Growth stats: Why UPA-2 record is shrinking towards NDA's

R Jagannathan
Firstpost.com

P Chidambaram has taken on Narendra Modi's claim that the NDA signed off in 2004 with 8.4 percent growth, while the UPA will be signing off next year at growth rates below 5 percent. "I wonder why Narendra Modi should stage a fake encounter with facts," Chidambaram said.

Among other things, Chidambaram got hot under the collar and pointed out that the average rate of growth of the NDA was just 6 percent when the UPA's average was more than 8 percent.

The problem is, both Modi and Chidambaram are stretching the truth-as all politicians do. The truth is not fully on either side: the NDA did sign off on a high note, but the UPA will be ending its second tenure by registering probably the lowest growth in a decade- at 4.4-4.8 percent.

Modi's bloomer was to choose end-years to show the UPA in bad light, and Chidambaram's bloomer was to take the entire UPA period average instead of only its second term – where the average floats down almost to the NDA level.

If NDA's average was 6 percent over five years, UPA-2's average will be around 6.5 percent, assuming this year ends up with 4.4 percent. Not a big difference from the NDA's performance.

The mistake is to pretend that achievements during any one party's term-or failures-are entirely the work of the regime in power.For example, growth in 2004-05 can't be said to be the UPA's achievement, for it did practically nothing that year. It is wrong to say that the slower growth during NDA was due to its bad policies just as it is wrong to say that the high growth during UPA-1 was entirely the result of its hard work.

As I noted before in Firstpost, this is how the scorecard should actually be seen from 1991 to now.

In Manmohan Singh's first stewardship of the economy – when he was finance minister from 1991 to 1996 and had ushered in big-bang economic reforms under the leadership of Narasimha Rao – the average GDP growth rate was just 5.24 percent. Reforms clearly did not lead to spectacular growth immediately, for in the previous five-year period (1986-91), the economy grew at the same 5 percent average. Before reforms 5 percent; after reforms 5.24 percent. What's the difference?

However, this is the point: reforms deliver after a lag. In the next government – Deve Gowda's and IK Gujral's – the average growth rate was 6.15 percent. In short, growth accelerated in the next period by 1 percent. It was the result of Manmohan Singh’s reforms. The Gowda and Gujral government were too insecure and unstable to carry out any reforms. Thus, in the six-year NDA period, average growth between 1998-2004 was still 6 percent. It was also the time of the Asian financial crisis, the dotcom bust, and the post-Pokharan sanctions. So the NDA period was not one of great growth.

However, we know that in the NDA period, there were many reforms. The Golden Quadrilateral infrastructure project was launched. Many state companies were privatised – Maruti, VSNL, IPCL IBP, Balco, Air India's hotels subsidiary. The Electricity Act was redone to allow consumers to choose their suppliers and state electricity boards were allowed to clean up their debts. The government also legislated the Fiscal Responsibility and Budget Management Act.

In contrast to the external current account deficit, the UPA actually inherited a current account surplus in 2004. More importantly, the world economy boomed under George Bush’s expansionary policies. As the benefits from the NDA reforms flowed, after a lag, in the UPA-1 regime, and Bush’s policies lifted all boats, Manmohan Singh and P Chidambaram began to think that 9-10 percent growth was their birthright, reform or no reform.

The last nine years of the UPA can be broken up into two clear segments – in the first half (2004-2008) we had 8.85 percent super growth; in the next five years, we had a 7 percent average. Add the current year's likely growth of 4.4 percent and the average growth for the seven-year period will be more like 6.5-6.6 percent. Not too different from the NDA period. And it's the result of no reforms being carried out during UPA-1 and UPA-2 till late last year.

The real difference between Gowda, Vajpayee and the latter half of Manmohan Singh’s regime is very little – and the growth rate has been between 6-7 percent. It is only the 2004-08 period that stood out with its 8.85 percent performance. Does this prove that UPA did better than the other governments, including its own second half performance from 2008-2013? Unlikely.

The conclusion I would draw is that the real growth rate the Indian economy is capable of achieving with its current state of political consensus is 5-7 percent, with 6-6.5 percent being the normal rate of growth without too much reform. The 8 and 9 percent rates achieved during 2003-08, or even 2004-08, were outliers and can largely be attributed to global factors. When the world is booming, India booms.

One reason for the higher growth in 2004-08 is that the UPA had not begun wasting money on political schemes such as NREGA or farm loan waivers or such things. If the UPA had begun these activities in 2004 instead of 2008, the growth figure could have fallen to 7-8 percent even faster – well before UPA-2.

However, here’s a prediction: the next government won't be able to do better than the UPA for a while. Reason: the slowdown ushered in by the UPA will linger, and will take time to reverse. The long-term damage done by the Food Security Bill, the Land Bill and other populist measures cannot be undone the minute the next government takes over. The economy will take years to overcome these drags and higher costs – and Chidambaram is sure to crow two years hence that the UPA did better.

But he should know that his government was the real author of the slowdown.

The writer is editor-in-chief, digital and publishing, Network18 Group