Is a coalition government bad for the economy ?
There is no evidence from India to show that a single-party majority is better for driving economic growth and reform.
The Indian electorate has delivered a sobering verdict for the ruling Bharatiya Janata Party (BJP) and, in particular, Prime Minister Narendra Modi, who had made the election a referendum on his leadership.
The BJP has fallen well short of the majority figure of 272 seats in the Lok Sabha and will need the support of its alliance partners to form and run a government.
Two of the larger allies, without whom Modi cannot form a government, have already demanded key central ministries for their parties. Their demands are unlikely to end with government formation, necessitating periodic accommodations and concessions.
Modi has long been a sharp critic of coalition governments, arguing they lack stability, are plagued by corruption, and suffer from policy paralysis. Proponents of strongman leadership argue that the consensus-building required to run a coalition slows economic reform and stymies growth.
But is there truth to this? What does India's history reveal?
Economic growth
India experienced some of its fastest economic growth during the early and mid-2000s, under both the National Democratic Alliance (NDA), the BJP’s coalition, and the Congress-led United Progressive Alliance (UPA).
In 1999, the BJP had 182 members of parliament in the Lok Sabha; in 2004, the Congress had 145. Both were more dependent on their allies than the BJP is today.
The decade between 2014 and 2024, when the BJP had a majority in parliament on its own, India did not see the kind of growth rates that were seen in the coalition era under both Atal Behari Vajpayee and Manmohan Singh.
The Modi years saw an annual average growth rate of 6%, while under Manmohan Singh the economy grew at 6.8%. It is important to note that the economy saw once in a century shock in 2020 due to the pandemic, while under Manmohan Singh the economy witnessed the impact of the global financial crisis.
Nevertheless, even accounting for this, economic growth was not higher under Modi than it was under Dr. Singh. Note the decline in growth post 2016 after the disastrous demonetisation move, which an alliance would probably not have allowed.
In the years before 1980, when the Congress was in power on its own almost throughout, the economy grew at less than four percent – which economists often call the Hindu rate of growth.
These include the years of Indira Gandhi and the emergency which allowed her to take any decision she wanted.
So, there is simply no evidence from India to show that a single strong leader with a majority is better for economic growth. In fact, if anything, the evidence points to the opposite.
Economic Reform
There is a popular notion that it’s easier to push through vital economic reform when a single party, preferably with a strongman leader like Modi, is in power.
Is that notion born out of evidence from India? The very short answer is no.
India’s most significant economic reform of all time, the decision to break the shackles and liberalise the economy in 1991, was taken by a coalition government headed by Congress leader P.V. Narasimha Rao, who is ironically known for his indecisiveness. This paved the way for the rapid economic growth of the late 1990s and the 2000s.
At the time, the Congress held 244 seats in India’s lower house and had Manmohan Singh spearheading the reforms as finance minister.
Between 1999 and 2004, the NDA under Vajpayee, when the BJP had 182 seats, also undertook key economic reforms. The golden quadrilateral highway project which now provides better and faster connectivity between major cities and ports was launched in 1999.
Vajpayee also brought in the new telecom policy in 1999 that allowed private players to compete paving the way for some of the lowest mobile phone tariffs in the world.
In the Manmohan Singh years, the Congress ran a coalition with notoriously fickle allies including the left parties. The Congress had 145 MPs in 2004 and 206 in 2009.
It was between 2004 and 2009, when it was weaker and thus supposed to be more “unstable”, that it brought in the Mahatma Gandhi National Rural Guarantee Scheme, more easily known as MGNREGA.
This scheme has been instrumental in providing a degree of income security to millions of poor rural Indians. During the COVID19 pandemic when millions were left without jobs, it was MGNREGA, as one of the few social security safety nets, that prevented, to an extent, catastrophic deprivation.
Manmohan Singh’s second term as Prime Minister between 2009 and 2014, when the Congress had more MPs, is, ironically, known for fewer reforms and much more for policy paralysis. A weaker Manmohan Singh was better for the economy.
But towards the end of the term, it introduced the National Food Security Act (NFSA), through which poor Indians would get rations at subsidised prices.
While Modi has often expressed his dislike for both schemes, the reality of poverty in India is such that he has had to continue both these schemes.
On the other hand, single party majority governments have often ushered in reforms that have perhaps not been ideal for the economy.
The decision by Indira Gandhi to nationalise banks in 1969, when she controlled parliament on her own, is broadly regarded as a mistake.
Modi’s decision to demonetise a vast majority of Indian currency in 2016, without any consultation, is seen by almost everyone as a historic blunder. The botched implementation of the goods and services tax (GST) would probably have been less botched had Modi needed to consult regional alliance partners.
Perhaps the best and most recent example of a powerful Prime Minister going wrong on policy is the farm laws of 2020 which Modi introduced without any consultation. Not only did he have to back track after one of the most powerful protest movements in India’s history, but it has also made much needed agriculture reforms a no-go for many years to come – setting the Indian economy back by many years.
So, evidence from India shows that coalition governments don’t necessarily mean that economic reform is put on the back burner. In fact, in my view, such a belief is contemptuous of the Indian electorate assuming that one leader and one party knows better than many leaders and many regional parties who have their ear to the ground. That feedback loop is crucial in a country as large and diverse as India and perhaps coalition governments are the natural political order in India.