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Good economics, good politics

Wealth distribution and its political after-effects in the Modi era

Good economics, good politics

It used to be said during the Independence movement that what Bengal thinks today, the rest of India would think tomorrow. I think that now applies to Uttar Pradesh, a state not given to much thinking, except with the limbic brain, which responds only to caste appeals.

This column is not about Bengal or UP but about just what got UP to wake up and break down its traditional (caste) model of thinking. We know that humans have three distinct personalities: the individual, when you are alone and nobody is watching; the herder, when a small group of known people is watching; and three, the anonymous, which responds to the 'collective unconscious', the tacit message from the wide outdoors.

Neuroscience is now telling us that it is possible to break these three personalities down to the genetic/neural algorithm to locate which parts of the brain are activated by which surroundings. This has uncovered some shattering truths. As individuals, we might use our entire brains, especially the 'human' brain, housed mainly in the forehead or just behind it. But in a board meeting, while responding to power (with a furtive eye on what the chairman is saying, for example), our human brain shuts down and our herding brain seeks security in coalescing towards the perceived power centre. And when we are with the broader crowd, anonymous but crowded (like in markets), we respond to the call of the herd. Whether it is casteism, communalism or regionalism, we listen to the lowest, limbic part of our brain, the part that we share with apes and monkeys.

Democracy responds to the lowest common denominator, which is why we must always have bad (elected) politicians. It is rare for a politician to implement good economics, when he has got into this seat with bad politics. That has been the story of Indian (and Congress) politics so far. And that is what makes Modi's new brand of politics doubly great.

Modi went after the 1 per cent, the very segment that funded his campaigns. He 'deserted' his old power base, the old loyal Jan Sanghis, the Jain-Bania nexus that was the mainstay of Hindutva support. (Disclaimer: I am a Jain) He did not feed the monster, choosing not to return political favours to the people who funded his campaigns, which used to be the old way.

If you look at the owners of that Rs 8 lakh crores of estimated black money that is now under the lens (just wait for the notices; get somebody to do a community-based analysis of the names), you will find a very distorted distribution of communities and regions. Politicians and the ruling class, of course, are distributed evenly, but otherwise, the distribution is skewed in favour of Gujarat, Maharashtra, Rajasthan and Madhya Pradesh, all traditionally BJP-dominated states. So it was very courageous to take on the very power base that catapulted him into power, betting that he would gain political currency out of a counterintuitive shift to good economics.

This brings us to the Keynes vs Hayek debate in India with new names, whether you call it the Kerala vs Gujarat model or the Amartya Sen vs Jagadish Bhagwati school of thought. Depending on which corner of the ring you are, you would have an opinion on whether the government policy should push the primacy of efficient markets (to decide on economic decisions) or pursue government intervention to shore up whatever is sagging in the economy, going to the extent of 'digging holes and filling them up', if you run out of ideas - in India, it's called MGNREGA.
Unprecedentedly, Modi has chosen the Hayek doctrine of putting markets at the centre of all resource-allocation (and pricing) decisions. I can't think of another government in the world that is pursuing this. The consensus among governments, almost since the War, is that Hayek is not good economics. What they mean is that he is not good politics.

The response to the otherwise painful exercise of demonetisation was coloured by a known pattern from behavioural economics: sibling rivalry, or crab-in-a-box mentality, which leads to the concept of relative wealth, the desire to focus less on your own welfare (or distress) than on the wealth or misfortune of others. It is a known, low-level limbic behaviour, found in animals (siblings in the black eagle and spotted hyenas will kill the younger ones) as well as lower apes (baboons especially, where the dominant members of the tribe will kill the young of a suckling mother to make her sexually available again). The chips that drive this behaviour are found in human societies, as established by research studies in behavioural economics.

Visibly, people put up with the discomfort of demonetisation because of the compensation they got in the discomfiture of others. Enough anecdotal evidence of the pain of the victims was available on the ground, so media slants and opposition hysteria (on behalf of the 'common man') only lost them further credibility. In case of the opposition campaign, there was actual hilarity at the visibly hysterical outbursts of major leaders like Mamata, Mayawati and even Kejriwal.

This was good politics, latching onto a very basic human emotion. And Modi chose the right targets, the Indian 1 per cent, currently made up of politician-thieves, robber barons and the trading-thieving class. These are not Google creators, the society-changing innovators of the US, hurting whom will damage the spirit of entrepreneurship itself. How do we know that not much damage was done? Look at where the money was going - gold and real estate mostly, and some of it under the mattress. This money has now been transferred to the government (say), a slightly better investor.

If the lion's share in economic growth is coming from capital productivity (with zero or marginal growth in labour productivity), then any improvement in investment strategy at a macroeconomic level will have a salubrious effect on the economy and the velocity of money. This is simply good economics, transferring money from a bad investor to a better one.

Dispossessing the haves was a bad idea in the Bengal of the seventies because the Leftists were worse investors than the Marwaris, who left for Mumbai. The resulting void is yet to be filled and is perhaps the reason why Bengal is now clueless about where to go. But Modi's redistribution should have better results, only partly because he has plugged leakages, ensuring better delivery of subsidies, even as he goes about reducing the revenue subsidies, while pushing capital subsidies (for solar energy, for example).

In the short run, the electorate has rewarded him, breaking India's famed caste barrier, but the next few painful (economic) moves should be careful to harness the concept of relative wealth, i.e., they should be visibly damaging to the 1 per cent, and the spoils should be visibly redistributed to the bottom 20 per cent. This is the voting block that will see him through.

For example, the benami bill will hurt about 20 million people (the owners of almost all the wealth in India), as compared to 600 million people in the case of the cash demonetisation of November 8. And the largesse to be distributed will be huge, bringing down real-estate prices by about 20 per cent plus maybe some panic sales and transfers of the kind we saw during demonetisation.

Gold will hurt the women who have been its biggest fans. Some social laws, if pushed through, like Muslim Personal Law, will bring in the Muslim women, who made all the difference in UP.

This is not the place to make suggestions. The point is that if Modi chooses his 'victims' carefully and redistributes the largesse carefully, he will do the economy a good turn, even as he achieves the laudatory objectives of wealth redistribution. And he won't be guilty of robbing his old loyal constituents, some of whom (like me) were anyway in the formal economy.