Comparing economic data across two time-periods is always interesting especially when the linkage is with different governments, the UPA and the NDA. There are some caveats that need to be attached before undertaking this exercise. First, the economic numbers may not be solely attributable to the government as, often, extraneous forces determine these movements. A very good example here is the case of retail inflation in India, where almost every entity has taken credit for bringing it down, when the real reason was simply “a favourable monsoon”. Second, governments are more responsible for policy framework and administrative house-keeping that are enablers. If these two principles are kept in mind, then the state of the economy across two three-year time-periods may be compared.
The accompanying table provides data on movements in various economic variables for the last six years, with the earlier base year data being used for 2011-12 to provide an indicative number. The current regime has been clearly better in the following areas.
First, GDP growth has witnessed a continuous increase till FY16, after which there was a slowdown. The average annual growth is higher by 1.2% points. The same holds for industrial growth, where it averaged 3.4% during UPA and moved up to 4.1%, subsequently. Third, inflation, by both the measures, came down, with the CPI moving from 9.3% to 5.1% and the WPI moving from 7% to -0.3%. The clinching factor has been the crude oil price which had come down sharply by the time the NDA came to power.
Fourth, the government has been better able to meet the fiscal targets with the benefit of less pressure from fuel subsidy. While the UPA government struggled to bring down the deficit from 5.91% in FY12 to 4.48% in FY14, the NDA has gotten it down to 3.5% in FY17. Fifth, the external account is again looking much healthier, and forex reserves have increased by around $66 billion under the NDA as against around $10 billion in the UPA regime and absorbed the outflow of the FCNR(B) deposits. Sixth, the rupee has been better behaved than other currencies even as the dollar strengthened and the US Fed tightened the monetary channels. The rate of depreciation was around a third of that in the last three years of the UPA. Last, FDI, which was strong even before the NDA took over, averaging around $39 billion/annum, increased to above $50 billion in the last three years.
Are there any concerns? This is quite interesting because while almost all preconditions look good, there are two major challenges for the government in the next two years. The first pertains to bank NPAs which have assumed prodigious dimensions from 3.8% in FY14 to above 9% in FY17. A weak banking system denudes the growth story carved as it makes the model suspect. More importantly, the issue is not just getting this number down but also capitalising banks and making them resilient. This is not easy given that the government is not willing to over-invest from the Budget nor agreeable to wholesale privatisation to raise funds.
The second issue pertains to investment. The gross fixed capital formation rate, which was at 34.3% in FY12, has come down continuously to 26.9% in the last five years, which is disturbing. The NDA government has corrected the irregularities in natural resource allocation and cleared stalled projects. Yet, private investment has not been enthused, with the banking crisis playing out in the background.
FPI provides a mixed picture. The flows averaged around $30 billion up to FY14 and then have come down to $27 billion. But, it does open room for debate that both FPI and FDI may not be moving because of the pro-investors policy, but more due to the push factor which was dominant when interest rates were very low in the West. Further, given that FDI has tended to get concentrated in regular sectors such as services (financial), telecom, IT, etc, the opening of new sectors has not yet brought in fresh investment.
How about policies where the government has been very active? The picture is mixed here, too. Opening up of fuel prices to market forces (which was introduced in a phased manner by the UPA to begin with) has worked well so far because crude oil prices have crashed. What happens when they rise again? UDAY has been a very good scheme for ushering power reforms. But will the discoms do their bit? If they don’t, there would only be a statistical transfer of the debt from the company to the state, which actually will not alter the status quo. On the other hand, policies on DBT in LPG and auctions of natural resources have been unequivocal successes.
There are other policies that would be open for debate. GST was an old idea that was always opposed by the Opposition, and hence, there could be joint credit taken by all parties. RBI has been constantly chided by both UPA and NDA FMs for not lowering the rates out of habit. But with the Monetary Policy Committee idea being floated in the UPA regime and brought in by the NDA, with the committee consisting of independent experts and academicians, the conclusion drawn all the time is the same as what RBI has been doing.
The demonetisation exercise of the government was probably one of the biggest attacks on black money. There is not much evidence to show that the income declaration schemes have brought in large sums, or that the way we transact has changed. In fact, digitisation could have had the unintended consequence of adding a substantial cost on society. This exercise could probably be the one in which there will continue to be discussion until such time that data is presented. Or else, it may go down as an economic misadventure which has, however, patched the moral fabric.
Other ventures of the government which bordered on campaigns, such as Startup India, Make-in-India, Swachh Bharat, etc, have been inspiring, but would need to get translated into the macro-variables. While there is no clear data on employment, the impressionistic feeling is that there has not been a significant addition to job creation in the private sector even while the government and public sector have been tightening their strings.
On the whole, if one has to choose between the current regime being a winner or loser, the die will be cast in favour of it being the former quite unequivocally. The economy seems poised to accelerate further, but the two cogs have to be addressed—investment and NPAs—to make the growth path sustainable.
– By Madan Sabnavis, Chief Economist, CARE Ratings
Views are personal