9 NOVEMBER 2018
Straws in the wind
Congress-JD(S) success in Karnataka’s bypolls has a larger message on Opposition unity
By winning two of the three Lok Sabha constituencies and both the Assembly seats for which byelections were held in Karnataka, the Congress-Janata Dal (Secular) combine has demonstrated the power of alliance arithmetic. But the strategic tie-up does not explain the huge margins of victory. Even the Bharatiya Janata Party, which thinks of Karnataka as its gateway to the south, could not have anticipated such heavy losses. The defeat in its stronghold of Ballari by around two lakh votes, a constituency in which the JD(S) is almost non-existent, is bound to raise questions about the BJP’s prospects in the State in the 2019 general election. Even in Shivamogga, the lone constituency bagged by the BJP, the victory was somewhat narrow, with the party’s vote share dropping. As expected, the JD(S) won comfortably in the Mandya parliamentary and Ramanagara Assembly seats, but this was no surprise given that the BJP here is only a bit player. Having tasted success, the Congress-JD(S) tie-up, which began as a marriage of convenience following a hung verdict in the Karnataka Assembly, could strengthen as they prepare for 2019. The results have demonstrated that all apprehensions about how well this partnership was working at the ground level were possibly exaggerated; the Congress high command will now be better placed to put pressure on the State unit to cooperate and strategise with its ally in the months ahead.
For the Congress, the victories will provide another illustration of the need to ally with other parties to take on the BJP. The party has been losing State after State since 2014, winning only in Punjab (where the BJP is only a marginal player) and managing to share power with the JD(S) in Karnataka in a post-election arrangement. Although bypolls have their own electoral dynamic and are not firm indicators of what will happen in a State Assembly or general election, the Congress victories, by huge margins in Alwar and Ajmer in Rajasthan and now in Karnataka, will infuse a measure of confidence in a beleaguered leadership that is trying hard to revive the party’s electoral prospects. Its hopes have been buoyed by the BJP’s own performance in recent byelections, which have been sub-par in States such as Uttar Pradesh, Bihar and Maharashtra. Going forward, the results of the elections to the State Assemblies — particularly to those of Rajasthan, Madhya Pradesh and Chhattisgarh — will be critical to how the battle for 2019 is fought. A strong Congress performance will have a bearing on not only how alliances are struck, but also how seats are shared. The BJP may remain the largest political party in the country. But the scattered byelection successes, Karnataka being the latest, will strengthen those in the Congress who favour an accommodative strategy, one that attempts to build locally resonant alliances and provides adequate political space for partners, to throw an effective challenge in 2019.
The credit stimulus for MSMEs could have some unintended consequences
In the run-up to the general election next year, the Centre has announced an important credit stimulus package for micro, small, and medium enterprises (MSMEs). Among the many sops doled out under the new scheme, Prime Minister Narendra Modi has promised the sanction of business loans of up to ₹1 crore within a time frame of 59 minutes, in order to encourage faster credit flow to MSMEs. These companies will also receive an interest subvention of 2% under the scheme and support from public sector units, which will now be mandated to make at least 25% of their overall purchases from MSMEs. It is worth noting that MSMEs, which account for 30% of India’s gross domestic product (GDP), were hit hard by the twin shocks of demonetisation and the implementation of the Goods and Services Tax over the last couple of years. Further, in the aftermath of the IL&FS crisis, which has affected the amount of lending done by non-banking financial companies to the MSME sector, the government would be looking at the scheme as a tool to improve credit flow and the pace of job creation in the economy. A study by officials of the Reserve Bank of India in August 2018, however, showed that growth in credit flow to MSMEs had recovered to pre-demonetisation levels by the April-June quarter, just before the liquidity crisis.
The scheme has signs of state-led economic planning written all over it. The biggest risk of a credit stimulus is the misallocation of productive economic resources. Pumping extra credit into MSMEs now may well lead to a temporary boom and enable a feel-good atmosphere in the run-up to elections, but it can lead to a painful bust when the stimulus ends some day. Another unintended consequence is the likely deterioration in credit standards as financial institutions are pushed to lend aggressively to MSMEs. Efforts to expedite business loan approvals may be welcome from the point of view of growth and job creation, but they rarely end well when motivated by political reasons. Conceptually, the Prime Minister’s latest credit scheme is no different from the MUDRA loan scheme, which has been troubled by soaring bad loans. In September, former RBI Governor Raghuram Rajan had warned that loans extended under the MUDRA scheme could turn out to be the source of the next financial crisis. Care needs to be taken to see that the new MSME loan scheme does not pose a similar risk in the future. Also, the demand that PSUs must procure a quarter of their inputs from MSMEs could breed further inefficiency in the economy. In all, the MSME loan scheme is yet another example of how bad economics can make for good politics.