From an economic point of view, there is a remarkable similarity between Modi 2.0 and the UPA-II. These similarities are circumstantial – a climate of economic gloom. But it is instructive to compare how Manmohan Singh and Narendra Modi governments are responding. While the Modi government has handled several of these similarities better than the UPA-II, it must avoid many looming pitfalls.
Both the second terms of the UPA and the Modi government began with a global crisis that had significant ramifications for the Indian economy. For the UPA, this was the 2007-2008 global financial crisis, which began to impact India from 2009 onwards. For the Modi government, its second term began in 2019, and the Covid-19 pandemic hit in early 2020.
In both cases, the Centre had to significantly loosen its purse strings and support the people and the economy through a sharp increase in government spending. This increase naturally had an impact on the fiscal deficit, since, in both periods, the tax revenue could not keep up with the increased outgo.
In 2008-09, the fiscal deficit was 6.1 per cent of GDP, which rose quickly to 6.6 per cent in 2009-10. It remained high at 5.9 per cent even in 2011-12 and began to come under a semblance of control only subsequently. The UPA left power with a fiscal deficit of 4.5 per cent.
Fast-forward to where we are now. The fiscal deficit was consistently decreasing in the first term of the Modi government, but then the pandemic resulted in a massive jump in the deficit to 9.2 per cent in 2020-21. To the government’s credit, it remained undeterred by the high number and instead proceeded to clean up its books by accounting for previously unaccounted expenditures. It then managed to lower the deficit to 6.7 per cent the next year and 5.3 per cent in the first half of the current financial year of 2022-23.
The target for this year is 6.4 per cent, and the government is committed to reducing the deficit to 4.5 per cent by 2024-25. The challenge for the government–especially with the 2024 Lok Sabha election looming–is to reduce subsidies, which currently form a large part of its incremental expenditure.
Also read: Modi govt plans to scrap LPG subsidy under PAHAL as economic woes hit revenues
The fuel factor
This brings us to the second similarity between UPA-II and Modi 2.0: fuel price control. Two years into the UPA’s second term, oil prices began rising sharply, averaging $112 per barrel in 2011-12, $108 in 2012-13, and $105.5 in 2013-14.
Not only did this result in eye-wateringly high inflation in those years, but it also forced the UPA government to step in and control the price of fuel. Even recently, with oil prices above $90 a barrel between April and October 2022, and above $100 for four of those months, the Modi government has kept tight control over fuel prices.
Whenever governments control fuel prices when oil prices are high, the losers are the oil marketing companies (OMCs) who have to bear this loss.
It is debatable whether it is better to provide immediate relief to consumers at the expense of the OMCs–who will have to eventually be bailed out using taxpayers’ money. However, once both governments opted to do the same thing—protect the consumers—it became clear which one chose the better way to do it.
The UPA government issued oil bonds to compensate OMCs to offset losses that they suffered. While this seemed like a neat trick because these bonds didn’t affect the fiscal deficit, what it did do was saddle future governments with significant repayments. Where the UPA issued oil bonds worth Rs 1.48 lakh crore, the total amount to be repaid by 2025-26 will be Rs 2.6 lakh crore.
The current price controls exerted by the Modi government are not being passed on to the future. Instead, the government is doing two things. The first is to incorporate the transfers to the OMCs into the current budgetary requirements. The second is to allow them to keep fuel prices high even though oil prices are now falling. This way, the government is letting OMCs recoup their losses from the market itself.
This is a far more transparent way to handle the subsidy burden, even if the timing of the price control remains opaque. Hopefully, the 2024 election will not induce the government to cast this push for transparency to the wayside.
Also read: Indian economy has a twin deficit problem. To counter it, govt needs to juggle growth & stability
The falling rupee
The third similarity is the depreciation of the Indian rupee. In January 2013, the rupee was trading at around Rs 55 per dollar and then depreciated by about 15 per cent to Rs 65 by September of that year. The rupee is currently at Rs 82.6 per dollar, which marks a depreciation of about 13 per cent since September last year.
The Modi government has gone to great pains to say that the two periods cannot be compared because the Indian economy was in very different positions. This is probably true–we were, after all, part of the infamous ‘Fragile Five’ then–but that doesn’t mean the economy is on a strong footing right now.
Growth is slowing, and India being one of the fastest-growing economies in the world no longer cuts ice. That tag is fast becoming a minimum requirement if we are to provide even basic levels of employment. Companies across the board are slashing their workforces, freezing hirings, seeing slower sales, and are bracing for impact.
That the rupee is falling isn’t a very big concern, but the government’s defence is. A little less head-in-the-sand and a little more acknowledgement of problems, please.
Both the UPA-II and Modi 2.0 were assaulted by high food inflation, the fourth similarity between them. While the UPA did seemingly little to address it, and suffered for it in the 2014 election, the Modi government has realised that the best way to combat high prices is to remove the price element altogether. Hence, its pandemic period free food programme is being extended for far longer than initially planned.
So far, the macroeconomic handling of the Modi government has been relatively solid. It must make sure that this continues and that the 2024 election doesn’t entice it to throw fiscal prudence out of the window, as was done in the latter half of UPA-II.
Views are personal.
(Edited by Prashant)