Hardly a muqabla

Gujarat Chief Minister and India’s wannabe Prime Minister Narendra Modi recently challenged the Congress to compare the record of the nine years of its United Progressive Alliance (UPA) Government with the six years of the previous BJP-led National Democratic Alliance (NDA) dispensation.

“ Ho jaye muqabla (let there be a contest)”, as he said in his trademark flourish to the rapturous applause of a star-struck audience in Pune.

The truth is there isn’t really much of a muqabla .

The Indian economy has been in slowdown mode for over two years now. Yet, the UPA’s tenure from 2004-05 to 2012-13 has seen an average GDP growth of 7.9 per cent, more than the 6 per cent in the preceding six years of NDA rule.

Moreover, the farm sector’s performance — which matters for the quality of growth — has been better under UPA than NDA. Foodgrain output alone averaged 230 million tonnes in the last nine years, as against 202 million tonnes between 1998-99 and 2003-04 (for a more detailed picture of Indian agriculture’s recent rebound, see >http://www.india-seminar.com/2013/641/641_harish_damodaran.htm ).

Inflation and inclusion

One area where the NDA period probably scores, though, is inflation. The average annual rise in the wholesale price index then worked out almost two percentage points below that during the UPA regime. The difference is more — over 270 basis points — if one takes the ‘GDP deflator’.

As a ratio of GDP for a particular year at current market prices to that at prices prevailing during any other reference (base) year, the deflator is a more comprehensive inflation measure, covering the entire range of goods and services produced in the economy. This is unlike the limited commodity baskets of the wholesale or consumer prices indices.

It is interesting, however, that during the term of the NDA, not only was inflation in general lower, but it was even more so for agricultural produce. It has been quite the reverse in the last nine years, with farm inflation outpacing overall inflation based on the GDP deflator nearly one-and-a-half times ( see table ).

So, what do these add up to?

One, economic growth was definitely better under UPA.

Two, it was so even in qualitative terms, given the improved production performance of the farm sector.

Three, since the latter was also accompanied by the terms of trade shifting in favour of agriculture — prices of farm produce increased at a faster rate than other commodities — it translated into higher rural incomes and purchasing power. A good indicator here is annual tractor sales. These averaged just 2.1 lakh units in the NDA period, compared with 3.7 lakh over the nine years ended 2012-13.

But it is not farmers alone who benefited. Since farm wages, too, went up by an unprecedented 7.8 per cent a year in real terms — that is, after adjusting for inflation — during the last Plan period, it made the growth process all the more inclusive. Or, to be more accurate, at least in relation to that during the NDA time, when there was neither growth nor inclusion.

Atalji vs Manmohania?

However, one should observe certain precautions before drawing sweeping conclusions even from the above analysis.

Most important is not to give too much credit — or, likewise, attribute failures — to ruling regimes. It is one thing to say that India’s growth performance has been better both quantitatively and qualitatively during the UPA regime, but quite another to conclude it is because of the latter.

The problem with a Modi-type framework — contrasting six years of ‘our’ Atal Bihari Vajpayee with ‘their’ nine years under Manmohan Singh-Sonia Gandhi — is precisely one of falling into such a trap. In this case, given how bleak the growth numbers actually were in the NDA years, Modi only stands to score a self-goal!

But things were pretty bad during 1998-2004 not entirely because of misdoings by the then ruling alliance. Those were genuinely difficult times when the Indian economy suffered from the aftermath of the 1997 East Asian financial crisis, besides the post-Pokhran nuclear test sanctions that the US and other countries imposed a year later.

More significantly, these were also years when much of India Inc went through painful restructuring and de-leveraging, after having indulged in an investment binge in the mid-1990s. That, of course, was only a result of the general optimism and ‘animal spirits’ unleashed by the initial burst of economic reforms.

Boom and bust

We are seeing a repeat of this all over again.

The UPA was lucky to have come to power when (1) Indian corporates had substantially cleaned up their balance sheets and (2) a flood of global liquidity was beginning to pour into emerging markets, courtesy loose monetary policies by western central banks. Both these were conducive for a revival of ‘animal spirits’ that set the stage for the next growth and investment boom from early 2004, lasting till end-2010 or more.

The rising tide lifted many boats.

That included government finances, as higher growth contributed to revenue buoyancy. The Centre’s fiscal deficit, as a result, has averaged lower relative to GDP during the UPA’s tenure than that under NDA. Also, while its outstanding debt-GDP ratio rose from 49.5 to 61.2 per cent between 1997-98 and 2003-04, the same has since fallen to 50.3 in 2012-13.

At the same time, the surge in global liquidity, while beneficial for growth and investment, has also had less benign effects in the form of higher international commodity prices. World crude oil prices, for instance, ruled at under $30 a barrel till 2003, whereas the new normal since then has been $90-100.

For predominantly commodity importing countries such as India, soaring prices have invariably translated into widening current account deficits (CAD). No wonder, the UPA period has registered an average CAD amounting to 2.3 per cent of GDP, as opposed to a surplus of 0.3 per cent under NDA.

What the Indian economy is today facing is a virtual repeat of the painful process of restructuring and de-leveraging that most firms experienced during the late nineties to the early 2000s.

The reasons are the same: Animal spirits, over-investments and excessive debt build-up by corporates in the last boom. Needless to add, the clean-up before the next recovery is going to be a prolonged affair, as it was in the NDA years.

In any case, invoking the ‘Atalji’ period as a Golden Era for the economy — as the BJP and Modi are claiming it was — is completely misplaced. The golden period, if at all, was from 2004 to 2010, although one shouldn’t give the UPA/Manmohania the whole credit for it.

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