UPA’s growth trajectory via higher spending policies led to high retail inflation, falling public and private investment, and subsequent slowdown in growth.
It would be churlish on the part of anybody, including the Bharatiya Janata Party (BJP), to deny that GDP growth rates were higher during the United Progressive Alliance (UPA’s) tenure. This was true before, and now looks even truer after the back series of GDP numbers using the new methodology was released a few days ago.
The numbers show that GDP at factor cost grew at 8.1 per cent on an average in the UPA decade (2004-14), while the National Democratic Alliance (NDA) average under Narendra Modi’s first four years comes to 7.35 per cent. The gap could have been narrower if three disruptions had not happened – two years of consecutive bad monsoon in 2014-15 and 2015-16, demonetisation and the goods and services tax (GST). Of the three disruptions, only one, demonetisation, can be held against the NDA. Blame for acts of god, and taxes resulting from a national consensus, cannot be placed at the BJP’s door.
But even after excluding these disruptions, it is more than likely that there would have been a gap between the UPA growth numbers and the NDA’s.
So, P. Chidambaram, who was the financial steward for much of the UPA regime, is entitled to crow about the headline numbers. He did that yesterday (19 August) in spades. “The truth”, he said, “can’t be suppressed forever….The numbers speak for themselves. The main and undeniable conclusions are: UPA-1 and UPA-2 delivered the highest decadal growth (8.13 per cent at factor cost) since Independence.”
He is entitled to his bombast and bluster, but the truth is not all black and white. And the grey areas in Chidambaram’s version of the truth cannot be suppressed forever either. The headline growth numbers, including the decadal high of 10.08 per cent in 2006-07, are facts (at least as they exist now, given that GDP numbers keep getting revised regularly). What is not the whole truth is the spin you give to the “facts”.
The reality is that the UPA “bought growth” at a cost. It would be irresponsible to claim that all the growth was real, but the costs are not.
UPA “bought” its high growth not through reforms, which mostly happened during the Vajpayee era, but by spending like crazy. In the global boom years from 2003-04 to 2007-08, UPA’s higher growth trajectory can simply be explained by its high spending policies, which resulted in high inflation. After the first two years of under 5 per cent retail inflation (Consumer Price Index – Industrial Workers), prices took off vertically for the rest of the UPA term, including in the post-Lehman period, when prices were crashing in the rest of the world due to the commodity price collapse.
Retail inflation was in double-digits almost every year during UPA-2, and the average for the five-year period was 10.3 per cent; for the UPA decade as a whole, the average was 8.15 per cent (all figures from the RBI Handbook of Statistics on Indian Economy, 2017). The NDA’s retail inflation average in 2014-17 (the period for which data from the same source is available, read here), is 4.6 per cent.
The central government’s gross fiscal deficit started soaring after 2006-07 – the year when GDP at factor cost topped – largely due to the stimulus provided after the Lehman crisis, but also due to the fact that the UPA decided to run the economy on steroids all the time, even when the immediate growth threat was over.
Consider four arguments.
One, the average gross fiscal deficit in the last six years of the UPA was a high 5.42 per cent. In contrast, the NDA’s numbers have been below four per cent all through, barring the first year in which it took over, where the UPA legacy was apparent. Put simply, this means fiscal irresponsibility entered the picture the minute growth faltered. The UPA maintained fiscal discipline only in its first four years, when growth was booming, and tax revenues were surging. And remember, this high gross fiscal deficit for the last six years was despite the UPA receiving a 3G spectrum revenue bonanza in 2010-11 of more than Rs 1,06,000 crore. The bonanza was simply blown up in a spend, spend, spend regime.
Two, a big part of the fiscal surge was due to non-merit subsidies – especially oil. In the UPA decade, oil subsidies totalled Rs 8.3 lakh crore – which is more than Rs 83,000 crore every year. Even if we assume that half this subsidy was unavoidable, since kerosene and cooking gas needed some subsidies, we are left with a fiscal stimulus of more than Rs 40,000 crore every year the UPA was in power – subsidies that were clearly not given to the poor.
Three, the UPA offered huge excise and service tax cuts post-Lehman, and this cost was more than Rs 1,80,000 crore, according to then Finance Minister Pranab Mukherjee. If we add the fact that in 2014 Chidambaram offered special excise cuts to the automobiles and consumer goods industries, the enormity of the UPA’s mismanagement of the oil economy becomes apparent: even as fuel subsidies soar, cut prices of cars and encouraged people to use more fuel.
Four, the other element of subsidy was in the sale of natural resources like spectrum and coal at throwaway prices, resulting in the spectrum and Coalgate scams. Even as the exchequer was going into huge fiscal deficits, A Raja, with the concurrence of the Finance Minister and the Prime Minister, was selling spectrum at 2001 prices, and the allottees raised huge amounts of capital by selling equity at massive premia – when these companies had nothing but spectrum on their books. Of course, we got a telecom boom in the coming years, but this boom was purchased at the cost of the taxpayer, and the resultant fiscal excess showed up as a cost to every Indian in terms of double-digit retail inflation.
The net result of this “purchase” of growth through high fiscal profligacy was high retail inflation and a subsequent slowdown in growth, a deceleration of public and private investment, and the double-balance-sheet problem.
It is possible to say that the NDA got its own bonanza in terms of the fall in oil prices. But while the UPA blew up its tax revenues and spectrum bonanzas in mindless subsidies, leaving behind a sick oil marketing sector, the NDA actually used its bonanza to reduce the fiscal deficit and make the oil sector healthy again.
One should ask: which is the better economic strategy?
If a strategy of spend, spend, spend, never mind inflation or high fiscal deficits, needs a pat on the back, well, then say so. There is no government on earth that would not be happy to do that. To its credit, the NDA under Modi didn’t. And we are blaming it for relatively slower growth.
NDA-1’s legacy to UPA-1 was lower inflation, an improving fisc, and a current account surplus. UPA-2’s return gift to NDA-2 was double-digit inflation, a twin deficit problem, a twin balance-sheet problem and falling private investments and loot of the exchequer.
A footnote: the highest growth of 10.2 per cent was registered in 1988-89, the last year of Rajiv Gandhi’s tenure. We know that India was already on the way to external bankruptcy after that spectacular performance. That growth too was “bought” by fiscal profligacy. V P Singh’s fragile government could do nothing to reverse the trend, and it was left to P V Narasimha Rao to clean up the mess in 1991. This time, the UPA-2 mess was cleaned up by Modi. It would be a mistake to compare the NDA government’s growth performance during the clean-up period with UPA’s entire decade of growth on steroids.
R. Jagannathan is Editorial Director, Swarajya. He tweets at @TheJaggi.
Reprinted with permission from Swarajya