The South Asia Channel

India’s Dangerous Love Affair with Populism

The world's largest democratic elections, encompassing a sixth of the global population, have now been set for April 7 through May 12. This election is largely thought to be a public referendum against corruption, nepotism, and general economic malaise that has set in under the Congress party and its allies in the ruling United Progressive Alliance (UPA). Until recently, the big story for the upcoming elections was the comeback of the main opposition, the Hindu nationalist Bharatiya Janta Party (BJP), under its new and controversial leader, Narendra Modi. Lately, however, this narrative has been overshadowed by the rise of the upstart, anticorruption-focused Aam Aadmi, or "Common Man," Party (AAP).

The AAP is an offshoot of the anti-corruption protests that started in late 2011 and continued throughout 2012 - a response to the blatant corruption charges leveled against some of the UPA's biggest political leaders. The AAP rode this wave of public dissatisfaction and outrage to win an unprecedented 28 of the 70 seats in the Delhi state legislature in December 2013 and appoint AAP leader Arvind Kejriwal as the state's chief minister.

Kejriwal's leadership of Delhi was short-lived, however. The AAP came face-to-face with the ingrained framework of the Indian administrative process and Delhi's unique status as a state that also has a federal mandate (in Delhi, the central government oversees various administrative agencies, including the police, that are typically run by state governments). These factors, plus the AAP's lack of an absolute majority in the state Legislative Assembly, prevented the party from delivering on key election promises - including the appointment of an anti-corruption watchdog, lower electricity and water prices, and increased safety for women. After these goals came to naught within the party's self-allotted time, the government resigned on February 14, essentially becoming a protest movement once again.

The AAP is now preparing to contest national elections. It has already selected 130 candidates and counting to run against opposing parties. If its popularity, specifically within urban centers, remains untarnished, it will likely win a significant number of parliamentary seats (a recent poll by ABP News-Nielsen projected 10).

Yet so far the AAP has failed to show that it can translate the fervor and enthusiasm its anti-corruption protests have generated into effective governance. When confronted with the limitations of its own power, the AAP essentially fell back into the pattern of protests that it had so successfully used in the past, targeting other political parties and vested industrial interests that it claims hampered the passage of its bills in the Delhi Legislative Assembly.

Since Kejriwal's resignation, AAP rhetoric has become increasingly tangential to its original aims of anti corruption and social justice. The most recent evidence is the party's attempt to force private companies to provide cheaper electricity, water, and gas to consumers, an issue that it has been quick to turn into a populist agenda point for the upcoming elections. In its haste, however, the AAP has overlooked the harm that these policies would likely cause the Indian government and economy.

Bills, bills, bills

In Delhi, the AAP has protested what it sees as unfairly expensive water and electricity bills charged by Tata and Ambani, the large industrial houses that own electrical distribution and marketing in the city. While it was in power, the AAP recommended a more progressive electricity pricing regime in Delhi to ensure that the people who use the most electricity pay the bulk of electricity charges. As long as the policy remains subsidy-neutral for the government -- which already has a stretched budget and cannot afford to spend more subsidizing electricity -- this policy is a sensible idea.

But in addition to focusing on the electricity prices in Delhi, Kejriwal has been deeply critical of the exclusive regional rights the previous government gave to BSES Rajdhani Power, BSES Yamuna Power (both owned by Anil Ambani), and Tata Power Delhi (owned by the Tata conglomerate) in July 2002 to provide electricity distribution within the city. The AAP has accused the government of failing to hold an auction for the electricity distribution rights and these companies of overcharging the population and thus making illegitimate profits.

While these accusations may have some logic, the government cannot turn to lawsuits every time it encounters a previous contractual agreement that seems unlawful. Reactions of this kind cause industry to lose trust with the political system and discourage long-term industrial investment. This is one reason the World Bank ranks India 134 among 189 countries in terms of ease of doing business.

In addition, all signs so far suggest the picture is more complicated than the one described by Kejriwal. In fact, distribution companies have incurred huge losses to provide power and have been unable to fully pay back loans because they are powerless to raise electricity tariffs. In Delhi, a government-run regulatory board is responsible for the final approval of electricity tariff increases, not the private companies. These rules have made companies more hesitant to invest in a crumbling Indian electricity infrastructure that is in dire need of a technological and regulatory overhaul.

Apart from its role in court cases against local distribution companies, the AAP has filed a court case against an upcoming national increase in gas prices. (Disclosure: I am an analyst of global gas markets for Energy Intelligence and advise clients on economic, political and regulatory issues. All views expressed here are my own.) The AAP alleges that the largest beneficiary of this price increase will be Reliance Industries Limited (RIL), the country's largest domestic gas producer.

This conflict features none of the shades of grey of the argument over the Delhi electricity companies; here, the AAP is clearly wrong. The gas pricing increase was recommended by an economic advisory panel headed by noted economist C Rangarajan - not a political party or the Indian Ministry of Oil & Natural Gas. Rangarajan has previously made successful recommendations for economic topics ranging from poverty reduction to revenue sharing contracts for the petroleum industry.

The committee's explanation of why gas prices must be increased is unassailable. India imports more than 25% of its natural gas (in reality, India needs even more gas than this due to power plant underutilization). This gas comes in at internationally set prices -- between $12-20 per million British thermal units or MMBtus -- for all new import contracts signed. If consumers are charged roughly $4.2/MMBtu for the same gas, the government must cover the rest of the price gap. India already has some of the world's highest fiscal deficits, hovering around 5% of GDP, and the subsidization of more imported gas would only worsen its position.

Beyond ensuring the government's solvency, a higher gas price would carry other benefits for India. It would be beneficial for companies - both public and private - and send the right signals for them to drill for more gas domestically. This would help to alleviate some of the chronic shortages of gas that lead to blackouts in cities like Delhi. Greater domestic production would reduce expensive liquefied natural gas imports and reduce the current account deficit, which has been between 4 and 6.5 percent of GDP in recent years. The largest beneficiary of the gas price increase will likely be the government-owned company that produces the largest amount of gas in India, Oil and Natural Gas Corp, not Reliance Industries, as the AAP's court case claims.

It is unlikely that any other measure except a drastic increase in gas prices can stabilize gas production and consumption in the Indian economy. By asking the Supreme Court to stall this gas price increase, the AAP has turned an important economic issue into a populist agenda point for the upcoming elections. Apparently, it has not stopped to consider the harm that might cause the Indian power and energy sector - and eventually the broader economy - in the long run.

In comparison with its foray into politics in Delhi, in which it aimed to combat corruption and improve safety, the AAP's national ambitions are significantly more anti-industry. This populist turn comes at a particularly alarming time, given that India's economic growth has been below 5 percent for more than eight quarters. Over the last four years, the squabbling within the ruling UPA coalition over issues like allowing foreign direct investment has weighed on growth. The next government must be able to send positive political signals to industry, both domestic and foreign, to help the economy regain some of its prior success.

If the AAP wins the projected 10 seats in the lower house of the parliament without any other party achieving an absolute majority, it will likely have the capacity to implement its anti-industry goals. In the past, the largest minority partners in ruling and opposition coalitions have been successful in stymieing economic reforms with a similar number of seats. The AAP has the added advantage of having significant resources on the ground in terms of its protest movement, which it can call upon to influence politics at a national level. Unfortunately, if the AAP becomes a part of a ruling coalition in the next Indian government, any spurt in industrial growth will be hard to imagine.

Kartik Misra analyzes global gas markets for Energy Intelligence. All views expressed are his own. 

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