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Politics in Economy

Politics and economics can’t be seen in isolation

~By Thakur MakhijaniI (DAV Public School, Amritsar)

Economics is concerned with studying and influencing the economy. Politics is the theory and practice of influencing people through the exercise of power, e.g. governments, elections and political parties. In theory, economics could be non-political, however in reality it is not so. An ideal economist should ignore any political bias or prejudice to give neutral, unbiased information and recommendations on how to improve the economic performance of a country. Elected politicians could then weigh up this economic information and decide. But, in reality, the economy and finance are always influenced by the political scenario of a country and there is a great impact of political decisions and powers on the economy.

Many economic issues are seen through the eyes of political beliefs. For example, some people are instinctively more suspicious of government intervention. Therefore, they prefer economic policies that seek to reduce government interference in the economy. On the other hand, economists may have a preference for promoting greater equality in society and be more willing to encourage government intervention to pursue that end. In the case of India as well, one can witness a lot many cases wherein one may find how deeply the politicians influence the economy and the way economists think through there policies either for nation development or for vote bank. For example, at the time of independence of India, the planning commission was formed which drafted the 5-year plan, deciding how the economy will function. Though this commission was maintained by economists or policymakers, the final power remained with the PM who was the chairperson of the commission. Till 1992, the thought of a liberal and globalized economy was not executed. Another such example for politics influencing the economy and economic policies can be “Demonetization”, which shook the whole economic system of India from in and out. The implication of GST was also a great example of economic reforms based on political will.

Who runs the economy – Politicians or economists? Another interesting case is the relationship between fiscal policy (set by the government) and monetary policy (largely set by independent Central Banks). Recently in pandemic times, we all are witnessing how such decisions are taken where at one-point RBI is working over the supply side by altering interest rates while the government is working over the demand side by announcing emergency economical packages.

The question is not only who runs the economy but who influences the economy? It is the ideologies of the politicians and the political parties that make the actual difference. Like in the case of the USA, The Republican party supports limited government involvement in economic decisions while The Democratic party relies heavily on the government to regulate the economy. In economic downturns, Democrats favor deficit spending to revive the economy, whereas Republicans hope to alter the money supply to revive it. In the case of India too, one can witness how the economic scenario has changed after NDA formed the government. The policy of improving foreign relations by the prime minister Narender Modi proved to be a positive turning point for India as it led to an 80% increase in FDI. Schemes such as Make in India, the idea of Atmanirbhar Bharat are not crafted by economists but have made the economist think in the direction adopted by the government.

However, there are some areas of economics we could argue are free of politics – basic supply and demand and concepts like the theory of the firm are not laden with political ideology. But, even in microeconomics, one could argue that politics can’t help seeping in. For example, privatization is a clear political issue. Who should control key industries – private enterprise or the government? Another issue with economics is that some criticize the subject for prioritizing economic growth and maximization of monetary welfare. Some argue that the aim of the society is not to maximize GDP but to maximize happiness, the environment and being satisfied with what we have. Therefore, a politician from an environmental background may disagree with the whole premise behind macro-economics. It is not just about the best way to promote economic growth. But whether we should be aiming for economic growth in the first place. That is a political issue too. Hence, the economy is one of the biggest political issues.