Indian media’s financial illiteracy is mind-boggling. Here is the Indian rupee nominal exchange rate against a basket of currencies. Up means rupee is appreciating unlike $/Rupee exchange rate. Contrast UPA with NDA, both 1 and 2.
Bank NPAs are indigestion from that credit binge.
Which government – UPA or NDA – has been better for India’s economic and social indicators? Dismiss the rhetoric and stick to the facts. In this analysis, I’ve chosen 10 key parameters. They cover both economic and social criteria.
1.GDP growth: Average GDP growth in 1998-2004 (NDA) was 6% a year. Average annual GDP growth in 2004-13 (UPA), up to June 30, 2013, was 7.9%.
Caveat 1: The Vajpayee-led NDA battled US-led economic sanctions following the Pokhran-II nuclear test in May 1998. It faced a short but expensive Kargil war in 1999 and the dotcom bust in 2000. When it took office, it had the lag effect of the East Asian financial crisis of 1997-98 to contend with.
Caveat 2: The UPA government, in contrast, benefited from the economic momentum of the high (8.1%) GDP growth rate of 2003-04 – the NDA government’s final year – and rode that wave. The global liquidity bubble in 2004-08 bouyed foreign inflows, helping UPA-I achieve a high GDP growth rate in its first term. The Lehman Brothers collapse in September 2008 did hurt the Indian economy but the ensuing US Federal Reserve asset buying programme attracted a steady flow of near-zero interest dollars into India from 2009.
Despite these caveats, the UPA government’s average annual GDP growth rate of 7.9% in 2004-13 clearly scores over the NDA government’s average annual growth rate of 6% (though high inflation boosted the former significantly). First strike to UPA.
2. Current Account Deficit:
2004: (+) $7.36 billion (surplus).
2013: (-) $80 billion.
The winner here is clearly NDA. It ran a current account surplus in 2002, 2003 and 2004. Under UPA this dipped into deficit from 2006 and has spun downwards since.
3. Trade deficit:
2004: (-) $13.16 billion.
2013: (-) $180 billion.
Again, advantage NDA.
4. Fiscal deficit:
2004: 4.7% of GDP.
2013: 4.8% of GDP.
Not much to choose between the two.
Caveat: This extract from the Asian Development Bank Institute (ADBI) report, published in 2010, explains why and when the UPA government’s fiscal defict began to spiral out of control.
“The central budget in 2008–2009, announced in February 2008, seemed to continue the progress towards FRBM targets by showing a low fiscal deficit of 2.5% of GDP. However, the 2008–2009 budget quite clearly made inadequate allowances for rural schemes like the farm loan waiver and the expansion of social security schemes under the National Rural Employment Guarantee Act (NREGA), the Sixth Pay Commission award and subsidies for food, fertilizer, and petroleum.”
“These together pushed up the fiscal deficit sharply to higher levels. There were also off-budget items like the issue of oil and fertilizer bonds, which should be added to give a true picture of fiscal deficit in 2008–2009. The fiscal deficit shot up to 8.9% of GDP (10.7% including off-budget bonds) against 5.0% in 2007–2008 and the primary surplus turned into a deficit of 3.5% of GDP.
“The huge increase in public expenditure in 2008–2009 of 31.2% that followed a 27.4% increase in 2007–2008 was driven by the electoral cycle with parliamentary elections scheduled within a year of the announcement of the budget.”
The recent announcement of the Seventh Pay Commission comes again, not unexpectedly, at the end of an electoral cycle.
2004-2013: 9% (Both figures are averaged out over their respective tenures).
Advantage again to NDA. Inflation under NDA was on average half that under UPA, leading to the RBI’s controversial tight money policy, high interest rates and rising EMIs.
6. External Debt:
March 2004: $111.6 billion.
March 2013: $390 billion.
The UPA suffers badly in this comparision, a result of lack of confidence in India’s economy and currency following retrospective tax legislation and other regressive policies, especially during UPA-2.
1999-2004: 60 million new jobs created.
2004-11: 14.6 million jobs created.
Clearly, the UPA’s big failure has been jobless growth – a bad electoral omen.
1998-2004: Variation: Rs. 39 to 49 per $.
2004-13: Variation: Rs. 39 to 68 per $.
(Rupee rose from 40-plus to 39 between October 2007 and April 2008.)
The NDA government’s economic and fiscal policies, despite the various crises of 1998-2000 pointed out earlier, evoked more global confidence, leading to a relatively stable rupee (Rs. 10 variation) compared to the Rs. 29 variation during UPA’s tenure.
2004: India was ranked 123rd globally on the human development index (HDI) in 2004, with a score of 0.453.
2013: India has slipped 13 places to 136th globally on the HDI in 2013 with a score of 0.554.
2004: Rs. 44,327 crore.
2013: Rs. 2,31,584 crore.
Here again, profligate welfarism, as the ADBI report quoted earlier shows, has led to a rising subsidy bill. Worse, a significant amount is siphoned off by a corrupt nexus of politicians, officials and middlemen.
Conclusion: UPA scores above NDA on one of the 10 parameters (GDP growth), is level on one other parameter (fiscal deficit) while NDA does better than UPA on the remaining eight parameters.
The next time Finance Minister P. Chidambaram wishes to stage an encounter with facts, he would do well to be aware of those facts.
Sources: Economic Survey of India, UNDP, IMF, Planning Commission of India.
In both love and war, it makes sense to hit where it hurts the most.
The war for the next Lok Sabha elections is currently on. And there is no love lost between the two main parties, the Congress and the Bhartiya Janata Party (BJP).
The BJP today hit out at the economic performance of the Congress led United Progressive Alliance government, over the last ten years.
Politically, this makes immense sense given the bad state the economy is in currently. Economic growth as measured by the growth in gross domestic product (GDP) is down to less than 5%. The GDP grew by 4.7% between October and December 2013.
The rate of inflation as measured by the consumer price index had been greater than 10% for a while and has only recently come below 10%. The consumer price inflation for February 2014 came in at 8.1%.
Industrial activity as measured by the index of industrial production (IIP) was flat in January 2014, after falling for a while. The overall index grew by just 0.1% during January 2014. Manufacturing which forms a little over 75% of the index fell by 0.7% during January 2014, in comparison to January 2013. This primarily is on account of the slowdown in consumer demand.
People have been going slow on spending money because of high inflation. This has led to a scenario where they have had to spend more money on meeting daily expenditure. Retail inflation in general and food inflation in particular has been greater than 10% over the last few years, and has only recently started to come down. Given this, people have been postponing all other expenditure and that has had an impact on economic growth. Anyone, with a basic understanding of economics knows that one man’s spending is another man’s income, at the end of the day.
When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them. When we look at the IIP from the use based point of view it tells us that consumer durables (fridges, ACs, televisions,computers, cars etc) are down by 8.3% in comparison to January 2013. The overall consumer goods sector is down by 0.6%.
This slowdown in consumer demand was also reflected in the gross domestic product(GDP) numbers from the expenditure point of view. Between October and December 2013, the personal final consumption expenditure(PFCE) rose by just 2.6% to Rs 9,81,463 crore in comparison to September to December 2012. In comparison, during the period October to December 2012, the PFCE had grown by 5.1%.
The lack of demand along with a host of other reasons also means that the investment climate for businesses is not really great. This is reflected in the lack of capital goods growth, which was down by 4.2% during January 2014. If one goes beyond this theoretical constructs and looks at real numbers like car sales, they also tell us that the Indian economy is not in a good shape as of now.
Smriti Irani, a television actress turned BJP politician summarised the situation very well, when she said “Today, as the Congress-led UPA leaves office, it leaves behind a legacy of an economy which has been mismanaged.” Yashwant Sinha, former finance minister and senior BJP leader, went a step ahead and said that “an investment crisis” and “a crisis of confidence in the economy”. The Congress is likely to react to this attack by the BJP by following the conventional line that it has always followed. The party is most likely to say that India has done much better under the UPA than the BJP led National Democratic Alliance (NDA).
Prima facie, there is nothing wrong with the argument. Between 1998-99 and 2003-04, when the NDA was in power, the average GDP growth rate was at 6% per year. Between 2004-05 and 2012-2013, when the UPA has been in power the average rate of growth has been at 7.9% per year. If one takes into account, the GDP growth rate for this financial year ie 2013-2014, this rate of growth will be lower than 7.9%, but still higher than the 6% per year achieved during NDA rule.
But it is worth remembering here that the economy is not like a James Bond movie, where the storyline of one movie has very little connection with the storyline of the next. An economy is continuous in that sense.
The rate of economic growth in 2003, a few months before the UPA came to power, was at 7.9%. The rate of inflation was at 3.8%. In fact, the rate of inflation during the entire NDA term averaged at 4.8%, whereas during the first nine years of UPA regime between 2004-2005 and 2012-2013, it has averaged at 6.7%.
If we take the rate of inflation during this financial year into account the number is bound to be higher. The index of industrial production, a measure of the industrial activity in the country, was growing at 8% in early 2004. Currently it is more or less flat.
The fiscal deficit for the year 2003-2004 came in at 4.5% of the GDP. The fiscal deficit for the year 2012-2013 was at 4.9% of the GDP. The fiscal deficit for the year 2013-2014 has been projected to be at 4.6% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends.
As I have explained in the past, this number has been achieved through accounting shenanigans and does not reflect the real state of government accounts. The expenditure and thus the fiscal deficit of the government is understated to the extent of Rs 2,00,000 crore. (Read more here.) This is not to say that there wouldn’t have been any accounting shenanigans under the NDA rule, but they would have been nowhere near the present level.
The broader point here is that the NDA had left the economy in a reasonable good shape on which the UPA could build. And the first few years of growth under the UPA rule came because of this. In simple English, unlike James Bond movies, growth under the UPA cannot be separated totally from the growth under the NDA. The growth under UPA fed on the earlier growth under the NDA.
That’s one point. The second point that needs to be brought out here is that the massive economic growth during 2009 and 2010, when India grew by 8.5% and 10.5% respectively (read more here), was primarily on account of the government expanding its expenditure rapidly.
The government expenditure during 2007-2008 had stood at Rs 7,12,671 crore. This has since rapidly grown by 123% and stood at Rs 15,90,434 crore for 2013-2014. While this rapid rise in government expenditure ensured that India grew at a very rapid rate when the world at large wasn’t, it has since led to substantial economic problems. During the period Atal Bihari Vajpayee was the Prime Minister of India, the government expenditure grew by 68% and stood at Rs 4,71,368 crore during 2003-2004.
This rapid rise in government expenditure in the last few years has led to loads of problems like high interest rates and inflation, as an increase in government spending has led to an increase in demand without matched by an increase in production.
As Ruchir Sharma put it in a December 2013 piece in the Financial Times, “With consumer prices rising at an average annual pace of 10 per cent during the past five years, India has never had inflation so high for so long nor at such an unlikely time… Historically, its inflation was lower than the emerging-market average, but it is now double the average. For decades India’s ranking among emerging markets by inflation rate had hovered in the mid-60s, but lately it has plunged to 142nd out of 153.”
In fact, if one looks at the incremental capital output ratio, it throws up a scary picture. Swanand Kelkar and Amay Hattangadi in a December 2013 article in the Mintwrote, “the Incremental Capital Output Ratio (ICOR)… measures the incremental amount of capital required to generate output or GDP. From FY2004 till FY2011, India’s ICOR hovered around the 4 mark, ie it required four units of investment to generate one unit of output. Over the last two years, this number has increased with the latest reading at 6.6 for FY2013.” Currently, the number stands at 7.
This, in turn, has led to a massive fall in investment. As Chetan Ahya and Upasna Chachra of Morgan Stanley write in a recent research report titled Five Key Reforms to Fix India’s Growth Problem and dated 24 March, 2014, “Public and private investment fell from the peak of 26.2% of GDP in F2008 to 17.3% in F2013. Indeed, private investment CAGR[compounded annual growth rate] was just 1.4% between F2008 to F2013 vs 43% in the preceding five years.”
What all this clearly tells us is that the economic growth during the UPA rule fed on the economic growth during the NDA rule. The UPA has left the economy in shambles, and the government that takes over, will have a tough time turning it around.
The Congress-led United Progressive Alliance (UPA) seems to have more or less realised that the 2014 Lok Sabha elections is a lost cause. Hence, the idea seems to be to make things difficult for the next government, especially on the finance front.
I had written on this issue on 17 February, 2014, the day finance minister P Chidambaram presented the interim budget. Since then, more details have come out, and these details clearly suggest that things are much worse on the finance front than they first seemed.
A recent news report in the Daily News and Analysis points out that the central government owes the states Rs 50,000 crore on account of compensation for the central sales tax. The newspaper quotes a finance ministry official to point out that a 2% cut in the central sales tax was introduced as part of the process to phase it out and move towards goods and services tax. The state governments were to be compensated for the losses they had incurred because of this. This payment hasn’t been made for the last three years and the amount has now gone up to close to Rs 50,000 crore.This is something that the next government will have to deal with.
On 28 February, 2014, the government raised the dearness allowance of five million central government employees to 100 percent of their basic salary. This was earlier at 90 percent. This move is expected to cost around Rs 6,390 crore in 2014-15. Interestingly, the government had hiked the dearness allowance from 80 percent to 90 percent of basic only in September 2013, with effect from July 2013.
The government also approved among the terms of reference for the seventh pay commission, the addition of 50 percent dearness allowance with the basic pay. This is expected to push salaries of public sector employees up by 30 percent, that is, if the recommendations of the seventh pay commission are implemented in the time to come. Also, once the dearness allowance of the central government employees is increased, it puts an immense amount of pressure on state governments to increase the salaries of their employees as well.
There are some points from the interim budget that need to be highlighted as well. An amount of Rs 1,15,000 crore has been budgeted against food subsidies for 2014-2015 (the period between April 1, 2014 and March 31, 2015). Out of this, around Rs 88,500 crore has been allocated under the Food Security Act.
The problem with this number is that the food security scheme is expected to cost much more than the amount that has been allocated (you can read a detailed explanation here). Also, with Rs 88,500 crore allocated towards food security scheme, it doesn’t leave enough, for the public distribution system that is already in place.
As the DNA article cited earlier points out “The next government will have to find a lot of resources for the public distribution subsidy as well. Out of the total Rs 115,000 crore for the food subsidy, the government has allocated Rs 88,500 crore to the Food Security Act.”
And if all this wasn’t enough there are expenditures from the current year that haven’t been accounted for and will spill over to the next year. Estimates suggest that this year close to Rs 1,23,000 crore of subsidies have been postponed to the next year. The next finance minister would have to meet this expenditure.
In fact, in a last ditch effort, the government tried to push in nine ordinances before the election commission announced the elections dates. But the President Pranab Mukherjee did not agree to it. As economist Arvind Panagariya points out in a recent column in The Times of India, “Perhaps the worst poison pill is UPA’s attempt to push as many as nine ordinances and clear vast numbers of projects on literally the last possible day before Election Commission’s Model Code of Conduct was expected to kick in. Only sage advice from the president held back the government’s hand from pushing the vast majority of these ordinances.”
The Congress led UPA government has left the country in a huge financial mess and the next government will have a tough time dealing with it, from day one. And if they mess it up even slightly, India will end up in an even bigger mess than it currently is.
The opinion polls suggest that Narendra Modi is likely to be the next Prime Minister of India. The great Indian middle class and Indian business have high hopes from Modi and his ability to get the Indian economy back on track. But the question is where will Modi get the money from, for whatever he wants to do, to set the economy back on track? Close to Rs 2,00,000 crore of government expenditure next year, hasn’t been accounted for.
One way out is to cut down on the subsidies. But will Modi be able to do that, given that he is likely to lead a coalition government. Also, during all the years that the BJP has been in opposition it has supported the populist entitlement programmes, which have led to the government expenditure going up big time. So it is really not in a position to reverse that expenditure even if it is voted to power. To cut a long story short, where will Modi get the money from?
As Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, recently told Mint “The power of the finance minister in the new government will be key… as will be the administration’s ability to either cut spending on social welfare or match that expenditure through revenue.”
Now that, as the common phrase goes, is easier said than done.