The Prisoner's Dilemma is a mathematical 'game'. Assume a crime has been committed and two suspects are being interrogated separately. If both stay silent, both will gain. However, if prisoner A implicates prisoner B, A gains. If vice versa, B gains. If both implicate each other, then both lose. So, will both prisoners keep silent? This is the sensible thing for them to do, if they can trust each other. Or, will each try to implicate the other first? The temptation to betray each other is high. By prioritising narrow personal interests, a prisoner could hope to gain, though it is more likely that both will lose.
The relevance of this problem should be obvious to anybody who tracks India's parliamentary affairs. The United Progressive Alliance (UPA) government tried to push through legislation which could have enabled reform. The Bharatiya Janata Party (BJP) blocked it. Now, the BJP is trying to push through much the same legislation and the UPA is blocking it. The goods and services tax (GST) is the most obvious example. GST was first introduced in 2011 and it was blocked by the BJP until 2014. Narendra Modi, then the chief minister of Gujarat, was in the forefront of vociferous opposition to GST. Having come to power, the BJP would like to push GST. But, the UPA has adopted the same disruptive tactics to try and stop this. The amended land acquisition Bill is another high-profile victim of the logjam in Parliament.
In this tit-for-tat battle, the two political blocs resemble two prisoners who betray each other. Both sides have placed their narrow political interests ahead of the interests of the nation. The net effect is that reform is no longer a given.
According to one estimate, GST has the potential to spark an extra two percentage points of annual GDP growth by removing barriers between states, reducing tax complexity and equalising tax rates between states. If we assume GST could have been passed in 2011-12, when it was introduced, India has lost three years of that compounded growth. If the UPA continues to block GST, it might not pass during the life of this Lok Sabha (2014-2019). More worrying, this logjam could persist through the next Lok Sabha and into the indefinite future. Calling a joint session to pass a Bill is not easy - it has happened only three times. Nor is it easy to buy members of Parliament (MPs), given the anti-defection law.
The Rajya Sabha has a different and more complex cycle of MP replacements, voted in by state legislators. If the tit-for-tat continues, legislation will not pass unless the same political bloc holds a majority in both houses of Parliament. That means winning multiple state Assembly electionS and also building alliances with regional parties, which have a say in West Bengal, Uttar Pradesh, Bihar , Odisha, Tamil Nadu, Andhra Pradesh, etc.
If reform is off the table, all GDP estimates for the next four years must be pared. There's an assumption built into those estimates that reforms will lead to an acceleration of growth. That assumption is now open to review and looks doubtful. Legislation for the acquisition of land now goes back to the states. GST is stalled, nobody knows for how long. Amendments in the Electricity Act, 2003, might also be stalled and without those, the power sector will continue to bleed. There is likely to be no real push for labour reforms, given the huge unionised opposition to such change. The strike last week was only the first manifestation of such opposition and designed to forestall attempts at changes in the laws.
'Minor' details such as clearing higher foreign direct investment stakes in sundry sectors might also never pass through this Parliament. Nor will a privacy law be easily introduced and passed, and that is required to support Aadhaar-based services and the Digital India initiative.
This government must now find ways to accelerate growth without changes in the legislative fineprint. That is actually possible, given an inefficient bureaucracy and far too much red tape. Improved processes could indeed lead to more efficient governance. But, it is a much less ambitious target and less effective in terms of fostering growth.
In turn, investors will need to find businesses in which growth prospects are less dependent on policy and legislative changes. This is already happening. There have been sharp downgrades of infrastructure and related sectors where the major blocks are policy related. There could be a churn where investors cut out infra exposure and go overweight on 'reliable' sectors such as fast moving consumer goods, pharma or information technology. This could be a theme through the next few months.
