The
performance of the economy during UPA’s regime has been volatile culminating
with a set of adverse economic conditions in FY14. However, there are two
significant aspects here. The first is that there has been a difference in the
performance of the economy during UPA1 and UPA2, with the second term being
less impressive. The second is that in qualitative terms UPA has achieved quite
a bit in the second term notwithstanding the adverse economic conditions.
If one were to draw a balance sheet for UPA1 and UPA2, then the net worth would slip into negative territory compared with UPA1 which posted superior economic results in most aspects. To make such a calculation, average performance during the two regimes has been taken with a very optimistic projection being taken for FY14 for UPA2 to get a five year average. The chart compares these averages for some leading indicators.
As can be seen, the columns for UPA1 are higher than those of UPA2 for all indicators except agriculture, which showed higher growth rate in the second regime. GDP growth has slowed down in the last three years to be much lower than the path of 8-9%. Within this segment, industrial growth has fallen sharply from 10.3% to 4.4% with growth in capital formation being just 8.9% relative to 15.8% during UPA1. The main reason would be the impact of high inflation rates and consequent high interest rates combined with issues on governance which came in the way of monetary policy action. Inflation surprisingly averaged higher in terms of both the WPI and CPI which was driven more by food prices. This does come as a surprise because with agriculture performing well (3.6% as against 3.1%), food inflation should have been under control. However, supply shocks for specific crops as well as distorted pricing through the MSP came in the way.
The fiscal deficit ratio also averaged 5.6% as against 3.9% in the previous term which made it difficult for the government to finance capital formation. With low growth coming in the way of tax collection, expenditures had to be curtailed to rein in the deficit at the targeted level. Further, on the external front, current account deficit has also deteriorated substantially in the UPA2 regime with a movement of -1.2% to -3.6% of GDP with gold imports being the chief cause. The pressure was finally seen on the rupee which tended to remain strong in UPA1 but declined by an average of 4.5% in UPA2 with the major hit being taken in FY14.
Therefore, on the whole it does look like the momentum that had picked up during UPA1 could not be sustained in UPA2. While the global situation was also quite volatile, it could probably explain not more than 10-15% of the performance as UPA2 did comparably well in terms of getting in FDI and FII funds. It was a case of all adverse conditions coming together, which coupled with policy issues were the impediments.
However, there have been some positives on the qualitative side given there has been an allegation made that reforms have tended to benefit the rich more than the poor. First, the Food Security Bill was passed, which is required to ensure that the poorer sections got this benefit. Second, the NREGA programme is a progressive policy that has provided employment to farmers between seasons. However, both of them would be pressure points for the fiscal balances going ahead. Third, the government has finally managed to crack the fuel subsidy bill, albeit gradually, by making people used to paying prices closer to the market. The steps taken through Aadhaar to link subsidy on LPG to this identification and increase diesel prices in stages, are commendable. Fourth, the manner in which the government got its act to bring down the current account deficit and improve the balance of payments this year with the help of RBI was noteworthy. Last, there have been some interesting reforms spoken of in banking which have been taken up in terms of getting in more banks with focus on inclusive lending.
Hence, while the basic economic parameters have not quite been maintained, in terms of inclusive growth UPA2 has progressed quite satisfactorily though the challenge will be to keep it within the confines of the fiscal constraints. Quite clearly, we will have to depend more on the private sector initiative rather than government for bringing a turnaround.
If one were to draw a balance sheet for UPA1 and UPA2, then the net worth would slip into negative territory compared with UPA1 which posted superior economic results in most aspects. To make such a calculation, average performance during the two regimes has been taken with a very optimistic projection being taken for FY14 for UPA2 to get a five year average. The chart compares these averages for some leading indicators.
As can be seen, the columns for UPA1 are higher than those of UPA2 for all indicators except agriculture, which showed higher growth rate in the second regime. GDP growth has slowed down in the last three years to be much lower than the path of 8-9%. Within this segment, industrial growth has fallen sharply from 10.3% to 4.4% with growth in capital formation being just 8.9% relative to 15.8% during UPA1. The main reason would be the impact of high inflation rates and consequent high interest rates combined with issues on governance which came in the way of monetary policy action. Inflation surprisingly averaged higher in terms of both the WPI and CPI which was driven more by food prices. This does come as a surprise because with agriculture performing well (3.6% as against 3.1%), food inflation should have been under control. However, supply shocks for specific crops as well as distorted pricing through the MSP came in the way.
The fiscal deficit ratio also averaged 5.6% as against 3.9% in the previous term which made it difficult for the government to finance capital formation. With low growth coming in the way of tax collection, expenditures had to be curtailed to rein in the deficit at the targeted level. Further, on the external front, current account deficit has also deteriorated substantially in the UPA2 regime with a movement of -1.2% to -3.6% of GDP with gold imports being the chief cause. The pressure was finally seen on the rupee which tended to remain strong in UPA1 but declined by an average of 4.5% in UPA2 with the major hit being taken in FY14.
Therefore, on the whole it does look like the momentum that had picked up during UPA1 could not be sustained in UPA2. While the global situation was also quite volatile, it could probably explain not more than 10-15% of the performance as UPA2 did comparably well in terms of getting in FDI and FII funds. It was a case of all adverse conditions coming together, which coupled with policy issues were the impediments.
However, there have been some positives on the qualitative side given there has been an allegation made that reforms have tended to benefit the rich more than the poor. First, the Food Security Bill was passed, which is required to ensure that the poorer sections got this benefit. Second, the NREGA programme is a progressive policy that has provided employment to farmers between seasons. However, both of them would be pressure points for the fiscal balances going ahead. Third, the government has finally managed to crack the fuel subsidy bill, albeit gradually, by making people used to paying prices closer to the market. The steps taken through Aadhaar to link subsidy on LPG to this identification and increase diesel prices in stages, are commendable. Fourth, the manner in which the government got its act to bring down the current account deficit and improve the balance of payments this year with the help of RBI was noteworthy. Last, there have been some interesting reforms spoken of in banking which have been taken up in terms of getting in more banks with focus on inclusive lending.
Hence, while the basic economic parameters have not quite been maintained, in terms of inclusive growth UPA2 has progressed quite satisfactorily though the challenge will be to keep it within the confines of the fiscal constraints. Quite clearly, we will have to depend more on the private sector initiative rather than government for bringing a turnaround.
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