UPA’s biggest failure is in communication, not in economy
The UPA government's biggest failing is its inability to communicate. Many believe that this government has ruined the economy, is totally corrupt, has let inflation go out of control, has bankrupted India through subsidies and so on.
Let us subject the economic narrative to fact-based scrutiny — minus under-analysed hype. As statistics guru William Deming said, "In god we trust; all others must bring data."
In our view, it's the UPA-II's economic performance that is really worthy of praise. UPA-I had a comparatively easy time: global tailwinds lifted all boats. For UPA-II, to deliver a compounded 7.1% GDP growth, with declining indebtedness, when world growth collapsed to under 1.5%, was the equivalent of getting a double century on a Perth track against Mitchell Johnson when nobody else got into double figures.
Growth has to be seen in context of risk, or the debt/GDP ratio. The UPA has delivered what no country has, since 2004: not only has India grown fast, it has taken its debt/GDP ratio down to 67%. China has grown marginally faster, but has run up an unsustainable debt/GDP ratio of 200%.
In 2004, India's debt/GDP ratio was nearly 85%, up from 73% in 1999. Under the NDA, gross fixed capital formation (GFCF), a measure of investment, was around 25% of GDP. Under the UPA, the GFCF has increased sharply to 33%, which is commendable. Russia's GFCF is 20%.
The other completely overlooked aspect about growth is simply the size of India today: we are nearly a $2-trillion economy. Just to put it in context, India today adds about $100 billion to GDP every year, 25% of India's entire GDP under the NDA. The entitlement programmes have supposedly bankrupted the exchequer.
Under the NDA, India spent 50% of its budgetary receipts on interest payments, an unsustainable ratio. The UPA's fiscal management has reduced this to around 30%. The freed-up headroom of 20 percentage points is what has been used to fund subsidies and programmes like the NREGA.
These have reduced poverty sharply and boosted rural demand without burdening the exchequer. This is precisely why India has managed high growth despite sharply lowering its debt/GDP ratio.
On employment, both the NDA and the UPA have been unremarkable. On inflation, the UPA has a problem, but the NDA had an easy time because of very low global commodity prices earlier: prices of oil, wheat, rice and others have risen 6-7 times since 2002.
The inescapable truth is that the days of heady growth are over for all major countries. Minus the complicated economics, the reason for the slowdown in global growth is simple: since the 1980s, world economic growth has been driven by large debt build-ups by all western economies. It is this debt that lifted all emerging economies, India included. The second growth driver was China, again, by feasting on debt.
Both these factors will not recur. Neither the west, nor China can stretch their balance sheets any more.
Co-authored with Devina Mehra.
Both writers head First Global, an international securities firm