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.
In recent years, I have given a number of presentations to high-school and college students on the importance of economic freedom and persistent threat of socialism – as witnessed, for example, by the recent economic meltdown in Venezuela. One problem that I have encountered is that young people today do not have a personal memory of the Cold War, let alone an understanding of social and economic arrangements in the Soviet bloc, which, I suspect are either downplayed or ignored in American school curricula. As a result, I have written a basic guide to socialist economics, drawing on my personal experience growing up under communism. I hope that this – somewhat longer piece – will be read by the millennials, who are so often drawn to failed ideas of yore.
As a boy growing up in communist Czechoslovakia, I would, for many years, walk by a building site that was to become a local public health facility or clinic. The construction of this small and ugly square-shaped building was slow and shoddy. Parts of the structure were falling apart even while the rest of it was still being built.
Recently, I returned to Slovakia. One day, while driving through the capital of Bratislava, I noticed a brand new suburb that covered a hill that was barren a mere two years before. The sprawling development of modern and beautiful houses came with excellent roads and a large supermarket. It provided a home, privacy, and safety for hundreds of families.
How was it possible for a private company to plan, build, and sell an entire suburb in less than two years, but impossible for a communist central planner to build one small building in almost a decade?
A large part of the answer lies in “incentives.” The company that built the suburb in Slovakia did not do so out of love for humanity. The company did so, because its owners (i.e., shareholders or capitalists) wanted to make a profit. As Adam Smith, the founding father of economics, wrote in 1776, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”
In a normally functioning market, it is rare for only one company to provide a certain kind of good or service. The people who bought the houses in the suburb that I saw did not have to do so. They could have bought different houses built by different developers in different parts of town at different prices. Competition, in other words, forces capitalists to come up with better and cheaper products – a process that benefits us all.
Communists opposed both profit and competition. They saw profit-making as useless and immoral. In their view, capitalists did not work in the conventional sense. The real work of building the bridges and plowing the fields was done by the workers. The capitalists simply pocketed the company’s profits once the workers’ wages have been paid out. Put differently, communist believed that the capitalist class exploited the working class – and that was incompatible with the communist goal of a classless and egalitarian society.
But capitalists are neither useless nor immoral. For example, capitalists often invest in new technologies. Companies that have revolutionized our lives, like Apple and Microsoft, received their initial funding from private investors. Because their own money is on the line, capitalists tend to be much better at spotting good investment opportunities than government bureaucrats. That is why capitalist economies, not communist ones, are the leaders in technological innovation and progress.
Moreover, by investing in new technologies and by creating new companies, capitalists provide consumers with a mind-boggling variety of goods and services, create employment for billions of people, and contribute trillions of dollars in tax revenue. Of course, all investment involves at least some level of risk. Capitalists reap huge profits only when they invest wisely. When they make bad investments, capitalists often face financial ruin.
Unfortunately, communists did not share the above views and banned private investment, private property, risk-taking and profit-making. All large privately held enterprises, like shoe factories and steel mills, were nationalized. A vast majority of small privately held enterprises, like convenience stores and family farms, were also taken over by the state. The expropriated owners seldom received any compensation. Everyone now became a worker and everyone worked for the state.
In order to prevent new income inequalities and new classes from emerging, everyone was paid more-or-less equally. That proved to be a major problem. Since people did not make more money when they worked harder, few of them worked hard. The communists tried to motivate or incentivize the workforce through propaganda. Posters of strong and determined workers were ubiquitous throughout the former Soviet empire. Movies about hardworking miners and farmers were supposed to instill the population with socialist zeal.Propaganda alone could not increase the productivity of communist workers to Western levels. To incentivize the workforce, communist regimes resorted to terror. Workers who slacked off on the job were sometimes convicted of sabotage and shot. More often, they were sent to the Gulag – a system of forced labor camps. Sometimes, the authorities arrested and punished completely innocent people on purpose. Arbitrary terror, the communists believed, made the rest of the workforce more productive.
In the end, tens of millions of people in the Soviet Union, China, Cambodia, and other communist countries were sent to labor camps. The living and working conditions in the camps were inhuman and millions of people perished. My great uncle, who was accused and convicted of being a supporter of the underground democratic opposition in communist Czechoslovakia, was sent to mine uranium for the Soviet nuclear arms program. Working without any protection from radiation, he died of cancer.
By the late 1980s, communist regimes lost much of their revolutionary zeal. Terror and fear subsided, and productivity declined further. Thus, in the late 1980s, an average industrial worker in Western Europe was almost eight times as productive as his Polish counterpart. Put differently, in the same time and with the same resources that a Polish worker needed to produce $1 worth of goods, a Western European worker could produce $8 worth of goods.
Just as they replaced the profit motive with propaganda and terror, so the communists replaced competition with monopolistic production. Under capitalism, companies compete for customers by slashing prices and improving quality. Thus, a teenager today can choose between jeans made by Diesel, Guess, Calvin Klein, Levi’s and many others.
Communists thought that such competition was both wasteful and irrational. Instead, communist countries tended to have one monopolistic producer of cars, shoes, washing machines, etc. But, problems soon arose. Since producers in communist countries did not have to compete against anyone, they did not have any incentive to improve their products. Compare, for example, the BMW 850 that went into production in West Germany in 1989 and the Trabant that was made in East Germany at the same time.Communist producers were protected from domestic competition by having a monopoly. They were also protected from foreign competition by prohibitively high import tariffs or an outright ban on imports. Put differently, they had a “captive” consumer base. The Trabant car manufacturer did not have to worry about losing consumers, since the latter had nowhere else to go.
Moreover, the workers at the Trabant car plant received the same salary irrespective of the number of cars they produced. As a result, they produced fewer cars than were needed. People in East Germany had to wait for many years, sometimes decades, before they were able to buy one. Indeed, shortages of most consumer goods, from important items such as cars to mundane items such as sugar, were ubiquitous. Endless queuing became a part of everyday life.
Under capitalism, shortages are generally avoided through the movement of prices. Some prices, like those of national currencies traded globally, change virtually every second. Other prices change more slowly. If there is a shortage of strawberries, for example, their price will rise. As a result, fewer people will be able to buy strawberries. On the upside, the people who value strawberries the most and are willing to pay the higher price will always find them.
The movement of prices provides important information for the capitalists. Capitalists take their money and invest it in more profitable business ventures. If the price of something is rising, not enough of it is being produced. Investors rush in with new capital, hoping to make a profit. Production increases. The economy as a whole thus tends toward an “equilibrium” or a point at which capital is distributed roughly where it is needed.Prices are an important source of information, but where do they come from? In a capitalist economy, nobody sets prices. They emerge “spontaneously” in the market place. Every time I buy a cup of coffee on the way to work, for example, I incrementally increase the price of the coffee bean. Every time I fail to buy my usual morning cup of coffee because I am late for work, I decrease its price by a tiny amount. If everyone stopped buying coffee, its price would collapse.
Communists banned profit, capitalists, competition, free trade and much (if not all) private property – all of which are necessary for accurate prices to emerge. Instead, tens of millions of prices for items ranging from tractors to a loaf of bread were set annually (or every few years) by government bureaucrats. Since they could neither accurately predict how much bread would be produced (i.e., supplied) nor how much bread would be consumed (i.e., demanded), the bureaucrats almost always got the prices wrong.
Price-setting made shortages associated with low productivity worse. If the price of flour was set too high, bakeries would bake too little bread and bread would disappear from shops altogether. If the price of flour was set too low, too much bread would be baked and much of it would end up rotten. Put differently, communist economies were very inefficient.
To complicate matters, communists sometimes mispriced items intentionally. The price of meat, for example, was kept too low year after year out of political considerations. Low prices created an impression of affordability. On their trips abroad, communist officials would often boast that the workers in the Soviet empire could buy more meat and other produce than their Western counterparts. In reality, shops were often empty. As a consequence, money was of limited use. To get around shortages, many people in communist countries resorted to bartering goods and favors (or services).
Under communism, the state owned all production facilities, such as factories, shops and farms. In order to have something to trade with one another, people first had to “steal” from the state. A butcher, for example, stole meat and exchanged it for vegetables that the greengrocer stole. The process was inefficient, but it was also morally corrupting. Lying and stealing became widely used and trust between people declined. Far from fostering brotherhood between people, communism made everyone suspicious and resentful.Of course, not everyone was equally affected by shortages. Government officials and their families could generally avoid the daily hardships of life under communism by having access to special shops, schools, and hospitals. Communism started as a movement for greater equality. In reality, it was a return to feudalism. Like feudal societies, communist societies had an aristocracy composed of the communist party members. Like feudal societies, communist societies had a population of serfs with limited or no rights and little possibility of social mobility. Like feudal societies, communist societies were held together by brute force.
I am sometimes asked why, if communism was so inefficient, it had survived as long as it did. Part of the reason rests in the brute force with which the communists kept themselves in power. Part of it rests in the emergence of smugglers, who made the economy run more smoothly. When, for example, a communist shoe factory ran out of glue, the factory manager called his contact in the “shadow” or “underground” economy. The latter would then obtain the glue by smuggling it out of the glue factory or from abroad. Smuggling was illegal, of course, but it was preferable to dealing with the government bureaucracy – which could take years. So, in a sense, communism’s longevity can be ascribed to the emergence of a quasi-market in goods a favors (or services).
Acute labour shortage is a common refrain heard from all sectors of the Tamil Nadu (TN) economy – from industrialists, construction companies, cultivators, retailers, restaurant owners – and the issue has taken such large proportions so as to affect fresh investments into the state. At the first brush, it stretches one’s belief to hear about a labour shortage in a state with a population of over 7.7 crore.
To put in perspective, TN would be among the top 20 populous countries in the world if it were a separate country. So where are all these people? And is this problem unique to TN? Are other industrialised states like Maharashtra, Gujarat and Karnataka also facing the same issue? An analysis of the composition of TN’s population, along with key reasons for the shortage at sectoral and policy levels, throw up some interesting insights.
Composition of the Population
As a first step, let us take a closer look at the composition of TN’s population. The total population of TN as on 2016 is estimated to be about 7.7 crore. Of this, about two crore are children below 15 years of age, and about 50 lakh are above 60 years of age, leaving them out of the labour market. That is about 32 per cent of the state’s population, which compares favourably with the national average of 34 per cent.
Of the remaining 5.2 crore (aged 15-59, comprising men and women equally split), about 1.75 crore are women who voluntarily do not enter the labour market.
This again compares slightly favourably with the national average, where over two-thirds of the female population do not enter the labour market. That leaves the size of the “worker” population in TN at about 3.45 crore or 45 per cent of the state’s population. The corresponding figure for all India is about 40 per cent, the difference arising on account of slower population growth in TN (and hence lower share of <15 years) and slightly higher women participation in the TN workforce.
So, in spite of having a larger share of the population as workforce, why does TN face an acute labour shortage, which is not very commonly observed in other states?
Before we hazard a guess on the reasons, a closer look at the composition of the workforce is necessary.
Composition of the Workforce
Of the 3.45 crore large workforce in TN, 40 lakh are cultivators (i.e., with own land) and one crore are agricultural labourers (including farm labour, fisheries and animal husbandry), together accounting for 40 per cent of the state’s labour force.
Of the remaining approximately two crore large workforce, the top three sectors are ‘Micro, Small and Medium Enterprises’ (MSMEs), construction sector and retailing, all three being almost entirely unorganised. As of date, about 65 lakh are employed in MSMEs, 40 lakh are employed as construction labourers and about 30 lakh are employed in the retailing sector. These numbers are based on TN government data for the first two, and industry estimates for the last.
As per Census data, about 15 lakh are employed in the public sector, and a minuscule 10 lakh are employed in the organised private sector. The all-India figures (two crore and 1.7 crore respectively in public and organised private sectors) compare well with the reported numbers in TN, based on its share of the population to that of the country.
The official data of unemployed labour is about eight lakh, and the remaining 30-35 lakh are spread across various sectors including self-employed (plumbers, carpenters,maids, drivers, masons, cooks), migrant labour and others.
Based on historical data, as well as peer states’ comparison, there is an active movement of the workforce from agricultural labour towards MSMEs, construction, retail and self-employment, as evidenced by share of agricultural labour to total workforce vis-à-vis the national average.
This is a positive development for the long-term growth of the state. However, certain extraneous factors that are unique to TN are impacting this transition, thereby resulting in labour shortage.
a) Alcoholism – About one crore people in TN are daily consumers of liquor as per independent studies. This is about 30 per cent of the total workforce of the state. Such daily consumption has a direct impact on the ability of the person to work effectively either in an organisation or being self-employed.
The widespread availability of liquor through TASMAC with its 6,800 retail outlets, which is the highest among comparable states like Andhra (4,000 outlets), Maharashtra (6,000 outlets for a 50 per cent higher population) and Karnataka (4,000 outlets) could be attributed to such high degree of alcoholism. Government’s dependence on this source of revenue has resulted in stiff growth targets for TASMAC, which in turn results in extended working hours, minimal holidays, shops in prime locations, etc. to meet these targets. The unintended consequences of this on labour availability could have a long-term adverse impact on the economy of the state.
b) Freebies – TN is among the pioneers to devise innovative freebie schemes for almost every section of the population (“from the cradle to the grave” to use a popular phrase used during elections). Ironically, these freebies are enabled by the healthy revenue collection from alcohol taxes (over Rs 30,000 crore is collected as taxes from alcohol every year by TN, by far the highest in the country). Such freebies, while intended to act as safety nets, also has the unintended consequence of reducing the motivation to seek regular employment. Top freebie schemes include canteens (that serves cooked food for approximately Rs 18 per day for all three meals), 20 kg free food grains, free home appliances, laptops, bicycles, free clothing for BPL families, etc.
c) MNREGA (Though this is not a freebie but, given the work expected for the wages paid, it resembles one.) This has resulted in labour shortage across several states. But given that already the share of agricultural labour is lower in TN than the national average, the impact of this has been severe in TN. Over 60 lakh beneficiaries availed MNREGA in TN against a total primary sector workforce of 140 lakh, a whopping 40 per cent share. Such a large share of workforce diverted from agricultural labour for at least 100 days in a year has a significant impact on the labour availability across rural TN.
The other (intended) consequence is that MNREGA has set the wage bar at much higher levels. As MNREGA assures Rs 200 per day in TN for minimal work, the expectations for farm work or other industrial casual labour is at least Rs 300 per day, and even goes up to Rs 450 per day or more during peak seasons. Cultivators and other employers who cannot afford these daily rates end up either mechanising the work or seek temporary migrant labour to get the work done.
d) High Urbanisation – TN is among the most urbanised large state in the country with over 48 per cent of the population living in urban areas (as against 31 per cent all-India average, 33 per cent in AP, 38 per cent in Karnataka, 42 per cent in Gujarat and 45 per cent in Maharashtra).
Such a high degree of urbanisation results in higher labour demand from labour-intensive sectors such as construction and retail, as well as more self-employment opportunities than their rural counterparts. However, the pace of transition from agriculture (which is entirely rural) to construction/retail/MSMEs (which are mostly urban) have not kept pace with the rate of urbanisation, leading to a shortage of labour in many urban centres across the state.
Besides the above, several other qualitative parameters such as micro-market demand-supply mismatch, the mismatch between education and job opportunities, the widespread presumption of low-esteem among youth for jobs in agri/construction sector, etc. also adds to the labour shortage.
To conclude, the labour situation in TN is very delicately poised with various segments of the economy competing for a limited pie. At the same time, extraneous (and eminently addressable) factors such as alcoholism, freebies and MNREGA are nibbling away at the availability of this workforce, resulting in large-scale inward migration of labour from far flung areas such as Bihar, UP, North East and even Nepal.
As most such migrant labours tend to be available for a short duration (18 months on an average), long-term investments cannot be made with the presumption of availability of migrant labour. There is an urgent need to do further research on this subject, and also take policy measures to address these extraneous factors.
Following the “save Democracy” march on May 6 by the Indian National Congress leaders to divert public attention from the AgustaWestland scam, where Manmohan Singh was seen courting a photo-op arrest along with Sonia Gandhi, a joke did the rounds of social media. It said the former Prime Minister would willingly take the blame for all the scandals of the UPA era if the party president just asked him once. It was not the first time this purportedly honest public figure re-entered politics when he could have led a peaceful, retired life—expected of a “scholar” whose Prime Ministership was an “accident”, as Sanjaya Baru, his former media adviser, put it. Earlier, Singh had come out of the woodwork in support of Sonia and Rahul Gandhi in the National Herald controversy when the mother-son duo was slapped with a criminal case (they are currently out on bail).
What draws the man again into the hurly-burly of politics—even cheap street dramatics—from the quiet confines of his bungalow where he should be spending the evening of his life with his wife and family?
After all, even in his prime, he couldn’t win a Lok Sabha seat.
There can be only one answer: servility. Perhaps, 45 years of being a yes-man has deleted from his nature the capability to say no.
Faster, Higher, Smarter
It all began in 1971. Two years before, Singh had started teaching international trade at the Delhi School of Economics. The then Principal Secretary to the Prime Minister P.N. Haksar, responsible for the most socialistic of Indira Gandhi’s policy decisions—for instance, the nationalisation of banks, insurance and foreign oil companies—asked Singh to write a paper on what the newly elected government ought to do. Equipped with this paper (and perhaps more), Singh became an Economic Adviser in the Ministry of Foreign Trade (later renamed Ministry of Commerce). The very next year, he was Chief Economic Adviser in the Ministry of Finance.
Haksar was succeeded by fellow Kashmiri Pandit P.N. Dhar as Principal Secretary. The latter was a founder of the Delhi School of Economics and thus, an old acquaintance of Singh.
Dhar referred Singh to Lalit Narayan Mishra, then Minister for Foreign Trade. Singh was Mishra’s co-passenger on a flight to New York, and Singh flew on to Santiago, Chile. Of course, Singh might not have planned to share the flight with Mishra. But then, when they returned, Dhar asked Mishra about Singh, and the minister said he was pretty impressed with his economic views shared on the flight. And promptly came Singh’s next promotion! Between 1976 and 1980, Singh was a director of both the Reserve Bank of India and the Industrial Development Bank of India. While Dhar kept a benign gaze on him through the Emergency till 1977, even under the Janata Party government that held office for the next three years, Singh managed not only to keep his job, but thrive. In the Janata era, Singh was also Secretary (Economic Affairs), Ministry of Finance.
Thereafter, Singh got the following promotions and placements: Governor, RBI (1982–1985); Deputy Chairman, Planning Commission (1985–1987); Secretary General, South Commission, Geneva (1987–1990); Adviser to Prime Minister on Economic Affairs (1990–1991); Chairman, University Grants Commission (15 March–20 June 1991). By government standards, this rise was more than meteoric.
Singh’s Report Card: 1971-91
After Indira Gandhi’s electoral win in 1971, the economy hurtled into crisis. Hit by drought in 1973, the Gandhi-Dhar-Singh team’s solution was to nationalise wholesale trade in foodgrains. This created the first unholy cartel of hoarders. Inflation touched 30 per cent. Panicking, the Haksar-Singh team froze dearness allowance and drastically cut corporate dividends. The Sensex nosedived. Many private companies shut shop, facing incessant worker strikes. Meanwhile, the State’s debt climbed to Rs 30 lakh crore.
Under Prime Minister Charan Singh, corporate tax was increased so much that companies had to pass the additional cost on to customers. Prices of essential commodities like soaps skyrocketed. Then came the second oil shock, and inflation shot up 17 per cent.
So what was Singh being promoted for—that too so rapidly—while the economy was performing so poorly? The answer may lie in the way he functioned under Indira and Rajiv Gandhi, V.P. Singh and Chandrashekhar over the next decade.
The now-dissolved Bank of Credit and Commerce International, established and run by Pakistani wheeler-dealer Agha Hasan Abedi, had applied for permission to open a branch in Mumbai during Singh’s stint as RBI Governor in the early 1980s. Singh, when informed that US and UK authorities were investigating the bank for money laundering, rejected the application. Some Delhi satraps frowned. Singh offered to resign (this was his first resignation drama, repeated several times later). He was persuaded to stay on. And the Pakistani got his licence to operate in India as well.
When Singh, as Deputy Chairman of the Planning Commission, turned down Tamil Nadu Chief Minister M.G. Ramachandran’s request to the Centre to fund his mid-day meal scheme for schoolchildren, and the enraged MGR rushed out of Yojana Bhawan, Singh ran after him to pacify him. But while Singh had found mid-day meal schemes populist in Rajiv Gandhi’s era, he saw eminent sense in them during UPA1 and 2. But as we will see, U-turns are a hallmark of Singh’s career.
When Rajiv Gandhi wanted to convert the Planning Commission into a think tank, Singh refused. Rajiv called the Commission a “bunch of jokers” (and later denied having said so). The Commission’s members resigned en masse. Singh did not resign, but threatened to (there he goes again!). He tried to persuade his colleagues not to quit, but failed. He himself finally accepted the post of Secretary of the Geneva-based think tank South Commission. In Singh’s case, fortune favoured, not the brave, but the timid.
After Chandrashekhar brought Singh back to India from the South Commission, he advised the government to impose additional taxes worth Rs 1,200 crore to rein in the fiscal deficit. Finance Minister Yashwant Sinha first resisted the proposal and then yielded. The balance of payments crisis was already staring the country in its face, forcing Chandrashekhar to mortgage 67 tonnes of gold to the Bank of England and Union Bank of Switzerland as guarantee money. One wonders why Singh couldn’t think of solutions other than high taxation to offer Chandrashekhar—solutions he readily supplied as Finance Minister in the Narasimha Rao government just a few months later.
But that is Manmohan Singh for you—the economic chameleon: a centralising socialist under Indira Gandhi, an inertial socialist refusing to correct himself under Charan Singh, surrendering to a dubious operator, taking insults lying down under Rajiv Gandhi, continuing to be tax-happy under Chandrashekhar, and suddenly a liberaliser under Narasimha Rao. And then back to socialism under Sonia Gandhi!
Rao had reached out first to former RBI Governor I.G. Patel to be his Finance Minister. When Patel refused to leave academia for politics, he turned to someone whose re-entry into academia had been stonewalled: Manmohan Singh. The previous year, the Punjab University had rejected his candidacy, saying: “His first love is politics rather than economics.”
Everybody knows what Singh did for the next five years as Rao’s nuts-and-bolts man. Or do they? Yes, India’s economic reforms began on 24 July, 1991, but the reforms were set in motion by Rao, who also held the Industries portfolio, when he announced a pathbreaking industrial policy which scrapped licensing in almost all sectors, allowed foreign equity up to 51 per cent in some areas, and set the ball rolling for disinvestment. A few hours later, Singh rose in Parliament to read his first Budget speech, and there was little reformist in that Budget! But public memory today associates reforms with Singh’s Budget, aided by the post-Rao Sonia Gandhi-dominated Congress, and a strangely amnesiac media. It was in his second Budget, in 1992, that Singh picked up the ball and ran—making the rupee partly convertible, lowering income tax rates across the board, reducing import duties, and abolishing government control over pricing of share issues.
But this lasted only two years. In 1994, when Congress lost the assembly elections in several states, Rao decided that inflation was the only thing to focus on, liberalisation be damned. Hearing his master’s voice clearly, Singh squeezed money supply. The result: Indian industry, which was about to take off, was tripped without any prior warning.
The effects—as is the norm for all economic matters—became visible only after a lag. By 1997, industrialists and economists were whispering the dreaded R-word—recession. And for all his loyal efforts, Singh couldn’t even save his master; Congress lost the elections in 1996, and a “Third Front” government headed by H.D. Deve Gowda came to power.
It inherited an economy that looked healthy but was haemorraging internally. Singh had given hope to Indian industry and then brutally dashed it, mutilating a rising economy and not even being able to help his own party.
The story in 2014 was the same. Singh handed over to the Modi government an economy characterised by high inflation, high fiscal deficit, non-existent industrial growth and dramatically diminished foreign investment inflows.
But then, Singh, even as Prime Minister, had been doing what he had always done, obeyed his master, in this case Sonia Gandhi, who had decided, after careful study of her mother-in-law’s economic policies, that promising the poor the earth and launching grandiose schemes that burnt a hole through the exchequer and was successful only in boosting government corruption, was the way to go. And if Sonia resolved to walk down that road, Singh was ready to run.
It would also be useful at this point to remember that the first scam worth thousands of crores in independent India unfolded when Singh was Finance Minister: the securities scam.
And the biggest scams in independent India—scams that made the securities scam look like chump change, took place when Singh was Prime Minister. The securities scam, for the most part, involved avaricious stockbrokers; the Commonwealth Games, the 2G scam, the coal block allocation scam involved government functionaries, including ministers in Singh’s Cabinet.
The accidental prime minister
In 2002—four years after Sonia had grabbed the top position in the Congress and two years before Rao passed away, the party declared through a resolution that the father of economic reforms in India was not the Rao-Singh team, but Rajiv Gandhi. The “good doctor” grinned and bore the insult.
Life then came a full circle for him when the Prime Minister’s job landed on his lap in 2004. However, before he could shift to the PM’s official rsidence at 7 Race Course Road, he had to undergo a supremely humiliating experience the likes of which has hardly ever been seen in the history of democracies.
After Sonia announced that she would not be PM, and Singh would, all Congress MPs stood in a queue and begged Sonia to be PM. She listened impassively, and Singh sat beside her with his usual expressionless face. No one who possessed even one vertebra of the 33 that make up a human spine would have sat through this incomparable exhibition of sycophancy, whose clear message was: “We want Sonia, we don’t want you.” But Singh did. This pathetic drama was televised live and anyone watching knew who would actually sit on the throne, and who, though Prime Minister, woud sit on a footstool.
As PM, Singh nearly apologised for liberalisation—for which he had got all the credit from the media, not Rao. Doles like the minimum employment guarantee scheme called MGNREGA began. As a result, agriculture became less profitable for farmers. Opposition parties in different states complained that all the jobs were going to labourers affiliated to unions run by the ruling political parties. More than 50 per cent of the beneficiaries, it was found in 2011, were not poor at all. However, Sonia Gandhi and the 60 Communist MPs who had extended outside support to UPA1 still vie for its credit. So, yet another Manmohan Singh decision which was not a Manmohan Singh decision!
Next, the super PM prevailed upon the PM to bring in an equally leaky Food Security Act. The RBI Technical Advisory Committee in July 2013 warned of food price inflation. It was estimated that the law would cost 3 per cent of the GDP in its very first year. A December 2012 report by the Commission on Agricultural Costs and Prices foresaw the Act causing acute imbalance in the production of oilseeds and pulses, limiting private enterprise in agriculture, reducing competition in the market and moving money from investments to subsidies. Nutritionists pointed out that the quantity of assured food did not address dietary needs. Nothing deterred Sonia and, since the boss wanted it, Singh implemented it.
Meanwhile, he enjoyed the lag effect of the Vajpayee government’s policies. So the economy did fine as long as the momentum he had inherited lasted, and the coffers didn’t run dry. GDP growth had risen to 7.9 per cent by the time the NDA demitted office. Even as 7.9 per cent remained the average growth rate under UPA, by the end of its second term, it had plummeted to below 5 per cent.
Singh’s education was adequate for him to see doom in every order of every boss that he implemented since 1971, but he never put his foot down. As commentator Tavleen Singh writes in her book India’s Broken Tryst (see the Books section in this issue): “Nobody called it Dr Manmohan Singh’s government any more because he had retired into a world of shadows and silences from which he emerged only occasionally to go off quietly on some trip abroad.”
Singh had cut food and fertiliser subsidy in 1991 and then rolled back the policy in 1993. In 1991, the fiscal deficit had burgeoned to nearly 9 per cent and the current account deficit to almost 3 per cent of the GDP. The flight of capital from India had peaked. Pre-Budget, Singh had devalued the rupee in two steps (by 16 per cent and 6 per cent), slashed export subsidies and Rao had abolished industrial licensing. Post-Budget, Singh cut government expenditure. But then political pressure mounted, and Singh bowed again. Against the target of reducing the fiscal deficit to about 4 per cent of the GDP in five years, the government managed to bring it down to only about 5.5 per cent of the GDP.
Volte-faces, as already documented, have defined Singh’s career. As the exchequer couldn’t bear the weight of throwing good money after bad anymore, Sonia decided in 2012 that some reforms were needed to avert a 1991-like crisis, failing which even populism couldn’t save the government. She asked for a couple of liberal measures. She agreed to a reduction in diesel subsidies; Singh reduced diesel subsidies. Then she agreed to foreign direct investment in retail; Singh said there would be FDI in retail.
In late 2013, the government led by Singh decided to issue an ordinance against disqualification of convicted lawmakers. Then Rahul Gandhi suddenly appeared in a public meet, and called the ordinance “complete nonsense” and “wrong”. The ordinance was withdrawn.
Perhaps the ordinance was morally wrong, but Singh would not have pushed for it unless Sonia wanted it. Yet, her son Rahul’s action was a degrading public slap on his face. No PM had ever been slighted like this by his boss’ son, who also he had accepted as his boss.
But this time, Singh did not offer to resign (By our count, he has played the resignation card at least five times in his career). Maybe, as the late Vinod Mehta, who once proudly admitted to be “a Congress chamcha”, wrote, Singh had grown too fond of the vast estate—with its large verdant lawns and roaming peacocks—where Indian PMs live. Maybe he was ready to take any insult to have a comfortable life.
And yet the party isolated him
Singh must be repenting the one time when he “revolted” against the high command. In a programme on NewsX after the people’s verdict of 2014, journalist Vir Sanghvi said that the script for the collapse of UPA 2 had been written during the 2009 elections, after which Singh began believing that the UPA victory was due to his sticking his neck out on the India-US civil nuclear deal. Within the Congress, crediting anybody except the dynasty for success is sacrilege. The Gandhi coterie was furious that Singh had got this air about him that he was responsible for the Congress’s 2009 victory.
Apart from a customary “Dr Singh is innocent” line mouthed by spokespersons on television, his party did not come to his rescue even when his aide and adviser T.K.A. Nair was grilled by the CBI during the coal block allocation scam probe. Singh’s isolation became palpable after the “Chandigarh Club”, as his backers were called, lost their locus standi to support him. Ashwani Kumar and Pawan Bansal had resigned from the Law and Railway Ministries respectively, following allegations of corruption. Kapil Sibal, the last Punjabi supporting him, was miffed as he had also not been favour of the ordinance that Rahul rubbished.
Much before Baru’s book, The Accidental Prime Minister, was released, he wrote: “The entire arrangement between the Prime Minister and the party has been that Sonia, and now Rahul, get all credit for the good the government does, and the Prime Minister gets the blame for all the bad.” Baru claimed that the PM, who had appointed Shyam Saran as Foreign Secretary, superseding several IFS officers, now did not even have a say in the matter of which bureaucrats would work in the PMO.
The present decade
But the fact that he had been isolated had dawned on Singh years ago. When anti-corruption activism—led by Baba Ramdev and Anna Hazare in 2011—erupted, the Congress refused to stand up for its own government. At every moment of crisis, Sonia would escape to an undisclosed destination for medical treatment and the party’s spin doctors would hypothesise that the situation could have been handled better if “madam” had been around.
Maybe the coterie was right. Maybe Sonia was much smarter than Singh. The latter goofed up big-time by unleashing brute police force on Ramdev; the former cleverly co-opted a part of the parallel movement led by Hazare, which was hoodwinked into submission. They withdrew their agitation on the promise that a national ombudsman (or Lokpal) would be created in no time. The proposal was never accepted by Parliament until the NDA2 government assumed office three years later.
Of course, Sonia might have been too clever by half. One, the popular narrative created by Anna Hazare’s India Against Corruption was so anti-Congress that it indirectly benefited the BJP. Two, activist-turned-politician Arvind Kejriwal turned an even bigger socialist and minority appeaser, robbing Congress of all its votes. He made the Congress and the section of media friendly to the grand old party see in him the only hope of stopping Modi’s onward march. This further eroded the Congress’s electoral footprint during the 2014 Lok Sabha election and wiped it out off the face of Delhi in 2015. But that takes nothing away from the fact that not being able to handle Lohia-ite rabble-rousers was among the prominent mistakes of the Singh government.
With so many journalists having carried out a vitriolic campaign against Modi since 2002, it was political ineptness on the part of Singh that he could not use their services to also argue via newspapers and news television that, for example, the nation had incurred “zero loss” (like Kapil Sibal said) on account of the 2G spectrum scam, or that the loss was at best “presumptive” (as Manish Tewari said). While the section of the media that was frothing at the mouth kept saying a Modi would be dangerous for the “idea of India”, none had the temerity to further Sibal and Tewari’s theories. If journalists complain today that Modi’s media managers are awful, Singh’s spin doctors hadn’t done a great job either. But then, they were Sonia’s spin doctors, not Singh’s, and the Sonia faction had turned apathetic towards the Prime Minister.
By 2012, Singh realised his pitiable position in the Congress and then was reconciled with his fate: standing up for what he believed in would not work. (Of course, the question remains: Had he ever believed in anything?)
When revelations about the loot during the Commonwealth Games, and the 2G spectrum and coal block allocations enraged the nation, Singh did not address a single press conference to come clean on any of these scams. His silence was the most deafening when Minister for Communications A. Raja told the media that his first-come-first-served rule while allocating spectrum had the PM’s consent. When every Tom, Dick or Harry—like Sanjay Jha, the owner of a pro-Congress website—masqueraded as a party spokesperson on television as the regular appointees were too embarrassed to face the camera, Singh came up with an Urdu couplet that underscored his helplessness:
“Hazaaron jawabon se achchhi hai meri khaamoshi,
Na jaane kitne sawaalon ki aabru rakhe”
(My silence is better than a thousand answers.
You never know how many questions are spared sheer embarrassment)
Singh finally sealed his fate with an April 2013 interview where he said he was not ruling out continuing as Prime Minister.
So humiliated was Singh feeling towards the fag end of his “rule” that, in the 3 October 2013 Cabinet meeting to discuss Andhra Pradesh’s bifurcation, he did not speak at all. When the MPs from the Telangana and Andhra factions urged him to say something, he said it was Home Minister Sushilkumar Shinde’s call.
Now Manmohan Singh toes the boss’s line again. But why? He is already 84 and has never betrayed the political drive or perseverance of an M. Karunanidhi or a V.S. Achuthanandan. But, as we said in the beginning, with his long history of peonage, serfdom must have become an inalienable part of his character.
Narendra Modi is correcting the monumental mismanagement of the economy by the economist Dr. Manmohan Singh
In his article (“Making of a mammoth tragedy”, The Hindu, December 9), Dr. Manmohan Singh attacked the demonetisation of high denomination notes (HDNs) by the National Democratic Alliance (NDA) government as the “making of a mammoth tragedy”. In his prose, Dr. Singh speaks less as an economist in which capacity he is respected more than as the former Prime Minister, the role which has actually dented his image. Yet it is best to respond to him on economic issues which he has kept away from, not to his political verses. Undisputed facts, not alluring rhetoric, should decide whether demonetisation is a tragedy or a remedy. Is it a monumental mismanagement of the economy as Dr. Singh charges? Or is it a remedy for the accumulated filth as Prime Minister Narendra Modi claims? To know the answer, the story of the Indian economy from 1999 to 2004 under the NDA and from 2004 to 2014 under the United Progressive Alliance (UPA) needs to be recalled.
Real versus statistic
During the NDA rule (1999-2004), real GDP grew by 27.8 per cent, annually 5.5 percentage points. Annual money supply, that fuels inflation, by 15.3 per cent. Prices by 23 per cent, annually 4.6 per cent. Asset prices rose only moderately in those five years. Stocks rose by 32 per cent; gold by 38 per cent. Taking Chennai as an illustration, land prices by 32 per cent. Jobs rose phenomenally, by almost 60 million. The NDA also turned in a surplus of $20 billion in 2002-04 in the external sector, after decades of unending deficits, save in two years in the late 1970s.
Now come to the UPA rule under Dr. Singh, the economist Prime Minister. In the first and best six years of the UPA (2004-05 to 2009-10), before it was hit by scams, real GDP grew by 50.8 per cent, annually 8.4 percentage points — one-and-a-half times NDA’s. The world celebrated Dr. Singh. The UPA was intoxicated by the “high growth” story. But how many jobs did UPA’s high growth produce? Believe it or not, just 27 lakhs against 600 lakhs during NDA’s five years, according to NSSO data. UPA achieved one-and-a-half times NDA’s GDP growth, but just 5 per cent of its job growth. Dr. Singh now bemoans that Mr. Modi’s demonetisation will stifle jobs!
Move on. In the six years, prices rose by 6.5 per cent (4.6 per cent under NDA). The external sector deficit was $100 billion (against NDA’s $20 billion surplus). Did high petroleum prices force it? No. Zero-rated customs duty-led capital goods imports which topped petroleum imports was the culprit.
Why was the UPA’s high growth jobless? The well-kept secret is that huge asset price inflation, not production, passed off as high growth. In the first six years of the UPA, stock and gold prices jumped by three times — annually by 60 per cent. Property prices doubled every two-three years. In Gurgaon, not on the property map in 1999, land prices rose by 10-20 times. Asset inflation in six years was three times the annual nominal GDP growth. The asset inflation not the result but the cause of the UPA’s “high growth”! How? Modern economics deducts the non-asset price inflation from nominal growth to know the real growth. But it sees asset price rise as wealth and prosperity and adds it to GDP. See how this economics worked for the UPA.
Unmonitored Rs.500/1,000 notes
Economics says money, growth, prices and jobs are inter-related. Apply this rule to the NDA and UPA periods. During 2004-10, average money supply grew annually 18 per cent (15.3 per cent under the NDA). But asset prices rose by several multiples of it. The moderate rise in money supply over the NDA’s number does not explain the huge asset inflation. The clue hides in the rising unmonitored HDN cash stock with the public which made black money deals easy. In 1999, the cash with the public was 9.4 per cent of nominal GDP. By 2007-08, instead of falling due to rising bank and digital payments, it jumped to 13 per cent of nominal GDP. Later it began hovering around 12 per cent. More critically, the HDNs with the public more than doubled from 34 per cent in 2004 to 79 per cent in 2010. On November 8, 2016, it was 87 per cent. The average annual rise in HDNs was 51 per cent between 2004 and 2010 and the annual rise was 63 per cent by 2013-14. The Reserve Bank of India noted that two-thirds of the Rs.1,000 notes and one-third of the Rs.500 notes — that is over Rs. 6 lakh crore now — never returned to banks after they were issued. The unmonitored HDNs roaming outside banks began driving up the gold and land prices by black cash and the stock prices through Participatory Notes (PNs) — which are largely hawala transfers out of India — that came back pretending as foreign investment in stocks. The PNs rose from Rs.68,000 crore in 2004 to Rs.3.81 lakh crore in 2007.
How did the asset inflation lead to the UPA’s “high growth”? Inflated asset prices to the extent realised by sale got accounted as part of income and included in GDP. Large part of the gains on stock sale got added to GDP with very little tax under Securities Transaction Tax. The spurious wealth effect also led to high-end consumption. The annual private consumption growth averaged 18 per cent till six years to 2009-10 — 80 per cent over the NDA average. The fake wealth effect, powered by HDN cash, scripted the UPA’s “high growth” story. HDNs outside banks took refuge in stocks, gold and land, produced capital gains-led growth and consumption. Had the HDNs circulated through the banking system, it would have multiplied through the fractional reserve model, reduced the inflation and interest, and funded the small-and-medium enterprises starved of organised funding.
The curse — asset inflation inspired jobless growth — seems irreversible till unmonitored HDNs roam and fuel fake growth. Dr. Singh had had enough wake-up calls when the share of HDN cash was escalating year after year from 2004. He could have de-escalated the hugely growing cash economy had he remonetised the HDNs by lesser denominations without demonetisation — sparing the people of discomfort and economy of short-term damage. Of course, he would have lost the “high growth” brand that made UPA rule an economic success. To unmask this deception and revive job productive growth, the unmonitored HDNs needed to be brought to account forcibly. By his inaction, undeniably, Dr. Singh had landed the economy in a Catch-22 situation. The Modi government could either opt to continue the status quo of jobless growth or force temporary decline in growth to reinstate real growth and jobs. It opted for the latter. Even an undergraduate student in economics will tell you that it will cause hardship and hit growth in the short run. A Cambridge economist is not needed to write a column on that. It is already late. If the status quo of unmonitored HDNs were to last for another five-six years, the size of HDNs would have become so huge that no government may have been able to act against it — inevitably inviting a huge crisis, both internal and external. Prime Minister Modi has rightly called the demonetisation as “kadak chai” (bitter pill). That HDNs promoted high bribery and helped terror funding through fake HDNs cannot be disputed at all. Far from doing a monumental misappropriation or making a “mammoth tragedy”, Mr. Modi is correcting the monumental mismanagement of the economy by the economist Dr. Singh.