After five years of populism, tough task for next govt

Written by fe Bureau | New Delhi | Updated: May 13 2014, 07:57am hrs
RetailPoverty reduction and employment are the two areas in which the UPA-II outperformed the previous two regimes, UPA-I and NDA. Reuters
UPA-II made extravagant use of the fiscal room created by the high-growth-enabled tax revenue boom in the previous half a decade to buttress its social inclusion agenda. The difficult external situation created the setting conducive to enhanced government spending. Since this approach squeezed credit particularly for corporates outlived its purpose and was not complemented by much-needed structural reforms, the regimes legacy has turned out to be a considerably weakened economy, marked by stubbornly high inflation, low rates of expansion and tepid growth impulses.

To be more current, in 2013-14 the average growth in industrial output was minus 0.1%, the lowest in at least three decades, according to data released on Monday. Also, retail inflation hit a three-month high in April of 8.59%, demonstrating the inflation genies untamed status. Clearly, as the second Manmohan Singh government leaves office later this week, the economy, having descended into a deep morass, will have barely reinvented itself.

Of course, although by largely artificial means, UPA-II managed to reverse the fiscal slippage and also rein in the current account deficit which for a while had looked ominous.

When judged by various other economic parameters, however, the track record of the outgoing coalition government, admittedly run by the left-of-centre elements in the Congress party led by its president Sonia Gandhi, doesnt score well (see chart).

Of course, despite all this, GDP growth averaged 6.7% in the UPA-II tenure. Though this pales against 8.4% growth during the UPA-I period, it is still higher than 5.9% in the five years of NDA government. What takes away the sheen from the UPAs economic management, however, is the apparent decline in the economys potential growth rate under its watch, reflected in and caused by the precipitous decline in both investment and consumption.

Worse, wholesale price inflation averaged a little over 7% in the UPA-II period, compared with 5.9% during the previous regime and 4.6% in the NDA (1999-2004) term. Factory output measured on the Index of Industrial Production (IIP) averaged a dismal 3.5% in the outgoing governments tenure compared with 9.6% during UPA-I and 5.4% under the NDA.

Poverty reduction and, to a lesser extent, employment are the two areas in which the UPA-II outperformed the previous two regimes, UPA-I and NDA. But even the employment growth rate (on Current Daily Status basis) has in fact fallen sharply from 2.62% in the previous (2004-05) NSS round to 0.92% in the 2009-10 round, the same as the rate estimated in the 1977-78 round and substantially lower than the figures churned out in the rounds in between. The fall in the unemployment rate in the 2009-10 round (to 6.53% of the labour force from 8.28% in the 2004-05 round) would appear qualitatively less significant given that this was primarily due to the employment guarantee scheme, rather than more productive jobs in industry. Women moving out of the workforce may also have helped. The unemployment rate was estimated by the labour ministry at 4.7% for 2012-13.

While the debate on the verity of poverty data continues, the Planning Commissions estimate for 2011-12 based on the Tendulkar method threw up sanguine figures. (This estimate was done quicker than the normal quinquennial surveys, considering that 2009-10, when the previous round was conducted by the NSSO, witnessed a severe drought.) The average decline in the poverty ratio, which was 0.74 percentage points per year during 1993-94 to 2004-05, accelerated to 2.18 percentage points per year between 2004-05 and 2011-12, the commission said in July, concluding that the rate of decline in the poverty ratio during the latter period was about three times of that in the former period.

Obviously, the anti-poverty schemes of the Congress-led coalitions (which have been reinforced in the UPA-II regime), the relentless increase in minimum support price of farm items for many years in a row and the employment guarantee scheme contributed to poverty reduction, as much as the trickle-down effect of the high rates of economic expansion for several years before the economy lost steam.

UPA-II has for most part of its tenure been bogged down by a series of corruption scandals. The regulatory/court interventions that followed (like the crackdown on illegal mining and the impasse in coal block allocation/utilisation after the coal scandal erupted) undermined economic activity.

The delay in carrying out the fiscal correction after the mostly consumption-led fiscal stimuli was unveiled after the 2008-09 global economic crisis also cost the economy dear. Investment sentiment fell to a level that makes recovery look difficult and time-consuming.

On the reforms front, the brave attempt to deregulate diesel prices in a calibrated manner stood out but failure to adhere to the plan due to electoral compulsions scuppered its full benefits to the exchequer. Though foreign direct investment in multi-brand retail was allowed in the later half of the UPA-II rule, it came a cropper thanks to the strings attached (including the freedom given to states on whether to follow the policy).

The goods and services tax remained elusive and for this some of the blame must go to the Opposition also, given that they only grudgingly cooperated with the government. While high interest rates and the delay in clearances hindered private investments, government spending was largely of the consumption-inducing variety, rather than productive capital expenditure.