of democracy in action. But the most valuable lessons of the Indian election are more far-reaching and should be heeded by other leaders.

First is Vajpayee's humbling lesson straight out of Statistics 101: Numbers can be deceiving. The numbers on economic growth, consumption and job creation did show an "India Shining," as the BJP slogan went. But 70 percent of Indians live in the countryside and subsist on agriculture. They have not benefited from the boom in information technology or the growth of call centers in the outsourcing meccas of Bangalore and Hyderabad. In fact, the agricultural sector averaged annual growth of 1 percent over the past six years, which has hardly made rural farmers better off.

Congress won by wide margins in the states of Andhra Pradesh and Karnatka, home to Bangalore and Hyderabad. Both states suffered yet another year of drought over the last 12 months, and suicides among farmers in despair of hunger are rising. Only about 1 million Indians work in air-conditioned software corporate offices or call centers. More than 600 million live in villages, more than half without clean water or electricity. More than a quarter of the Indian population still lives in severe poverty. For this overwhelming majority, India is hardly shining.

This should not suggest that Vajpayee completely overlooked the poor. In fact, between 1993 and 2000, the percentage of Indians living in rural poverty fell from 37 percent to 30 percent. So the rural poor have benefited from economic growth, as most economists predicted. Indeed, economists have argued repeatedly that economic growth reduces poverty. And the evidence, in India and elsewhere, suggests that they're right.

What economists forget, though, are social and political realities. While everyone seems to have benefited from the pro-market reforms responsible for India's economic boom, some are benefiting more than others. Needless to say, the poor are, as always, last on the list. Moreover, the gap between them and their richer neighbors has been growing. Not only does such growing inequality mean the poor are likely to benefit less and less from further reforms (recent economic data suggest this), it means they are increasingly likely to feel left out by their government. That's exactly what happened: While the major economic numbers looked good, the voting majority simply wasn't relatively better off.

Vajpayee could have done something to ensure the benefits of economic growth trickled down a bit faster without becoming an extreme populist. For one, Vajpayee could have broadened the tax base and spent new tax revenue on a poverty reduction campaign, education or infrastructure development — all areas in which the rural poor are woefully behind. He could also have worked to stem corruption, which depletes already miniscule local budgets. India's agricultural sector is also badly in need of land reform. Though international markets and rich farmers may not initially like these moves, if well designed, they might have evened the playing field without much damage to the boom.

The second lesson of the election is perhaps a bit pessimistic: There are few leaders in developing countries who are willing to confront these problems. In the end, the new prime minister of India is just as committed to pro-market economic reforms as Vajpayee. In fact, Singh, a trained economist, was the author of India's original 1991 reforms. Although Gandhi and Congress capitalized on the malaise of the poor, the criticisms were more politicking than genuine disagreement. And while markets were uneasy about the BJP's defeat (Mumbai's primary stock index, the Sensex, slipped steeply right after the election), Gandhi's move may have been calculated to help stem allay investor fears.

Like most economists, Singh is likely to carry on with India's pro-market reforms, cutting the fiscal deficit, privatizing more state-run firms and ensuring competition. In fact, he will likely suggest that continuing these reforms is the correct response to the election's surprises. His reasoning might go like this: The rural poor demand help and the best way to help them is to increase India's overall economic prosperity. Like Vajpayee and most developing country leaders, Singh is therefore likely to continue to make the same mistakes, and while poverty in India may fall in the coming years, inequality will likely rise.

The world's largest democracy may have taught us a lesson in what economic policies should like, but not how to implement them. The challenge for Singh, India, and many other developing countries facing growing inequality will be not only to recognize the problem, but to find politically viable solutions before things get worse.