Opinion: How the UPA made a mess of India's economy

(Dr. V. Anantha Nageswaran, independent consultant based in Singapore)

 

A good friend sent me a link to this article (Read) comparing the performance of the economy under the UPA and NDA governments. The UPA is being praised for high economic growth during the first seven years of its regime, but analysts have conveniently ignored the hard work done by the previous NDA government. The lagged effects of the UPA's acts of omission and commission will be felt in the years to come and again the next government will be blamed for non-performance. Here's why:

 

Government debt:  The central government's debt/GDP ratio was just over 60 per cent during the NDA years, but combined with state government debt, the ratio moved above 80 per cent. That ratio now is at about 70 per cent of GDP (chart 1). The important reason for the bloated debt of the central and state governments in NDA's era was the implementation of the Fifth Pay Commission, which led to a doubling of wage bill from 1996-97 to 1999-2000. 

 

 

Economic growth rates and inflation rates: The difference between the annual growth rates in NDA and UPA years in real terms was only 1.7 per cent. But, the difference in the nominal GDP growth rates was 4.6 per cent. It is obvious that the rate of inflation was much higher in the UPA years (7.4 per cent) than in NDA years (4.5 per cent). Higher inflation erodes the real value of debt faster. Hence, debt/GDP ratio came down in UPA years.

 

Interest burden in NDA and UPA years: The ratio of interest payments/budget receipts did not rise above 40 per cent during the NDA years. Only the narrower and conceptually flawed interest payments/tax receipts ratio was above 50 per cent. There is no economic logic in comparing a government's interest payment to its tax receipts alone as government borrowings are not applied only for the limited purposes of levying and collecting taxes. Interest payments were higher in NDA years because rates were high when they took office in 1998. It steadily declined during their regime. The case was opposite for the UPA. Interest rates started low - they had an excellent advantage - and steadily increased during their regime. 

 

Economics undergraduate students can tell the different forces behind declining and rising government bond yields. Two of the important factors are the government borrowing and the rate of inflation. Hence, one can make out easily which government had a worse record on burdening the economy with its borrowings.

 

Much more importantly, the NDA government lowered the rate on small savings successively and that had a huge impact on the level of domestic interest rates. The resulting saving on interest flowed largely to the UPA government. Further, global growth, inflation and interest rate conditions had turned far more benign, especially at the start of the first UPA regime.

 

So, it is easy to judge if the high interest payment/budget receipt during the NDA years was their fault and whether the declining interest payment/budget receipt during the UPA years was their achievement.

 

Market Borrowings of the central government (NDA versus UPA)

 

The reduction in the central government's debt ratio in the UPA years was primarily due to higher inflation, which resulted in higher nominal GDP. 

 

The market borrowings of the central government actually grew at phenomenal rates during UPA years and the ratio of government net market borrowings/budget expenditure ratio was markedly higher during the UPA years, especially in UPA II (2009-14). The more the government borrows from the market the less it is available for productive uses. 

 

Chart 2 shows the ratio of central government net market borrowing/budget expenditure. Notice how it had dropped to a low of 18.8 per cent in the terminal year (2003-04) of the NDA rule. It dropped to under 10 per cent in the first year of the UPA rule before their wasteful spending programmes took hold. There was no looking back after that.

 

In absolute rupee terms, the sum of market borrowings during the two UPA regimes is staggering. Such substantial market borrowing coupled with its funding by the Reserve Bank of India (indirect monetisation) meant that households' cost of living went up cumulatively by 63 per cent from end-2008 until end-2013. 

 

Simply put, the UPA government when it took office inherited possibly the best initial conditions - internally and globally - and proceeded to make a royal mess of the economy. 

 

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